Tariffs—which until recently were a fairly obscure and dense economic issue that ninety-nine percent of us understandably ignored—have made headlines every week for the last few months. The coverage picked up back in early March when Trump called for a 25% tariff on steel and a 10% tariff on aluminum, which would even apply to our allies with the exceptions of Canada and Mexico. But within the last week, Trump extended those tariffs to Canada, too. We’ve also seen Trump repeatedly single out China for tariffs, and China has retaliated, raising concerns about a trade war between the world’s two largest economies. And just today, the Trump administration announced a new round of tariffs on China, totaling some $50 billion.
China has already vowed to retaliate in kind.
The Trump administration has already vowed to retaliate against that retaliation.
This all sounds pretty far removed from daily American life, sitting in commuter traffic and drinking beer (hopefully not at the same time). But it really isn’t abstract at all, even though we haven’t yet felt any impact from these tariffs, save for a dramatic increase in boring news. A trade war could have immediate effects on Americans: Higher prices for consumers, fewer and smaller sales for American industries, and disruptions to the global supply chain. And in fact, a trade war would have a direct effect on Americans who sit in commuter traffic and drink beer. And it might lead some of us to do it at the same time.
For those of you who, like me, have a tough time navigating the ins and outs of international trade, which Trump’s knee-jerk vindictive reversals make even more complicated, here’s an explainer: What Trump’s tariffs and a trade war might mean for the U.S., and what they might mean for you. First, here’s a meme that says it all.
Now, to show our work.
Summary: Tariffs, trade wars, and deficits explained
First, Trump is partly right about existing trade policy.
According to Mauldin Economics senior editor and macro analyst Patrick Watson, “China hasn’t reciprocated U.S. trade policies, and some changes are necessary. However, which policies the president attacks and how he tries to change them is important. Flawed methods usually produce flawed results. In this case, the problem is more than a flawed method. It’s flawed economics.”
In other words, Trump sees the problem correctly. He merely has bad solutions and the wrong basic economic worldview: He thinks the world is divided into winners and losers, so if you’re not winning on every deal, you’re getting hosed. Sounds logical, but it’s simply not how the world works. In fact — hold on to your butts — America actually benefits from some trade deficits. That is, what Trump tells us is “losing” is sometimes winning.
So here’s a general sketch. (If you know this stuff, feel free to skip ahead to the detailed section.) This isn’t the way a trade war has to go, and it ignores a lot of technical fiscal variables and financial leverage blah blah blah—but it’s a pretty good big-picture view of what a trade war would do to us, and why America might actually want to run a trade deficit.
What’s a tariff? Basically it’s a tax we charge for goods and services we import into a country.
Why’s it important? Higher tariffs mean that in the end American consumers, you and me, will pay more for certain imported goods.
Why does Trump want to do that? If we drive up the price of goods from some foreign countries, we’ll buy from other countries. Trump believes that the countries he hits with tariffs would rather buy more goods from us than endure those losses. More American profits means balancing trade deficits with those countries.
Why does he hate deficits so much? America spends overall more buying imports than it makes selling exports. Sounds bad, because having money is good. But having stuff is also good, and Americans can afford to buy stuff, especially stuff from foreign countries, which is often cheaper.
Why do we spend money importing so much, though? We’re really profitable at some things (financial, agricultural, and software sectors), but we’re much less profitable at others (socks). We happen to be really good at the most expensive stuff. That’s called our “comparative advantage.” This means it’s smarter to let other countries spend their time and money making the things we’re not so profitable at (socks), because we can then spend our time and money maximizing the things we’re most profitable at (software).
Industries always change. Some industries will shrink (manufacturing) and some will grow (software and services), depending where our comparative advantages lie.
So we lose jobs to other countries? Yes, which in the wrong places and times can devastate local economies (manufacturing), but at the same time it has benefits: We make more money, and we get better deals, and our overall employment rate now is astronomically high.
