Let’s increase the tax on everything in the store by 25%!
Don’t we all like taxes? No, wait; let’s have China pay a 25% tariff on
everything they export to the US. They can pay their money directly to the US
treasury. Wait, who pays what to whom? Gibberish, I tell you!
A couple of weeks ago another #POTUS lie appeared, blazoned
across my twitter screen[i].
It boasted that tariffs on goods coming into the US would result in China
paying billions of dollars to our Treasury. It was a lie, but more importantly,
it was a demonstrated lack of basic economic know-how. The leaders of the
homeland don’t understand economic theory.
Aghast at this blatant lie, I read the string of tweets
that followed @realDonaldTrump’s
claim. In minutes, there were many hundreds of comments; most of the
posters were overjoyed with the prospect of hurting the Chinese and any other
country that wanted to ship cheap goods to our shores. Oh, there were the
occasional crazy liberal left-wingers who disagreed. But, you just knew they
were coastal elites spouting their socialist mantras.
Some say that if you put eight economists in a room, and
ask them any question, they will give you at least twenty-four differing
opinions. However, Adam Smith, (1723-1790)[ii]
the father of economics, and most economists since the 18th century,
pretty much agrees that tariff wars are never a good thing. That may be even
truer today because of the extent of the global marketplace.
It’s true that the US has a big trade deficit vis-à-vis
China, and a few other countries. We import more than we export. The normal
approach to world trade is to have agreements among countries: respect patents, intellectual property, play fair and don’t flood the markets with below-cost
merchandise. It generally works. China doesn’t always follow the rules. Will
tariffs end their bad behavior? History tells us no.
When the US places a 25% tariff on products coming from
China, who actually pays the tariff? Is it China? Nope! Do Costco, Walmart,
Target and other companies that import goods from them pay the tariff? Yes,
but the extra cost is passed to the American consumer. China does not pay one
red cent of the tariffs. But the trade war still escalates.
China has announced new tariffs on US goods exported to
their markets, like our agricultural products. If our farmers can’t export
their product, they can’t sell their product. If they can’t sell their product,
they go broke.
We live in a global marketplace. The small population of
the US (326 million)[iii]
must sell to the world market because it can’t survive on just the US consumer.
Automakers, for example, sold 17- million cars in the US in 2018. Europeans
bought 18- million cars, and Chinese bought 28- million cars in 2018. If you
want to be in the car business, you had better be in the global market. Eighty
percent of Buick’s sales are in China.[iv]
Toyota, Honda, Acura, BMW, Mercedes, and others manufacture cars in the US. It’s
a global market, so companies manufacture where the market dictates.
If we know that tariff wars seldom work, why do we start
them? Sometimes it’s a message to other countries that we expect them to play
fair. Usually, it’s a political move to assuage a base of supporters and those
were hurt by the massive regional economic shifts.
A better way to tweet out an explanation of the tariff war
would have been to tell the people that the government was imposing a 25% tax
on nearly everything imported from China. Then the government should have
reminded consumers how many Chinese goods they purchase each year. It could
have also reminded the people that nearly everything we export to China will be
subject to a tariff/tax, which will reduce the number of goods that they will purchase
from the US.
Tweeting can’t possibly be the best way to communicate
serious government policy. Yet, the millions who follow our leader are
satisfied with his comments, like his ideas and comment on them regularly[v]
Too many of us lack a foundational understanding of
economics, so we accept tweets about the goodness of tariffs, even when they
are lies. Many victims of lost jobs to the global market need and want to hear
that our government is doing something to return manufacturing to the heartland,
even when they are lies. People want meaningful jobs, they want to contribute, and
desperately want to make things better for their children, so they buy into the
lies.
So, should we be concerned about the lack of economic
knowledge among our government leaders or the extent to which they use lies as
a strategy? Yes, to both! The reality of the marketplace will help ease
economic illiteracy. But, will we trust them in times of crisis? I wonder. I
suspect not, and that will be to our detriment.
[i] @chuckwoods56
[ii] Adam Smith – The Wealth of Nations – W. Strahan
& T. Cadell, London, 1776
[iii] China and India are both well over a billion people
– World Population Review 2019
[iv] Carsalebase.com 2019
[v] 12K comments, 18K retreats, 86K likes, 60.2 million
followers - @real Donald Trump – May 10, 2019
