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Trump is wrong on tariffs

Trade restrictions are a zero sum game, making some better off at the expense of others.

The Chinese government’s retaliatory tariffs have been concentrated on agricultural exports from the heartland of Trump’s vote.
REUTERS/Jonathan Ernst

Amid the “fire and fury” of the first year of Donald Trump’s presidency, one consistent source of good news has been the U.S. economy. Unemployment has continued to fall to historic lows, growth has reached rates which “experts” were claiming to be impossible, and the stock market has boomed. A strong economy might even break the ‘blue wave’ in November.

John Phelan

And then the administration started to ramp up a trade war. It is in danger of throwing away its trump card.

Free trade is a positive sum game, which makes both parties batter off. They wouldn’t do it if it didn’t. Minnesota, for example, produces more soybeans than it needs. Via trade, Minnesotans are able to exchange the surplus soybeans for other things, such as electronic goods from China or clothes from Vietnam. Trade works like a magic machine that turns things you want less into things you want more.

Trade restrictions are a zero sum game, making some better off at the expense of others. The recent steel tariffs, for example, will help U.S. steel producers, in the short run. But what about U.S. steel consumers? Companies such as Smyth in St. Paul, which manufactures cans for craft breweries, will see the cost of their inputs rise. They will either have to cut into their profits, pass the cost on to the consumer, or cut back on production. The last time the U.S. imposed steel tariffs in 2002, it cost an estimated 200,000 jobs among steel-using businesses. What the steel producer gains, the steel consumer loses.

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You will often hear people tell you that they do support free trade, as long as it also fair trade. Of course, who is better placed to judge the fairness of a trade than the trading parties? There is no doubt that China’s government has, in recent years, pursued policies that have given its exporters an advantage. The Chinese people have been taxed to subsidize Chinese producers. The Chinese central bank has driven the country’s currency down to keep exports cheap, which has also imposed a cost on the Chinese people by lowering the purchasing power of their wages. The Chinese, who have a GDP per capita of $16,600, are subsidizing the consumption of Americans, whose GDP per capita is $59,000. You can see why the Chinese public might be angry about this, but you might well be wondering why Americans should be looking this gift horse in the mouth. The answer to bad Chinese policy (subsidies) is not to impose bad policy in America (tariffs).

The Chinese government are not fools. They might not practice democracy, but they do understand it. Their retaliatory tariffs have been concentrated on agricultural exports from the heartland of Trump’s vote. A trade war will leave losers all across the United States, including here in Minnesota. This November, a few congressional Republicans might end up victims too.

John Phelan is an economist at the Center of the American Experiment

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