E More About Trade Wars

I want to talk about the trade war again with China, because the Chinese have made a retaliatory strike. In the past I have predicted that the talks between China and America would break down, and that is exactly what happened. America instituted tariffs on Chinese goods, then added and increased the tariffs, and China said Monday that they will institute tariffs in retaliation as well. And from an economic perspective, there’s a few points to ponder, because it really does affect all of us, both here and in China.

First, tariffs imposed by America on Chinese goods may help American competitors in the short run. So too, Chinese imposed tariffs on American goods may help Chinese competitors in the short run. Emphasis on the word may, because there is no guarantee it will help.

Second, regardless of who imposes a tariff, it always results in the diversion of good capital to inefficient investments.  Bad investments will temporarily look good, but in the medium to long run, this will hurt both sides as good capital is diverted away from truly good investments.

Third, a tariff is looked at as a cost of doing business, and therefore a Chinese producer of yarn, for example, will pass that cost onto the buyer of his products, as will the American producer of products with tariffs imposed by China.  The guy who is really punished in this scenario is the final consumer, you and I and all other buyers of any product with a tariff.  And that will ultimately raise the cost of living without a commensurate rise in wages, leaving less cash on hand to consume other stuff, pay down debts, or save for the future.

Fourth, politics aside, President Trump may be right that the Chinese are being ruthless predators on the economic front by violating international trade rules and treaties and the like, but where he is wrong is that he thinks they’ll cooperate and we should play nice while they are playing playground bully. What has happened here is that the playground bully threw the first punch, and rather than punch back, Trump has gone to tell the playground aide. After all, there’s a reason this is called a trade war, and not a trade event. There is no playing field with referees here.

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Carl Schwartz 5 days ago Member's comment

I'm all for negotiating a better deal. But a #tradewar helps no one. They should get back to the negotiating table! Sometimes I think #Trump likes to be a bully for the sake of being a bully.