April 05, 2018

Trade Wars Are Bad

Simple economics for people in a hurry.

by Chris Thomas

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Photo by Guillaume Bolduc

Trade is, in a word, good. Be it between countries or individuals, any transaction is, pretty much by definition, one in which both parties feel pretty good about it. If you buy an apple for a dollar you expect to get more than one dollar of “value” (whatever that is) from the apple and the person who sold it to you feels that a dollar is a reasonable price for the effort it took to get that apple.

Trade means both parties benefit. It’s as simple as that.

When countries trade, that’s good too. American soybean farmers produce a lot more soybeans than the U.S. market can use. We ship those soybeans all over the world. Americans are so good at producing soybeans that, even with the costs associated with shipping them across the Pacific Ocean, American soybeans are cheaper in China than Chinese soybeans.

If the Chinese government puts a tariff in place — a tax, in effect — against U.S. soybeans that doesn’t do anything to help the average Chinese person. Chinese soybean farmers get a good deal — the average price of soybeans goes up so they can charge more for their crop — but the average Chinese person just pays more for soy based products and products that depend on cheap soybeans (like pork).

Of course, in the US that Chinese tariff hurts American soybean farmers. China won’t buy as many soybeans at the higher, tariff-inflated price so there are more sitting around in the United States. That lowers prices American farmers can get for soybeans which makes each acre farmed less profitable.

With the exception of the Chinese soybean farmer, everyone loses in this scenario. Technically, even the Chinese soybean farmer doesn’t see much of a gain; Brazil’s soybean exports are still cheaper than Chinese soybeans so the majority of soybean tariff windfall never lands in Chinese hands.

This dynamic gets even worse when we start talking about a trade war: multiple tariffs against multiple products on both sides of the Pacific. If trade means both parties benefit, trade wars man both parties suffer.

Now, to be clear, the United States does have a huge trade imbalance with China. Americans import much more from China than we export to it. That trade deficit is not a problem in-and-of-itself, but it does mean that that increased American spending often translates into Chinese — not American — jobs.

Tariffs can resolve the trade deficit but it can’t make American spending translate into American hiring. For that to happen the United States would have to be the second-most-efficient producer of all of those targeted goods. We just aren’t. Just like the Chinese soybean tariff will lead to increased Chinese import of Brazilian soybeans, an American tariff against Chinese manufactured goods just means that the United States will import manufactured goods from Vietnam, Taiwan, Korea, India, and elsewhere instead of from China. Those goods will cost slightly more, with prices passed on to the U.S. consumer, and the U.S. manufacturing sector will see almost none of the benefit.

Everyone loses.

Tell Congress What You Think

Unfortunately, the Congress doesn’t have to consent to any of Mr Trump’s changes to U.S. trade policy. November is coming, however, and the Chinese tariffs proposed so far hit Trump country pretty hard and the rest of America to boot. You can tell Congress what you think about trade, tariffs, or any other issue by texting RESIST to 50409. Or, if SMS isn’t your style, you can contact your government by talking to Resistbot on Facebook Messenger, Telegram, or Twitter.

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This fantastic image courtesy of the Washington Post. It divides soybean production by county, color-coded by whom that county voted for in the 2016 presidential election. Check out the rest of their article on the targeting of Chinese tariffs here.

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