Uncategorized

In a trade war, nobody wins

Oh! What a Lovely Trade War

This is a nice read on the issues with trade and tariffs. It should be intuitive that tariffs benefit the first order company involved, but those down stream are negatively affected.

For instance, assume imported widgets cost $9.25 and domestic widgets cost $10. A 10% tariff on widgets makes the imported widgets cost $10.18 while the domestic widgets are still $10. Now, domestic companies are paying $0.75 more per widget. Assuming they want to keep their margins the same, this cost will be passed along to the consumer or more likely the employees with either lower pay, less hiring, or by letting a few people go.

Similarly, referring to the job effects, Krugman notes,

Then there are the indirect effects, which mean that any job gains in an industry protected by tariffs must be compared with job losses elsewhere. Normally, in fact, trade and trade policy have little if any effect on total employment. They affect what kinds of jobs we have; but the total number, not so much.

Using the widget example above, the domestic producer will likely need to hire more employees to meet the new demand. But, the firms who buy from the producer may have to let people go as they need to make up for the higher costs of the widgets. Or, demand may shrink if they raise the price. In either case, net jobs remain the same.

So, in sum, tariffs benefit the domestic producer (typically a very large firm) as they can sell more units and may even raise the price to capture more profits. Why not raise the price a nickel? But the downstream effects are meaningful and most of the time ignored since they are hard to quantify.

That said, the tariffs proposed by the President are a classic case of allowing the rich to bring in more profits while hurting the working class. Small businesses in particular buy from large producers and sell their products to the local community. These are the people who ultimately pay the price of tariffs.

I am a proponent of free trade through and through. The reason for this is twofold: 1) over time the composition of jobs will shift such that jobs that are not advantageous in America will fall out of favor and 2) this composition shift naturally leads individuals in the developed economy (the U.S.) to move to less developed nations to chase the job they are good at. This will help these other nations develop. This helps the global economy which will benefit the U.S. as we are a major part of the interconnected global economy.

A more blunt way of saying this is that steel costs less to manufacture in China, so why would we willingly take dollars from the pockets of the middle class just to manufacture steel here? Well, the answer is simple: The owners of the steel manufacturers want more profits.

And of course, I will end with another sharp quote from Krugman:

But Trump’s promises on trade, while unorthodox, were just as fraudulent as his promises on health care. In this area, as in, well, everything, he has no idea what he’s talking about. And his ignorance-based policy won’t end well.

Categories: Uncategorized

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