Economy & Business

Everyone Loses from Trade Wars

(Joshua Lott/Reuters)
In the long run, a closed economy would be disastrous for us all.

Thanks to President Trump’s tariffs on aluminum and steel, Coca-Cola recently announced that it will need to raise the price of its canned products. Though the company has not specified how much more consumers will need to pay for their favorite carbonated beverage, the bottom line is that tariffs do raise prices, and American consumers may soon see feel their impact on everyday purchases.

When Trump announced his tariffs in March, he infamously tweeted, “Trade wars are good and easy to win.” He was wrong. Trade wars are bad and impossible to win.

First and foremost, tariffs are bad policy because they purport to help American importers but, in doing so, harm American exporters. If you make goods that are exported to China, such as pork, soybeans, cars, planes, or plastic products, then your business will undoubtedly be harmed by China’s retaliatory tariffs on these items: Your products will become more expensive for Chinese customers, leading to a drop in sales. In a trade war, your business is harmed for doing something good: producing enough in the United States that you can export globally and make a profit.

If you work in information technology, aerospace, or robotics, then tariffs could potentially help you by weakening your Chinese competitors in the American market. Your business might get a boost from the U.S. government not because it deserves such a boost but simply because your competition happens to be Chinese, as opposed to, say, Australian or Japanese.

In short, no American business did anything to merit the special treatment of Trump’s tariffs, and no American business did anything to merit the punishment of Trump’s tariffs. Instead of allowing the free market to decide the value of products, the Trump administration has sought to use tariffs as a weapon to improve the American economy, even though tariffs will always give rise to arbitrary winners and losers. This is fundamentally unfair to businesses whose only crime was exporting goods into an emerging market, and to those whose only merit was happening to have the “right” foreign competitors. (Trump’s $12 billion agricultural bailout puts a nice bow on the whole farce: His tariffs hurt American farmers, and then he turned to the taxpayers to offset the damage.)

Instead of allowing the free market to decide the value of products, the Trump administration has sought to use tariffs as a weapon to improve the American economy, even though tariffs will always give rise to arbitrary winners and losers.

Supporters of Trump’s trade war might point to his recent success in securing negotiations with the European Union toward the goal of “zero tariffs.” They may say that he is using steel and aluminum tariffs to gain leverage in the ongoing NAFTA-renegotiation talks, or to force Beijing to end its “unfair trade practices,” as administration officials have put it. If so, Trump’s actions are even more irresponsible. Allowing American farmers and manufacturers to take hits in the hopes of securing better trade deals is political suicide and economic malpractice.

Though Trump’s free-trade negotiations with the EU do offer hope for a happy ending to the NAFTA talks with Mexico and Canada, he must surely know that he is not in as strong a political position as Chinese president Xi Jinping. Xi effectively made himself president for life this past March, while Trump’s party will face the electoral wrath of financially threatened farmers in November’s midterms. China’s economy is still under the thumb of its government, and any public outcry would certainly be suppressed. China could simply increase subsidies to its already state-sponsored exports. It’s not as if the Chinese press could criticize the government’s policy as the American press has criticized Trump’s tariffs. Only a privileged, handpicked group of people is allowed to criticize the Chinese government. China will be able to hold out longer than the United States during a time of economic pain because it’s a one-party state, meaning there is truly no way the United States could “win” this trade war.

Additionally, businesses value stability in economic policy, and volatile trade wars bring nothing but uncertainty. Business owners never know when a new retaliatory tariff could hit; they will not see it coming when a component they need in their production line goes up in price. For example, General Motors uses tariffed steel and imported auto parts to make its vehicles, and has suggested that Trump’s trade war will force it to cut U.S. jobs. If Trump wants to keep businesses in the U.S., unpredictability is a terrible way to incentivize them to stay.

Trump supports trade wars so heartily because he believes there is something intrinsically economically harmful about the trade deficit, the difference between exports and imports. Of course, there are working-class men and women in the United States who have been harmed by global trade as manufacturing jobs are offshored and factories shut down. But workers lose jobs and factories close because of trade itself, not because of the trade deficit. Though job displacement is one awful side effect of an innovative and prosperous economy and the U.S. should do a better job of mitigating it, in the long run, everyone benefits from trade. The alternative — an increasingly closed economy — would foreclose any potential for economic growth, hurting us all.

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