A Perfect Example of Why Token Tariffs Aren’t Enough

October 11, 2020

https://www.fidelity.com/news/article/top-news/202010090706RTRSNEWSCOMBINED_KBN26U161-OUSBS_1

Never mind the fact that Reuters, a champion of globalism, is eager to post negative stories about the use of tariffs by the U.S., especially when they relate to a battleground state like Michigan, and ignoring the distortion of the statistics due to the pandemic, the above-linked article makes a valid point.

The effects of Trump’s tariffs on steel offers a perfect example of why token tariffs, applied to one industry, can have the opposite effect of what was intended. Here’s the situation in a nutshell. The tariffs helped the steel industry at first. Steelmakers were able to thrive while getting higher prices for their steel. Before long, however, the increased costs for steel customers – most notably the auto industry – hurt their competitiveness with foreign auto makers. Sales slumped, reducing demand for domestic steel, which ultimately led to steel mill closures.

This is why you can’t take a piecemeal approach to trade policy. If tariffs are necessary to restore a balance of trade – which they obviously are for the U.S. – then they have to be applied across-the-board to every single manufactured product from every country that’s over-populated to the point where they are dependent on exports. Anything less is guaranteed to produce a trade deficit and a loss of manufacturing jobs.

Although I used a whole book, Five Short Blasts, to explain the concept, it’s fairly simple, really. People living in crowded conditions have low per capita consumption of products. After all, there’s not enough space to use and store them. They don’t use much, so there’s not much for people to do. Unemployment is high.

People living in less crowded conditions, on the other hand, enjoy high per capita consumption, requiring “all hands on deck” to produce what’s needed. People in that society enjoy full employment.

If these two societies try to trade freely with each other, a host-parasite relationship is established. The high population density / high unemployment state begins to feed on the market of the other, sapping it of its manufacturing jobs. It’s inescapable. The only thing the latter society can do is to halt the free-trade relationship.

As the Reuters article points out, the tariffs on steel helped the steel industry. Then why in the world wouldn’t you apply tariffs to all other industries?


August Trade Results: Another Record Trade Deficit, Another Month of China Thumbing Its Nose at “Phase 1” Trade Deal

October 7, 2020

The trade results for August are in and they couldn’t be any worse, though given the current trajectory, they may very well be worse in September.

The overall deficit soared to $67.1 billion, beating the record set only one month earlier by $3.7 billion. More importantly, the deficit in manufactured products continues to explode, jumping $2.9 billion from the previous month’s record to $83.2 billion – an annualized rate of almost exactly one trillion dollars. Here’s a chart of the deficit in manufactured goods: Monthly trade deficit in manufactured goods.

China didn’t help a bit. If they lived up to the agreement they made in the “Phase 1” trade deal, the deficit in manufactured goods would have been lower by $4.5 billion. They didn’t. Not even close. Not only did they not meet the goal in any category of goods, they even fell behind the 2017 baseline by a half billion dollars. In two of the four categories – energy and agriculture – they did import more than the 2017 baseline, but barely. They’ve made no progress at all toward meeting the goals set for 2020 in the deal. Here’s the chart: Monthly “Phase 1” trade deal results.

The deficit with China did drop slightly, falling to $29.8 billion from $31.6 billion in July. But it was of no benefit to America. The big winners from the success that Trump has had in reducing the deficit with China – thanks to the tariffs enacted before the “Phase 1” deal – have been Mexico and Vietnam. The monthly trade deficit with Mexico has quadrupled since Trump took office, soaring to a new record of $12.8 billion in August (beating the previous month’s record by a whopping $2.1 billion), compared to $3.8 billion when Trump took office in January of 2017. The deficit with Vietnam also blew past the previous month’s record, rising $0.8 billion to $7.6 billion, more than double when Trump took office.

To be fair, the trade deficit in manufactured goods was dropping nicely until the pandemic hit. It had fallen to $59.9 billion in February, but has risen dramatically since. Blame the pandemic. All of the money that Americans used to spend on dining out, travel, gym memberships and entertainment is now being spent on goods. Much of the stimulus money meant to help Americans is now in the hands of foreign manufacturers.

Though Trump has done far more than any president in decades to address the trade deficit and to bring manufacturing jobs back to America, he still needs to be much more aggressive with imposing tariffs on a wide range of countries who feed off of the American market to sustain their bloated labor forces. If he had, he’d be a shoo-in to win the election instead of finding himself the underdog. America will never be “great again” until store shelves are stocked with products “Made in the USA.”