Tariffs are a means to an end
by Serban V.C. Enache
China vowed to counter Trump’s announcement of 200 billion dollars worth of tariffs on Chinese exports to the US. If the US loses less than China, that’s called “winning” in Trump’s view. I have written in the past about protectionism, the Historical School, and the role tariffs played as a policy instrument for the development of manufacturers and overall industrialization. However, I always stressed that context is the ultimate factor in decision making. There is no policy to be followed religiously irrespective of circumstance.
In this case we’re talking about the United States of America, a country that is already developed. It has the infrastructure, the know-how, the labor, and the military and industrial means at its disposal to do great things. It doesn’t need protectionist policies in place. All it needs is correct fiscal policy to increase employment, decrease rent and cartelized markups, and increase wages.
In 2017, China received about 130 billion dollars of imported goods from the US. In turn, the US imported over 500 billion dollars in Chinese goods. In services, though, the yanks have a small trade surplus. There’s no doubt that Trump’s tariffs will hurt Chinese exporters – and that Chinese retaliation won’t be to scale. With regard to steel alone, the US has about 140.000 steel production jobs and approximately 6.5 million jobs that depend on steel.
One would think Trump’s steel tariffs are for the purpose of protecting US steel workers from the Chinese firms who benefit from the ‘unfair’ Chinese Government currency peg (the yuan is not allowed to appreciate against the dollar).
Even though it was sold off as a fair counter to the unfair Chinese peg, Trump’s tariff policy actually hurts steel exports coming in from allied and friendly states. The European Union (over 20%), Canada (over 18%), South Korea (over 12%), Mexico (9%), Brazil (9%), Japan (6%), and Turkey (over 4%). Steel imports from China are at only 3.5 percent. Since the numbers don’t add up with the official narrative, we have to scrap the policy’s appearance and focus solely on its essence.
On March 5th, Bruno Le Maire, France’s economy minister, revealed that the European authorities are working on a plan to tax Google, Facebook, Amazon, and Apple. The tax rate is expected to be “closer to two than six” and shall be levied on the companies’ turnover, not on their profits. The rent-seeker in chief (Trump) is trying to look tough and appease his nationalist base; and the EU doesn’t wish to play dead either. The issue of protectionism is particularly divisive, because the far right and the old left are in favor of it, while libertarians and liberals prefer free trade.
So long as politicians cooperate with the deep state and private monopolies, they get favorable press coverage. If they don’t, they get smeared. The multi-nationals lobby countries left and right, they have politicians in their pockets. So no matter what happens, their investments will pay off, and if they don’t (though highly unlikely), they can more than comfortably endure the losses. In all this discussion, however, protectionism gets a bad rep. What is a nation’s particular context, and what is its strategy?
Historically speaking, tariffs were just a small part of a broader plan of national investment. The goal was to foster and protect nascent industries. Manufacturing and agriculture – these sectors are seminal to possess, because unlike mining and deforestation, you’re not depleting your pool of resources. The fundamentals for a full fledged sovereign state (mini-states excluded) are agriculture, industry, and commerce. Once these three elements are grown and combined, the nation can open up to free trade, when it is able to compete on equal footing with other countries in world markets. Yet the issue of demand is ignored time and time again. It is especially tragic since most countries around the world are nowhere near full capacity. Unsold output abounds. Idle production capacity is in excess. Instead of trying to win the race to the bottom, we should have a race to the top by increasing wages and increasing investments for public purpose.
If the goal is to help out domestic steel production, the Federal Government can simply create demand for US steel. It can include a protectionist clause (Government calls for tenders) to only accept US produced steel, and only import if there’s a shortfall in domestic supply. Another way Trump can secure demand is to give out US dollar loans to partner nations in bilateral trade agreements – with the obligation for the debtor countries to only use the loans to purchase output manufactured in the USA. The loan would appear on the asset side of the Federal Government’s balance sheet, so it wouldn’t add to the fiscal deficit or the national debt.
The game, of course, isn’t played in the interest of consumers and workers, it’s played in the interest of trans-national oligarchs. Tariffs or not, real issues are lack of demand, lack of purchasing power for the poor and middle class, erosion of the physical infrastructure, alongside environmental degradation.
Jobs in the US steel industry have been falling for decades. The sector, which includes only workers where the steel tariffs are concerned, employs a total of 140.000 people. Foreign competition alongside technological innovation is blamed for the sector’s job losses. Since the year 2000, employment in steel production fell by 33 percent while output per worker increased by 43 percent.
Tariffs increasing the price of imported steel will make domestic steel producers to also increase their price. Markup adjustments generally show that a 10 percent increase in competitor prices leads to a 5 percent increase in domestic prices. With a 25 percent tariff on imported steel, local steel producers can increase their markups and remain competitive. But firms dependent on steel inputs (both importers and non-importers) will face higher prices. Down the line, domestic producers will have to increase their prices or reduce markups; the former will render them uncompetitive relative to competing imports. Consequently, US exporters who require steel or steel-related inputs will face higher costs and will have to either increase export prices or lower their markups. This phenomenon could lead to lower employment in these steel-intensive industries and potential bankruptcies.
