Arthur E. Sowers is a resident of Harbeson.
Donald Trump has always presented himself as some kind of “Superman.” He even bragged that, in his second term, he will “fix everything” (an internet search will reveal links to this). In recent months, he bragged about one of his grand plans to significantly raise tariffs on all imports from all other countries. I saw many articles that read that most economists think this idea from Trump is a bad one. I agree with the economists. Wall Street didn’t like his plan, either. Trump’s new tariffs started to go into effect Feb. 4 and, within one month, turned into both a national and an international train wreck. A nice, short summary of Trump’s actions and dates is on the NPR newsletter website for March 7. Canadian and European grassroots boycott movements started to spread to protest Trump’s tariff actions. Trump got additional overwhelming pushback, and he had no choice but to retreat or delay at least some of his tariff plans. I would say he shot himself in the foot. In this letter, I will shed more light on this and related problems.
Trump proposed two reasons for his tariff actions.
First, he has made a lot of noise about the fact that we “buy more from” than we “sell to” foreign countries, and that increases our trade deficit, even though this has been going on for 50 years. And, second, he made even more noise about the fact that foreign countries sometimes put higher tariffs on stuff we export to them, compared to tariffs we put on what we buy from them. Hence, he says, “they are ripping us off.” He is right about the two facts but wrong about the “rip-off.”
I would like to explain how this “story” is another misunderstood molehill that Trump is puffing up into a mountain. Here is a very simplified model of how it works. You buy a made-in-China light bulb at a big box store for one dollar. Big box transfers one dollar from its account in a U.S. bank to China Light Bulb Co.’s account in the same U.S. bank! The Bank of China (in China) gives 5 Chinese yaun (“yaun” is the informal name for what its currency is called) to China Light Bulb Co. in China to pay workers who make many, many light bulbs for those 5 yaun.
Notice these two important facts (this is never mentioned in news articles): First, that one U.S. dollar stays in the same bank in the USA, even though it just went out of one account and into another account. Second, the bank still gets to loan 95 cents of that dollar out and earn market interest, which the bank takes as profit for itself. The dollar does not get on a boat to China. It stays in the USA, to be used a second time as a loan! It is almost magic. But that is only half the story.
The Bank of China (in China) has to have a deal with the U.S. bank, such that a dollar deposit here in the U.S. will let 5 yaun go out to someone in China. Conversely, a Chinese guy buys a $100 made-in-USA computer by depositing 500 yaun into the Bank of China, which then tells the U.S. bank to move $100 out of the China account in that U.S. bank and into the U.S. computer company account in that U.S. bank. No problem there. That is, basically, how trade is financed.
Where is the problem? It is when the Chinese account in the U.S. bank grows in U.S. dollars faster than the U.S. account grows in yaun in the Bank of China. With a surplus, China can start buying up more assets like land, companies, etc., here than we can buy in China. There is a “cheat,” however. The Chinese yaun is devalued! In other words, the exchange rate has a lot to do with who gets more business. China devalued the yaun, deeply and twice, in the early 1990s. No wonder stuff you buy from China is much cheaper. Its currency is weak; ours is strong (see the Wikipedia article “Strong dollar policy”). If our currency was weak, we would have a trade surplus, but then, the U.S. dollar would lose its worldwide stability and desirability. Right now, about 75% of all worldwide business, even between non-U.S. countries, is paid for by such transfers, like above, of U.S. dollars between different accounts in U.S. banks! Also, doing business with the U.S. dollar is preferable because we have the best payment system in the world.
Tariffs were meant to do two things: (1.) generate revenue for the government and (2.) increase the cost of imports to inhibit too much purchase of foreign products. It should be expected that smaller, weaker and poorer countries will have tariffs on us that are higher than our tariffs on them. It has been that way for many decades, too. We had big trade deficits with Japan from as far back as about 1960-70 right up to now, and overall, it did not hurt us.
Economic history shows that, if one party increases tariffs, then all the others retaliate. It causes a slowdown in sales everywhere. Trump’s idea to force American corporations to move their factories back to U.S. soil would, indeed, reduce the trade deficit. But it will also increase prices and inflation here. Trump’s idea of a simple “fix” is flawed from the start.
In another political stunt that was more “noise” than substance, Trump said our national debt is too high. Trump linked his perception of the national debt problem to (1.) too much government spending (thus, the massive government layoff project under way now, which is also not going well) and (2.) his solution to raise tariffs. He is really doing this to ward off the unpleasant effects of going off of his Tax Cuts and Jobs Act (2017), which would raise our taxes back up as it expires at the end of this year. It’s a lose-lose situation. Trump is caught between a rock and a hard place.
Reader reactions, pro or con, are welcomed at civiltalk@iniusa.org.