Losing money is good for the economy? We don’t “lose” money. We spend it on stuff, and when you and I spend money, the American economy does well. In fact, the economy just grew by nearly four percent in the last quarter. The biggest factor? Consumer spending. If prices go up thanks to a trade war, we won’t buy as much, and that hurts our economy.
This is one reason our small trade deficit is good. Other countries might get our dollars, but we get their stuff.
But don’t we want to keep our dollars? Buy American! We don’t want all of our dollars. Other countries use our dollars to reinvest in America. We need this because we don’t make enough on taxes (which we just cut) that we have to borrow. And we borrow so much damn money the national debt is incomprehensible.
Our economy is growing. We’ve currently got the strongest economy in the world, by far, despite some deficits. Trump even likes to brag about this. He did it today.
So Trump is wrong? He’s not wrong about deficits, but there’s no trade crisis and no need to start trade wars.
Why are trade wars so bad? We can’t depend on only our economy to provide us with everything we need/want at reasonable costs. Higher costs for materials also means higher costs for goods that use those materials. (Aluminum cans.) Therefore a trade war will cause prices on many everyday items to go up no matter what.
Give me a hip and relatable example. Beer makers expect they’ll have to make small price increases, but they’ll also have to take other cost-cutting steps, such as eliminating jobs or reducing investment. And we simply don’t make a lot of goods anymore: Certain U.S. industries, such as textiles, won’t come back tomorrow.
Why are trade wars so bad? (Part two.) When we start trade wars with major economies such as China or Europe, we’ll disrupt the global supply chain, which means it will take longer to get stuff that costs more. And it’s not just us: It will effect a lot of countries that aren’t involved.
Why are trade wars so bad? (Part three.) If we get into a trade war with too many trading partners, or with the wrong trading partners (such as our allies and China), then the countries we sell most of our stuff to today might choose not to buy our stuff in the future. People who live in a country with a strong nationalist streak (China) might even boycott American products.
Why are trade wars so bad? (Part four.) We can’t stop other countries from trading with each other. They’ll continue growing.
Why are trade wars so bad? (Part five.) That all means we’d either have fewer places to sell the stuff we make, or we’d sell our exports for less profit.
So that’s a vicious cycle. Yes: Lo and behold, a trade war might very well increase our trade deficit, and not only that, it will increase it on the sales side. We won’t be putting more dollars into other countries, which means they won’t have as much dollars to invest in us.
Dear god, Roger, please talk more about tariffs.
Currently the U.S. doesn’t impose any tariffs at all on the majority of its imports (~54%). New tariffs will lead to a lot of change. Generally, tariffs are a way for the U.S. government to regulate the free market, stepping in to discourage American importers and consumers from buying certain products from certain countries. And for certain reasons.
For one, since tariffs are taxes, they can help governments raise revenue. Governments might also use tariffs to shield their own domestic industries from foreign competition. Most commonly, it’s a way that a country can protect its new industries from getting undercut by foreign competition. This gives them a better shot to grow.
Trump, however, wants to use protectionist tariffs in a different way: To shield shrinking old industries from foreign competition—like steel, for instance. If Chinese steel costs more for American purchasers to buy, we can expect those purchasers (such as construction companies) to buy less of the stuff from China and more of it from other countries. For Trump, that means hopefully from American steel companies, though he exempted some friendly nations from those steel tariffs. Canada, we’ll get to in a bit.
The problem here is that global trade isn’t a zero-sum game. The U.S. can’t “win” at everything. For one, we can’t physically make everything we need and want. And as for the stuff we can make, we can’t be profitable making all of it. We have to negotiate, and sometimes we have to pay more.
So that explains why people who like free trade tend to dislike tariffs. Historically in the U.S., the most ardent free trade supporters have been Republicans. President George W. Bush, for instance, caught heat from the GOP about trade policies that didn’t seem so free, so he proposed a program that would eventually eliminate all tariffs, without the condition of reciprocity from other countries. That’s the opposite of what Trump’s doing now.
