A Trade War With China Will Be a Disaster

Jack Parkos | @laissez_faire76

President Trump has decided to raise tariffs on China from 10% to 25%, effectively declaring a trade war, and took to Twitter to justify his decision.

From the sounds of it, Trump is implying that the tariffs will hurt the Chinese economy. However, it actually will hurt the United States economy by forcing consumers to pay the cost. What Trump believes is that if tariffs are high, then businesses will be forced to come back to America. But this is not what will happen, tariffs could start a trade war, one that China would win.

Trade war hurting farmers

Last year, after Trump put major steel tariffs on China, they responded with putting tariffs on U.S. agriculture. The results from this hurt farmers and forced the federal government to bail them out. This was one battle in the trade war and was one that China won. With the new hikes in tariffs, China has now raised tariffs up $110 billion on U.S. agriculture. It is already clear that the trade war will hurt farmers. Moreover, the taxpayers will then have to bail out the farmers that were hurt by the trade war.

A tax on the consumer

Tariffs are a tax on the consumer. Already, the trade war has harmed consumers. According to a report by Princeton, the 2018 trade war caused a reduction in U.S. real income of 1.4 billion a month.

Overall, using standard economic methods, we find that the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018. We also see similar patterns for foreign countries who have retaliated against the U.S., which indicates that the trade war also reduced real income for other countries.

The paper further stated that the trade war was causing U.S. consumers an extra 3 billion per month in taxes and an additional 1.4 billion per month in “dead weight” costs.  Moreover, the steel tariffs cost the average family $767 a year.

This was from last year, now with tariffs going from 10% to 25%, it is very likely that costs will go up even more than in 2018. The theory of “Reaganomics” was that fewer taxes will help boom the economy, why is this logic not applied to tariffs and trade?

Increase in prices

A tariff, much like a tax, only adds to the cost of business. Because of this, a company will have to compensate by raising prices. An artificial rise in prices is never healthy for an economy and will only slow it down. One example of this is the beer industry. The mere announcement of aluminum tariffs caused the aluminum company Midwest Premium to raise their prices from 13.4 cents per pound to 17.5 cents per pound. This will put brewing companies (and other companies that use aluminum) to have to raise their prices due to the rising costs.

It is basic economics that an increase in cost will result in an increase in price. Any tariff on any product will increase the cost and with it prices. Furthermore, companies may have to let workers go to cover the costs that tariffs cost.

Made in China

Ironically, even with the tariffs, the US still had its largest trade deficit with China in 2018. This is because the U.S. economy is dependent on China. Trump is trying to have America drop its dependency on China. This may be a good idea, but it should be done within the free market. Tariffs are not a good idea. We cannot have a trade war with a nation that we buy all our products from. Americans love their cheap products and it would be risky to jeopardize it via a trade war.

Furthermore, a trade deficit does not necessarily mean that the economy is doing poorly. Cheaper steel, aluminum, etc cuts down costs for businesses and allows them to hire more manufacturers in America. Trump’s base was the blue collar worker, but the tariffs will not help them. Furthermore, the lower prices allow more products to be purchased by American consumers, which in turn, will help the economy.

There are no winners to a trade war. Even if the U.S. reduced its trade deficit, it would come at a cost that is not trumped by a lower trade deficit. America may have a strong economy, but it cannot beat China in a trade war. Evidently, these tariffs will escalate the war and ultimately, hurt the economy.

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