The world has been waiting to see how the Trump Tariff plays out. Enacted in March of 2018, and primarily targeted at China, it has been on again/off again. But on 6/22, EU counter tariffs took effect and new China tariffs hit in a couple of weeks. President Donald Trump believes that America can force global political and economic changes through tariffs. Is Trump right? What can we expect in the coming months?
Every nation has tariffs, including America. But the world has fewer tariffs now than a few decades ago. Globalization increased trade and commerce with other nations and tore down tariffs and other barriers between nations. Globalization was the darling of conservatives, under the name of "free trade" - a fundamental pillar of capitalism. However, lower barriers to trade also meant lower barriers to offshoring, automation, intellectual property theft, lower wages, and a loss of jobs. In the UK citizens saw falling wages as the new reality and chose to opt out of globalization with the Brexit. However, even if anti-globalization arguments are right, globalization happened for good reasons.
Big corporations wanted higher profits from cheap foreign labor and access to new markets, especially China. Both political parties saw globalization as a force for peace. After all, nations that trade don't bomb each other. And it all came true! Corporations had exceptional profits. China and developing markets added hundreds of millions of new customers to the global marketplace. We haven't had a World War since the 1940's. That's a world record for peace and prosperity!
If globalization cost jobs and lowered wages, the working class paid the price. However, the same individuals financially benefitted from low-cost goods from retailers like Walmart. By the 1990's Walmart became the world's largest corporation, outselling local competition and then taking over their customers. By pioneering the sale of inexpensive Chinese products to American consumers, Walmart offered unheard of low prices. The rise of Walmart eliminated small stores and domestic suppliers. And the jobs they provided. But Walmart also saved the average American family $2,500
every year, keeping millions of American's above the poverty line.
Soon everyone sold Chinese and offshore consumer goods... Costco, Sam's Club, Amazon, and others. Today every retailer sells Chinese goods, sometimes under an American brand name. The cost of everything
is lower! According to a study by Wells Fargo, our spending on clothing has dropped dramatically. In 1959 Americans spent 26% of their discretionary spending on apparel and footwear. Now it is just 11 percent.
Another study, by the Pew Foundation, tells us that US wages have been stagnant since the mid-1960's
. But the low cost of luxury electronics... flat screen TVs, smartphones, computers... and other cheaply manufactured offshore goods creates an illusion of wealth. The reality of consumer buying power is clear when you need medical care or buy a house.
Economists agree that tariffs don't work. Tariff a nation, and they tariff you back, raising the cost of products for consumers and killing jobs. Let's look at the details of the Trump Tariff:
- Weak Foundation : In March of 2018, President Trump tariffed foreign steel and aluminum. Traditionally, tariffs require the consent of Congress, but rarely used rules do allow the President to unilaterally impose tariffs (during a war, a national emergency, or for reasons of national security). The war in Syria might justify a tariff on Russia, but we're not at war with China, Canada, Mexico, France, or other tariffed nations.
- The Opposition: Democrats would like to block the Trump Tariff, but they lack the votes. Historically, Republicans are anti-tariff. But, if the tariffs hurt their voters, they just might make friends with Democrats.
- China: China has a lopsided trade agreement with America and the world. China is the world's center for counterfeit goods, they steal intellectual property ($50,000,000,000 annually), manipulate currency to lower their price of goods, and demand the right to reverse engineer any technology used in China. But China buys $115 billion of American products. They have already enacted a $3 billion tariff on the US. On July 6th, Trump ups the tariff on China by $50 billion. China pledges to respond in kind.
- Allies: Normally, you want the support of economic allies when you enact a tariff. Instead, the Trump doubled down, tariffing enemies and allies, shocking economic partners around the world. It is difficult indeed to explain why America suddenly need to tariff Canada. Over maple syrup. For reasons of national security. Not surprisingly, every nation we tariffed announced counter-tariffs.
- Timing: The coming weeks are filled with counter-tariffs. On June 22, the EU starts new tariffs. On July 1st, new Canadian tariffs hit, and on July 5th, Mexico adds its own tariff. July 6th starts is a big new round of Chinese tariffs. Even India has tariffs slated for August.
- Mindshare: Mainstream media thrives on bad news. We will see a constant stream of tariff reporting throughout July and beyond. The stock market is expected to have some very bad days.
- Retaliation: Trump has already announced more counter-counter-tariffs. Including a new tariff of $200 billion against just China. Each new round of the Trump Tariff is several times larger than the last. Since China only sells around $500 billion in goods to the US, Trump has just one more escalation left.
- $200 Billion?: China only imports $115 billion in American products, limiting their next round of retaliation. However, China can retaliate in other ways, such as no longer buying US Treasury bills, bonds, and notes (they own $1.3 trillion). If China is no longer an investor in the Treasury, our interest rates will rise. Remember, Washington needs another trillion dollars in Treasury securities to pay for the Trump tax cut.
The world has not followed Trump's script as nation after nation rejects the Trump Tariff. Trump has asked America to be patient while the tariff works, but a falling stock market and the potential of billions in lost business is starting to make the Trump coalition nervous. Trump can fire one last round of tariffs at China, but after that... is Trump ready to fire the first round of a full-scale global Trade War? Before the summer is over, we'll find out!