Our president, however, is also a Republican.
Trump’s policies and a possible trade war
Over the past few months, the Trump administration announced several rounds of new tariff hikes on specific goods from several trading partners. This included the EU. Some countries, most notably China, responded with tariff hikes that targeted certain U.S. products such as soybeans. That targeted tariff was a shot at middle America, i.e., Trump supporters, to wake them up to the fact they’d pay if the president kept increasing more tariffs on them.
Then Trump increased more tariffs on them. Then China did, too.
Then Trump said we were stopping the trade war with China. He might have said this to make China happy for the moment: Trump needed their support for the North Korea summit.
Then Trump went to the G7 and got upset about “unfair” tariffs from countries such as Canada, our second-largest national trading partner. That’s insane, and I’ll explain in a bit.
Then today, the North Korea summit fading in the rearview, Trump increased tariffs on China again.
Economists worry this could kick off a feedback loop that might lead to an all-out trade war.
It’s easy to see why tariff hikes would upset our trading partners: They make a lot of money selling to the U.S. market. It’s also easy to see why tariffs might upset in a particular way our friends such as Canada, whom Trump just hit with substantial tariff hikes on aluminum and steel. Earlier he’d promised Canada they’d be exempt to those tariffs.
Canada, rather reasonably, saw this as an aggressive move. Trump’s hikes might provoke a tit-for-tat response, which might provoke tariff hikes in response to that, etc etc. If this gets out of hand, we’ll find ourselves in a trade war.
With fucking Canada. If you’ve got the impression we’d easily win because Canada is weak, that’s not right. They’re our second-largest trading partner, so a trade war with them will hurt us.
Yet Donald Trump tweets about spilled Canadian milk.
Ah, the sweet Canadian dairy air: A case study
For a great example that captures so much of why Trump’s reductive views on trade are wrongheaded, let’s look at one of his chief complaints about Canada: It charges a 270% tariff on American dairy products.
Sounds like those hosers are hosin’ us, eh? But that doesn’t mean we’re “losing,” as Trump wants you to believe. In spite of that tariff, in 2017 the U.S. ran a $474 million trade surplus with Canada.
Plus, dairy comprised only 0.1 percent of our $680 billion trade with Canada. And if Trump hates tariffs so much, he ought to also realize that 99% of our trade with Canada has no tariffs at all, thanks to none other than NAFTA, which Trump says he also hates. Overall, in spite of Canada’s dirty dairy trick, the U.S. ran a nearly $3 billion trade surplus with Canada last year. Or in Trump’s brain: We won!
Things aren’t great for American dairy farmers, true, but that has less to do with Canada than it does a whole bunch of globally interconnected reasons we can’t do anything about. If you care about that, read this.
And Trump is also a hypocrite: The U.S. has steep agricultural tariffs, too. For instance, we put a 350% tariff on tobacco products to protect our tobacco industry.
In other words, Canada’s 270% dairy tariff, in an industry where the United States literally already runs a surplus, doesn’t deserve Trump’s response, which was a whopping 25% tax on steel and a 10% tax on aluminum.
Good news for people who like good news
Yesterday we learned that the U.S. economy beat expectations last quarter, growing by nearly four percent. Economists believe Trump’s tax cuts are partly to thank, because a sharp increase in consumer spending drove the growth.
But there’s also good news for people who like bad news: A trade war, which would affect consumer spending, might reverse those gains. On top of that, since the economy and employment look so strong, we’re spending a ton without saving. Household savings have dropped dramatically over the last few years. Now they’re around two-and-a-half percent. And because Americans don’t save enough, we have to rely on foreign capital to keep the country going.
But if we get rid of the trade deficit, Trump couldn’t get that foreign capital to run budget deficits here. We’re spending more and more, and we’re racking up more debt, and if something goes wrong, or if a trade war gets out of control, everyday Americans will find themselves suddenly in a bad place, wondering what ever could have gone wrong.