Tariffs – A Lesson in Economics for Trump Supporters

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Trump Tariffs a lesson on economics
Photo Credit: politicaledu.org

In regards to economic affairs, Donald Trump’s presidency has been one that could be described as turbulent. Trump’s policies consist of actions both praise worthy and worthy of condemnation.

Through one action, he spawns investment and increases productivity through large tax cuts. However in a short period afterwards, Trump signed off on a $1.3 trillion dollar omnibus spending bill that is forecasted to further increase the already crippling 21 trillion dollar debt.

This bipartisan effort was the largest spending bill since the Obama stimulus. His supporters tout him as a shining example of fiscally conservative principles, yet that notion is completely unfounded when one observes his policies.

Of all of the policies one may choose to analyze, Trumps stance and policy making on trade must be condemned. This has proven difficult, as his followers seemingly have chosen to read his book The Art of the Deal, rather than Economics in One Lesson by Henry Hazlitt.

Whether it is diehard partisanship paired with denial, or a simple lack of understanding in economic thought, Donald Trump’s supporters have remained firm on defending his protectionist policies. They believe they are the face for free market capitalism, while in reality their insistence on government intervention is nothing less than glorified socialism. Ultimately, Trump has convinced his supporters to support an increase in taxes on them due to a lack of understanding economics.

Firstly, let’s establish what economics is, and what it is not.

Economics is the study of efficiently utilizing scarce resources that have alternative uses. Accounting concepts, such as trade deficits, are not.

In order for one to understand economics at its core, one must grasp the concept of scarcity. Simply put, scarcity is the fundamental observation that humans exhibit unlimited wants, but the resources to satisfy these wants are limited.
These wants and desires can be met from the goods and services that are produced by an entrepreneurial entity that acts in self-interest and is incentivized by profit.

Ultimately, the producer intends to meet the wants of the consumer, while simultaneously maximizing profits. The producer maximizes profits through various competitive methods. Methods that are directly related to trade include decreasing costs of production, offshoring, outsourcing, and specialization. While these factors are vital, they all are directed to obtain a desirable level of efficiency.

The protectionists believe it is healthy to produce goods at the cost of an increase in consumption prices, as long as it is “saving American jobs.”

Yes, tariffs do protect the industry that they are intended for. However, this is paired with externalities that cause unintended damages such as increase in consumer costs and job loss in industries that rely on the imported good.

Trade allows separate economies to engage in a mutually beneficial exchange called a comparative advantage. Comparative advantage essentially insinuates that one country can specializes and produces a particular good more efficiently then another country can, while the other nation produces a different good more efficiently then they could.
The nations then trade the manufactured goods with one another, which allows the consumers and companies of the importing nation to purchase them at a lower cost. This allows both nations to reallocate scare resources to another domestic industry which is more profitable, thus becoming more productive and increasing output. There are no losers in this trade, only winners as both parties were better off after the exchange.

One must understand that trade is not a “zero sum” game. There are not winners and losers in a voluntary exchange. If there was, nobody would do it. This is why it is vital one does not attempt to use accounting practices in economics, as the utility and value of goods are subjective.

To claim that our business owners are “losing” in trade and that government must intervene and alter the exchange, is to insinuate that the government knows how to run an individual’s business better than them.

To say the least, the government does not have a great track record in this regard. And yet they create outrage in the name of jobs, and use phrases such as deficits and surpluses.

Deficits and surpluses do not matter.

To echo Thomas Sowell,

“Too many people have yet to grasp the full implications of that, even in the twenty-first century. If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a “deficit” or “surplus” in the international balance of trade.”

As mentioned earlier, this is a misapplication of accounting concepts into an entirely different realm of study.

One important factor that is not even accounted for is the income the US generates from exporting services, which is the large portion of our workforce and output.

Economies start as agricultural, then through innovation and growth a particular economy becomes industrial. Eventually, the industrial society a country maintains becomes obsolete like its agricultural predecessor, and the economy transforms to one that is a service based economy.

The US happens to be in a service economy, while competitors such as China remain in one that is industrial. When China is introduced into the equation, the protectionist will then claim that China uses slave wages and labor, making it virtually impossible for US companies to compete. Again, another misguided claim that holds no value.

