VIPs
- Tariffs are nothing more than a tax on someone else’s goods that everyone ends up paying for.
- It’s no coincidence that U.S. imports have ticked down leaving the trade deficit at a seven-month low.
- In the grand scheme of a near $80 trillion global economy, the steel and aluminum tariffs that went into effect against U.S. allies at midnight on May 31 are inconsequential and symbolic…for the moment.
- When you raise the stakes in a trade war you risk lowering global trade activity on both sides of the trade ledger.
- Most world leaders are united in recognizing the tariff field is not level and are incented to work together to exact justice on the main perpetrator – China.
- A 25% tariff on cars and parts imported into the U.S. would possibly create 92,000 new manufacturing jobs but trigger a loss of 250,000 jobs elsewhere.
- The end goal of a more even-keeled tariff system is noble and worth pursuing. And yes, in an ideal world, there are no tariffs.
In an ideal world, there’s no crying in baseball, world peace is secure and, of course, there are no tariffs. After all, tariffs are nothing more than a tax on someone else’s goods that everyone ends up paying for. At the end of the G7 meeting, even President Trump, the epicenter of the trade spat, recognized that the ultimate goal is to be, “tariff free, (with) no barriers…and…no subsides.”
We can hope that an end is achieved where trade barriers collapse for the greater good. In the meantime, companies, consumers and countries are dealing with trade war fall out.
At the front lines are China and Germany, the world’s biggest exporters in their respective geographies, whose economies depend the most on a peaceful resolution to an undeclared trade war. For all the talk about all bluster and no follow-through, China and Germany’s export engines have already begun to sputter. It’s no coincidence that U.S. imports have ticked down leaving the trade deficit at a seven-month low.
To be clear, in the grand scheme of a near $80 trillion global economy, the steel and aluminum tariffs that went into effect against U.S. allies at midnight on May 31 are inconsequential and symbolic…for the moment. But we can’t disregard the consequences these nominally small tariffs invite. Rather than settled negotiations and the lowering of existing tariffs, actual implementation will provoke a retaliatory response. That folks, is called a trade war – declared or not.
That’s when the inter-linkages of global trade kick in, like those between the biggest importer – the U.S. – and two of the biggest exporters – China and Germany. Higher tariffs on US imports would lower US imports. But higher tariffs on US imports would also lower Chinese exports and German exports, not to mention other countries’ exports who have chosen to retaliate. When you raise the stakes in a trade war you risk lowering global trade activity on both sides of the trade ledger.
It’s easy enough to envision an escalation. In response to the end of the exemptions from steel and aluminum tariffs, Canada will impose $16.6b of taxes on 134 American-made products. Last week, Mexico announced $3b of tariffs on Tennessee whiskey, select cheeses, port, apples, potatoes and American-made steel. In its defense, the Mexican government said, “it is necessary and urgent to impose measures equivalent to the measures implemented by the US.” Tit for tat anyone?
Taking a step back, it’s important to separate out the two major concerns of the Administration. One is the perceived unfair nature of the world’s trading system where the tariff playing field is clearly not level. Most world leaders are united in recognizing this reality and incented to work together to exact justice on the main perpetrator – China.
It’s the Administration’s other “concern” that is economically troublesome. It’s fair to call it an unhealthy obsession with trade deficits; its very existence is abhorred. In this paranoid parallel universe, leveling the global trade playing field naturally results in the eradication of the trade deficit. At the risk of venturing out on a limb, a trade deficit with certain trading partners can merely reflect a given country’s saving rate and the cost of production.
A singular focus on the trade deficit can also backfire bigly. As per a recent Financial Times article highlighting the alarm being raised across the auto industry, Trade Partnership Worldwide, an economic consultancy, figures a 25% tariff on cars and parts imported into the United States would possibly create 92,000 new manufacturing jobs but trigger a loss of 250,000 jobs across the rest of the economy.
For now, car tariffs remain in the “threat” mode. For now, the EU tariffs on U.S. imports are limited to about $3.3b and will include orange juice, bourbon, jeans, motorcycles and particular steel products. Put Chancellor Merkel’s mighty auto machine in the cross hairs, though, and things could get ugly and quick.
Hyperbole aside, trade wars have a nasty history. Some have even led to shooting wars. At a minimum, they are difficult to reverse when cooler heads do eventually prevail. The end goal of a more even-keeled tariff system is noble and worth pursuing. And yes, in an ideal world, there are no tariffs. If the misguided means to that end continue to be as contentious as they are, costs will continue to rise to the detriment of companies, consumers and countries worldwide.