What do soybeans and washing machines have in common? One is grown in the United States, and the other produced in China, but both are affected by the recent clash on trade. A trade war is defined as, “a situation in which countries try to damage each other’s trade, typically by the imposition of tariffs or quota restrictions.” Yet, adjustments to trade are a common occurrence, so when do trade disagreements become trade wars?
A trade war begins when a country institutes tariffs in retaliation for other tariffs, a zero sum game where the goal is to harm the opposing country and force them to yield. This begins a cycle based on swapping blows. Under President Donald Trump and Xi Jinping, the United States and China are both attempting to weaken each other through a series of tariffs. In March, Trump implemented 25 percent steel tariffs and 10 percent aluminum tariffs, citing national security threats. By June 15, the United States had raised tariffs to $50 billion of Chinese goods. This was quickly followed by $50 billion in retaliation by China. These events present only one conclusion: the United States is in a trade war.
So who benefits?
A tariff is a targeted tax on imported goods. The goal often touted by protectionists is to protect domestic workers. They claim that, by raising the price of foreign goods, manufacturers will produce more goods domestically. This will expand the number of jobs in the United States. Yet the reality is that trade wars hurt consumers, producers, and finally, workers.
- Consumers are affected by tariffs because tariffs raise prices on goods. For instance, Trump’s 25 percent tariff on medical devices will make healthcare more costly to U.S. citizens. Higher prices mean that consumers must either receive less healthcare or spend more on healthcare and less on other goods which they desire.
- Producers who are not specifically protected by tariffs are hurt by higher production costs. The Wall Street Journal reported that U.S. producers are being harmed by U.S. tariffs. Lyon Group Holdings, which manufactures lockers is considering moving some production of parts to China because it cannot compete. Since tariffs are designed to target and protect certain industries, they are harmful to those companies which cannot secure the same special privileges.
- Workers, counter to the claims of protectionists, are also harmed by tariffs. When tariffs reduce production and output, businesses lay off workers. Overall, the number of jobs will be reduced because jobs are determined by the existence of productive businesses. Although Trump’s concern over the plight of U.S. workers is justified, the result of his policies will be a loss of manufacturing jobs. Furthermore, because workers are also consumers, they are negatively affected by higher prices on goods.
Ironically, tariffs result in the exact opposite outcome that they are intended to produce: higher prices, less production, and less jobs. Protectionism is a modern iteration of the economic theory of mercantilism, which claims that in every economic transaction, one party gains at the other’s expense. Following this mindset, the most important goal of policy is to make sure you are the country who is benefitting.
A more expansive view of the economy is necessary to understand why tariffs cannot improve the overall prosperity of the United States. Trade is based off of mutual benefit; both parties in a trade are better off after a transaction has occurred. The power of trade to increase our prosperity is due to the many areas of specialization on which each person is able to focus. Adam Smith describes in The Wealth of Nations how, “It is the great multiplication of productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.”
This explains in part why the stock market has fallen since the trade debacle has begun; investors anticipate less trade taking place as a result of the tariffs. They interpret the drop in trade as a drop in the extent of the market and thus a fall in general prosperity.
The average American will be worse off after the trade war has run its course. Trump has called trade wars “good and easy to win,” but this statement betrays his mercantilist mindset. In reality, no country ever wins a trade war.
Photo Source: Harley-Davidson Motorcycles