This can be debunked in multiple manners, one being comparative advantage. China can effectively manufacture in an industrial setting due to cheap labor, while the US has more highly skilled individuals who can offer services more affordable than the Chinese.

But what of competition between the US and China in the same industry? American workers are able to produce more per hour than in poorer nations who have little investment in capital and maintain bad managerial practices.
This illustrates that the US is more efficient per unit of output. For example, in a study introduced by Thomas Sowell in Basic Economics, he acknowledged that it is estimated “the average labor productivity in India is 15% of that in the U.S.” Therefore, hiring an Indian worker at a mere 20% of a US worker would still be more expensive when observing output.

A common argument of many supporters of Donald Trump’s tariffs has been that the US used tariffs in the nations early years of development. Though this is true, it is extremely dishonest to use it in this context.

Tariffs were used to fund the Federal Government, not for the sake of protecting industries who are failing to compete internationally. Tariffs accounted for roughly 80-95% of federal revenue up until the mid 1800’s. Their stance is further static due to Congress allowing the government to use tariffs and excise taxes. It is as if this appeal to government legislation somehow negates the common economic fundamentals mentioned in this article.

When one proposes policies, they must be judged by their results, not their goals. This is a common problem with left-winged proposals, such as “living” wages, universal healthcare, etc. Among these policies, there is an extreme disregard for what outcomes actually manifests from their initial implementation. However, the protectionist has adopted the tendency to completely ignore the results of government policies.

Let’s look at the results.

Certainly one couldn’t forget the devastating effects of the Smoot-Hawley tariff that influenced “Black Tuesday” and the Great Depression.
1,028 economists of various schools collectively urged congress not to pass the damaging tariff, but it fell on deaf ears.

This tariff, although not made decree until after the Great Depression began, caused a massive decrease in investment production from mere speculation. This negative outlook on a future piece of legislation caused a major crash in the stock market. To add to this, during the Great Depression, the United States had a surplus in trade. Obviously, this accounting observation held little importance.

Another example is when the Bush administration levied tariffs on steel imports in 2002. The immediate effect was an increase in domestic companies output and jobs of the particular industry, as expected in the short run. However, other domestic industries who used steel for production saw a steep increase in costs of production. ITC estimated a 31 million annual loss in its report. Consuming Industries Trade Action Coalition (CITAC) funded a study that measured nearly up to 200,000 jobs lost indirectly from the steel tariff.

Where was all the support from some of these ‘conservatives’ for tariffs when Obama enacted them on Chinese tires in 2009? Obama’s tariff, which backfired as expected, was the subject of scrutiny due to its indirect job loss and sharp rise in consumer pricing. It is estimated to have saved 1,200 jobs in tire factories in the US, but a study from the Peterson Institute of International Economics noted extensive losses. This included a 26% increase in costs for consumers, nearly 4,000 retail jobs lost, and not to mention other industries increase in costs of production that relied on cheap Chinese rubber.

Current tariffs are implemented under the same circumstances; the only difference is the person currently imposing them has a capital R in front of his name. It appears many choose partisanship over principle.

It does not matter if one would rather buy American. Others may not. Frankly it is not yours, nor the government’s duty to determine how individuals or private companies choose to purchase their materials and products.

It is extremely illogical, unprincipled, and a display of economic illiteracy to advocate government use of socialist practices to combat socialist nations we are trading with.  Rather than optimizing comparative advantages and using this competitive atmosphere to increase innovation, the protectionist suggest we use centralized planning and price controls in order to compete rather than allowing the market to maneuver as it should.

* Logan Davies works in the banking services industry. He graduated from Middle Georgia State University with a degree in business, and is currently pursuing his master’s in business economics. A proud father, outdoorsman, and rebel to society.

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Logan Davies

Logan Davies is a Regional Manager in the Banking Services industry, and the director of the non-profit organization, Voluntaryism in Action. He graduated from Middle Georgia State University with a degree in Business Administration. He is the father of a loving son, an avid outdoorsman, firearm enthusiast, and unwavering supporter of liberty.