Trade Wind

07/18/2018

I hear a lot these days about how great the economy is, with corporate profits through the roof and the unemployment rate dropping like a stone. I’m not completely convinced.

There is also a general impression among Americans that the stock market is soaring. I don’t usually talk about the market very much, because it can change direction at any moment, and I think it’s important to remember that it is just one facet of a very complicated economy, but it does sometimes send messages to which we should listen.

It was actually 2017 that saw the big run-up in the stock market, as Wall Street anticipated a major tax cut. We could argue all day about whether or not the cuts were the right thing to do, but the market was quite correct in assuming that they would happen, and that they would add fuel to the economy.

By February of this year, the market had moved on to the next big thing, and this thing was not so appetizing. In just two weeks, the Dow fell more than 3,200 points, or 12 percent.

The reason the market went down was basically the same reason it had gone up, except in reverse. The president was taking action to fulfill another of his campaign promises, albeit a promise that most people hoped he had not really meant.

For more than a century, the United States got along without any income tax. The federal government derived most of its income from tariffs, and financially it was a very successful arrangement. In 1882, for example, the country ran a budget surplus of 36 percent, but there was a growing consensus that the system was fundamentally flawed.

A tariff is a tax which is applied to certain imported products, or to imports in general. Although it is initially paid by the importer, ultimately it is passed along to consumers in the form of higher prices on those products. It’s considered to be a “regressive” form of taxation, because it is not adjusted according to income. In fact, it hits the poor especially hard because they tend to be more dependent upon cheaper imports.

It is a tax that can also be advantageous to the wealthy, or at least to some of them. Tariffs are usually designed to protect domestic manufacturers (or farmers, or miners) from lower priced foreign competitors. In the case of the U.S. those domestic suppliers are privately owned, and the owners can benefit enormously from protection.

During the 2016 presidential race, Donald Trump said that, if elected, he would impose a 45-percent tariff on everything imported from China. His rationale was that such a move would protect jobs in the U.S. and bring back jobs that have been lost.

There are, to be sure, some reasons to be concerned about our trade relationship with China. We currently run an annual deficit of around $600 billion, and several million American jobs have indeed migrated to China over the past two decades. China does protect some of its own manufacturers from American competition, and it allows the theft of intellectual property to continue at an alarming rate.

According to the U.S. Department of Commerce, the toy industry is one of the most extreme examples of the China syndrome. Around 80 percent of the toys sold in the United States are imported, and China is by far the biggest source. In 1992, less than half of the imported toys came from China, but by 2008 that share had grown to more than 90 percent.

If we’re talking about jobs, however, there are other statistics to keep in mind. One of them relates to technology, or what economists call productivity, the ability to produce more products with fewer people. At least 85 percent of the job losses in this country were the result of modernization. The jobs didn’t go anywhere, and we actually produce more now than we ever have.

The jobs that did go to China didn’t get there because of unfair trade policies. They went because wages there were lower, allowing manufacturers to compete on price. If those jobs should ever leave China (assuming technology doesn’t obviate them), it will likely be for the same reason.

China now has the highest average pay for factory workers, at $424 per month, of any country in developing Asia. The average in India is $230, Vietnam is at $185, and Bangladesh is $100.

The U.S. average is around $3,800, and we are basically at full employment in this country. Do we really want or need those jobs back?

The real issue is not the jobs that have left, but the money that continues to flow from the U.S. to nations around the world. There is a perception among many Americans that the trade deficit is caused at least in part by countries that assign high tariffs to American products. The president has been reinforcing this notion every chance he gets, insisting that the U.S. has been taken advantage of by virtually everyone.

It made me curious about how high tariffs really are, so I did a little digging. If you average out the levy on all the products imported into the United States, the tariff equals 1.6 percent. That happens to be the exact same average tariff on goods brought into Great Britain, Germany and France. Japan is slightly lower, at 1.4 percent.

China is indeed much higher, at 3.5 percent, but not as high as Mexico, which has an average tariff of 4.4 percent. Still, those numbers don’t sound nearly as severe as we have been lead to believe. Where are the 100-percent markups that we keep hearing about?

Well, it turns out that such things are real but very rare, and every country seems to have a few. The United States, for example, has a 25-percent tariff on light trucks, making it virtually impossible for overseas manufacturers to be competitive. That would explain why Toyota builds its pickup trucks in Texas.

Among our major trading partners, the lowest average tariff was .8 percent, or half that of our own. Ironically, the country with that rate is Canada.

The constitution grants Congress the power to regulate foreign trade, but the executive branch has gotten around that fact by arguing that the control of some products is vital to our national security. Under that rationale the first new tariff to take effect was on steel and aluminum, and the country most affected was Canada.

The Canadians took offense at being construed as a security risk to the U.S. and promised to retaliate accordingly. A nasty war of words followed.

But don’t worry. As soon as we get our friends straightened out, we’re going to deal with China. Just this morning, the White House released a list of Chinese products, representing about $50 billion in trade, which will be hit with a 25-percent tariff. Toys don’t seem to be included, but stay tuned. Trade wars have a way of escalating.

They also have something else in common. Nobody ever wins.


You can e-mail Kevin at kfahy@fwpi.com.

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