President Trump announced Friday that his administration would impose a 100 percent tariff on Chinese imports “over and above any Tariff they are currently paying” in retaliation for China’s threat to impose export controls on rare earth exports, which the U.S. consider vital to national security.
This latest exchange of trade restrictions is purely intended to harm the other party rather than to achieve any benefit for the respective countries’ populations. But it has occurred in the context of the trade war with China started by Trump in his first term. The ultimate goal of these trade wars is still mysterious, given Trump’s own self-contradictory statements.
Trump continues to claim both that the tariffs will restore American manufacturing and that foreign exporters will pay the tariffs rather than American consumers. Both cannot be true. The only way for the tariffs to reestablish American manufacturing is if they do raise the prices American consumers pay for the imported goods, and not just marginally. They must raise the prices so dramatically that they exceed the much higher prices for the same goods domestically produced that led to the imports in the first place.
If the foreign exporters reduce their profit margins to absorb the tariffs and thereby make their exports available to American importers at the same price, as they have in most cases so far, then American manufacturing is not stimulated. Americans are still buying the imports at the same price just as they were before, which is still lower than they can buy goods produced domestically.
Trump represents this as a “win” for America, citing all the new tax revenue flowing into the treasury, but this doesn’t help Americans as workers or consumers. It doesn’t create new jobs or lower the cost of goods. On the contrary, the tariffs ultimately harm Americans even if foreign exporters continue to absorb them.
Trump has successfully framed the discussion in terms of “who will pay the tariffs.” When foreign exporters largely absorbed the tariffs to supply Americans with the goods at the same price, Trump claimed victory. America was finally “winning” again. This is deeply uneconomic thinking. Inflicting economic harm on one’s least expensive supplier of goods or services is not a “win.” It’s lose/lose for both sides.
Just as left wing economists ignore the demand curve when claiming higher minimum wage laws won’t result in higher unemployment, right wing economists ignore the supply curve when it comes to international trade. Reducing profits for one’s suppliers will ultimately result in lower supply. And lower supply leads to higher prices for consumers. It may take a little longer than in the scenario wherein American consumers absorb the tariffs, but it is inevitable.
When profits are high, new suppliers enter the market to take advantage of the profits. When profits are artificially lowered, the opposite happens because it must happen. It is the same cause/effect scenario as price controls. When you reduce profits, supply decreases, resulting in shortages when the price is coercively limited and higher prices when it is not.
Conservatives believe all human interaction is warlike, with winners and losers. They have no less a zero-sum game view of the economy than the socialists. That their view of the purpose of government is to suppress man’s innate savagery rather than achieve an impossible economic equality may lead to them doing less economic harm, but they do significant harm just the same.
Read the rest at Tom’s Substack…
Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?