by Lynda Bryant-Work
“Trade wars are good, and easy to win.”
So President Trump tweeted after announcing the United States would impose steep tariffs on imported. This after already imposing other tariffs that are directly affecting other American businesses and industry.
But the Great Depression years would indicate that nothing could be farther from the truth. Trade wars are bad – call it the tariff trickle-down theory – like real wars, they hurt people.
Those who remember the last trade war or have even read about it know the damage that can be caused. The passage of the Smoot-Hawley Act created a disaster. Other countries retaliated with tariffs against U.S. goods. Imports and exports plummeted. Banks and companies went out of business. Unemployment went up. Most economists agree that Smoot-Hawley made the Great Depression worse than it would have been had Congress not passed the law.
And that is what is happening now.
Another example is the Canadian-American trade war of the late 19th century. After the Civil War, the United States canceled its reciprocal trade agreement with Canada. The Canadians retaliated with steep tariff increases. This led about 65 U.S. manufacturing firms, including Singer, International Harvester and Westinghouse, to move their production facilities to Canada so they wouldn’t have to pay the tariffs. Exactly the opposite of the intended effect.
So why would anyone with a knowledge of history and economics think it would be any different now?
The International Monetary Fund issues a warning, saying:
“The import restrictions announced by the U.S. President are likely to cause damage not only outside the U.S., but also to the U.S. economy itself, including to its manufacturing and construction sectors, which are major users of aluminum and steel. We are concerned that the measures proposed by the U.S. will, de facto, expand the circumstances where countries use the national-security rationale to justify broad-based import restrictions.”
China has already launched new tariffs on American agriculture crops and livestock/meat. More are to come.
Even though his staff urged the president to not go forward with the tariffs, he did anyway. And already, the repercussions are starting to be felt.
While it is easy to sit in a lofty position and make decisions, it is not Trump who will pay the price. It is the American workers in industries who use steel and aluminum who will lose their jobs. It is the struggling farmer who lose income and maybe even a farm. It is the American consumer who will see prices skyrocket and the industries that will be victims of retaliation by America’s trading partners.
And it could cost the Republicans elections in the midterms.
Usually both sides lose in a trade war, but one side often loses more. Even though China or Canada or Mexico could be hurt – U.S. consumers, companies and allies may end up damaged more.
Trump hasn’t completed his targets, but it is likely to hit many areas untouched up to now like computers and computer parts. Should that happen, Japan, Korea, Taiwan, Singapore, Malaysia and other who are allies will actually bear a substantial portion of the cost.
With numerous companies concerned… Boeing, Nike, Walmart and General Motors, not to mention the agricultural sector…many could be harmed by the tariffs.
Another thing to consider when starting a trade war with China, is that they would cease to buy and hold as much U.S. debt. Chinese Ambassador Cui Tiankai told Bloomberg Television that China might reconsider its lending to the U.S. money by purchasing U.S. Treasury bonds.
Such a move would could hurt the financial markets and the American middle class. If China decided to unload some of its vast holdings of U.S. debt, the value of U.S. Treasury bonds would drop and China would begin to lose money.
A trade war is a lose-lose situation. History has proven it. And the U.S. will take the biggest hit.
In response to Trump’s tariffs on steel and aluminum, China has pledged tariffs on $3 billion worth of American exports, including fruit, pork, wine and seamless steel pipes and they are following through.
Mexico and Canada are exempt on the steel and aluminum for now, but only because of the NAFTA negotiations.
Tariffs on imported steel and aluminum were supposed to create more domestic jobs, but history doesn’t support the claim.
But trade wars are not self-limiting. European Union officials have said they may impose tariffs on bourbon, blue jeans and Harley-Davidson motorcycles. Canadian Prime Minister Justin Trudeau had also pledged retaliation. These are our allies.
So why a trade war with China on steel and aluminum? According to reports, only about 3 percent of U.S. steel imports and 6 percent of aluminum imports come from China.
As NAFTA negotiations continue, states such as Texas watches closely. Texas led the nation with $264 billion in exports in 2017, according to the International Trade Administration. Of that, about $98 billion in goods went to Mexico and $23 billion to Canada. Texas also exported nearly $34 billion in goods to Europe. Big import states are concerned.
Tariffs create a situation where consumers have three options. They can absorb the cost and fire workers. They can absorb the cost and lower their profit margin. Or they can pass on the cost to customers.
Typically, two of those options are exercised – firing workers and passing on the cost in higher prices.
Lessons should have been learned during the Great Depression and again when the George W. Bush administration imposed the steel tariffs in 2002. The failure of those tariffs to work as designed and the economic harm done should provide a warning of what can be expected from the Trump administration tariffs. The effects of higher steel tariffs led to higher steel prices and the loss of nearly 200,00 jobs in the steel-consuming sector.
History repeating itself, history in the making. The downside of tariffs is something Americans should be prepared for.