It’s likely that average wages in US steel-related industries will decline, and fired workers will remain unemployed for quite a while.
The negative effects of the steel tariffs could be amplified if there is retaliation by other countries. China has already retaliated against Trump’s plan by imposing tariffs on $3 billion in fruit and meat imports from the United States. Placing tariffs without giving contracts to domestic manufacturers is folly. Again, since the US is a developed nation, it doesn’t require tariffs, it requires demand and ‘nationalistic’ call for tender clauses in those Government contracts – in which firms competing for those Government contracts would have to use first and foremost domestic resources, and foreign ones only in case there’s a domestic shortage.
Employment in steel is down 57.7% while production is up 7.7%. The sector is doing more with less. Gains in productivity and rising automation are a reality. I often hear naive folks who look at automation as an inconsequential thing to life of people at grassroots. We’ll see how they feel about it when this phenomenon they belittle so much will threaten their jobs and incomes – and they will have the unpleasant discovery that Government welfare checks or employment guarantees don’t offer living wages or adequate benefits – in contrast to the jobs they lost due to automation.
To sum up the Trump tariffs, it’s a strange geopolitical bargaining chip; it’s not about targeting a revival of US industries. The figures speak for themselves without any need for a philosophical boxing match between protectionism and free trade ideas. 6.5 million US employees benefit from lower prices. Only 140.000 employees benefit from tariffs. 327 million US consumers benefit from lower prices. Cheap steel is to the benefit of US exporters, particularly if the EU applies tariffs and the US doesn’t.
Affordable Chinese imports (via the cheap yuan-dollar peg) benefit the United States. Many people believe that the Chinese are financing the Federal Government’s ability to remain solvent. This is not true, because the Chinese don’t print the US dollar. The Chinese (with their earned dollars) can buy whatever is available for sale in USD (goods, services, foreign currencies), can buy US treasury bonds (which are saving accounts at the Federal Reserve), or they can leave them in their checking accounts at the Fed. Saving accounts pay higher interest than checking accounts.
So… China sells the US cheaper goods while China recycles its commercial surplus against the US by purchasing US Government treasuries. There are two points of view here. China profits from the exports to the US by giving its people jobs and good wages, but China incurs the cost of pollution associated with the manufacturing and exporting process. US consumers (those who have an income from which to spend) benefit from cheap Chinese goods, but at the expense of domestic job losses that paid good wages. These (good) jobs get replaced by lesser (paying) jobs, if at all… Yet, this state of affairs has been going on for decades, and no American politician had any real problems with it. But the lower middle class bled profusely.
The present geopolitical dynamic is different from the one in the past. China’s growing dominance in Asia, Africa, and build-up in military capabilities have the Deep State worried. If anything serious happened between the two powers, the US would freeze Chinese accounts at the Federal Reserve or cancel (delete) them outright. Personally, I think it’s high time Chinese political elites changed gears and quit sending net wealth abroad in exchange for net payments in US currency. This strategy worked in the past when China had need to develop its economy by purchasing technology, capital goods, and materials that were not available for sale in yuans – but the situation has changed. Time will tell how the new relationship between Washington and Beijing will unfold. To make matters more interesting, next year the US is set to become the world’s biggest exporter of crude as well as the biggest exporter of refined petroleum products. Don’t discount a 2nd term for Trump, especially given the behavior of corporate democrats, complicit in the thievery and belligerent stances on foreign policy. Trump is not an ideological crusader. He’s concerned with staying in power for as long as he can to expand his web of ‘friends’ and ‘favors’.
By the by… While browsing the news on the issue of tariffs, I read a claim made without any type of demonstration that if all countries in the world dropped tariffs completely, that would be the ‘best’ option. Sometimes I wonder if people have bothered to read up anything on history. Tariffs are a means to an end, and do not deliver magical results on their own. They need to be accompanied by increases in domestic Aggregate Demand. If implemented correctly, tariffs are an efficient instrument (to be used by a young or undeveloped nation) for protecting and fostering national industries, infrastructure (emphasis on in-land development), and the skilled workforce necessary for its operation. These three things are seminal for ensuring a nation’s independence and sovereignty.
But I guess in the cosmopolitan world view – in which states are supposed to be the servitors of big corporations and nations the embodiment of evil – independence and sovereignty are inimical to world peace, oh, I mean, a threat to the global rent-seeker paradise, in which ownership over natural resources, over capital, and the exploitation of the mass of humanity is done by a select few.
Only the slave’s mind can be tranquil in these times…
Serban V.C. Enache is a Romanian journalist and indie author. Though interested in history, politics, and economics, his true passion is for medieval fantasy fiction. https://www.amazon.com/Serban-Valentin-Constantin-Enache/e/B00N2SJD6O/ He can be reached over Twitter. https://twitter.com/SerbanVCEnache