Tariffs Are A Clear and Present Danger To The U.S. Economy
The business guru Peter Drucker is credited with the notion that “if you can’t measure something you can’t manage it”. Using this logic in reverse, perhaps the best way to thwart the misplaced attempts to manage global economic trade is to stop measuring it.
After all, when was the last time people worried about trade deficits between the 50 states? Undoubtedly, Iowa sells more agricultural goods to New York than New York sells to Iowa. And, New York probably sells more financial services to Iowa than Iowa sells to New York. Yet no one worries about these trade flows. Perhaps Iowa has a trade deficit with New York; perhaps it is the other way around. Who cares?
Yet, when the discussion turns from trade flows between individual states to trade flows between countries, all sorts of nonsensical theories arise. For instance, anti-trade factions falsely blame global trade on job losses in the U.S.; or, they claim that the U.S. trade deficit is a sign that we are not benefiting from global trade. There is simply no merit to these theories.
Tariffs have never, on net, saved jobs in any country that has imposed them. Similarly, eliminating the U.S. trade deficit, per se, will not create any net benefits to the U.S. economy.
While there is no net economic benefit from the tariffs, the tariffs are another body blow to the global trading system that has fueled U.S. prosperity for more than 70 years. And, while the opportunities created by the global trading system are often couched in terms of exports, this is only part of the story.
Imports improve the quality and quantity of goods and services we Americans consume on a regular basis – often providing us with these goods and services at more affordable prices. This means that U.S. families are better off when imports are increasing, not worse off.
The focus on exports also distracts from another important part of the global trading system – investment. For starters, foreign investment into the U.S. economy has created millions of jobs. According to a 2016 study by the International Trade Administration, over 12 million U.S. jobs in 2013 (8.5 percent of the labor force) existed because foreigners were investing in the U.S. economy.
Just as importantly, these investments increase our productivity and make the U.S. economy more competitive globally. Increasing the productivity of the U.S. economy is essential for increasing the economy’s growth rate and for revitalizing the growth in the average family’s income. Consequently, the net worth of American families grows faster when the U.S. engages with the global trading system, and grows slower when their access to the global trading system is arbitrarily denied.
Undoubtedly, the global trading system is rife with many trade impediments that must be managed, such as China’s theft of intellectual property. But, creating more trade impediments is not the answer to these problems.
This is particularly true for the tariffs that the Administration has imposed, which are on our closest trading partners who are playing by the rules. These countries, despite the rhetoric, impose tariff rates on U.S. exports that are similarto the tariffs that the U.S. imposes on their exports. Therefore, overall, there is already parity in tariff rates across these countries.
Of course, tariff parity should not be the goal because when the U.S. levies tariffs, the government is raising taxes on U.S. consumers and businesses. As with any tax increase, it is domestic citizens that bear these costs.
Businesses bear the costs of tariffs through higher production costs. These higher costs dis-incent businesses from hiring more workers or expanding production in the U.S. Instead of creating jobs, tariffs drive them offshore, along with the capital and investment that goes with them.
Tariffs harm families by raising the costs for all types of goods and services. As a result, families will have to spend more of their hard-earned money on the now higher priced goods, such as automobiles and food, and will have less disposable income to spend on other priorities.
Therefore, the tariffs that the Trump Administration is implementing are counter-productive – they attempt to punish countries for actions they have not taken by imposing higher costs on Americans.
Instead of pursing this economically destructive policy, the Administration should lead by example and reduce (or eliminate) all currently imposed tariffs. Such an approach would help families’ budgets, improve business productivity, strengthen the job market, and exhibit global leadership that would help expand the benefits from global trade.