October 20, 2019, 20:38

Why you should give a shit about Trump’s tariffs, explained by an economic historian

Why you should give a shit about Trump’s tariffs, explained by an economic historian

The Trump administration will impose tariffs on $34 billion worth of Chinese goods on Friday. As expected, China is likely to respond by initiating tariffs on an equivalent amount of American goods.

Trump has been threatening a trade war with China and many other countries for several months now. He has insisted that he’ll “do it in a very loving way,” and that other countries will “respect us much more.”

This has been one of the few issues on which Trump has received public scrutiny from his own party. “We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan,” a spokesperson for Speaker Paul Ryan wrote in a March statement. “You’re punishing the American taxpayers, and you are making a huge mistake,” Republican Sen. Lindsey Graham said on Face the Nation. And Trump’s top economic adviser, Gary Cohn, resigned in March over Trump’s decision to move forward with tariffs.

But are all the fears about a trade war justified? What would a trade war even look like? And how will these tariffs impact everyday consumers?

To answer these questions, I reached out to Professor Emily Blanchard in March. She’s an economist specializing in international trade policy at the Tuck School of Business at Dartmouth.

A lightly edited transcript of our conversation follows.

Sean Illing

What are the immediate consequences of Trump’s tariffs?

Emily Blanchard

Let’s just look within the US economy. In the US, a tariff is a tax on imports and it would raise the prices on imported steel and aluminum by about the amount of the tariff. So a 25 percent tariff on $30 billion worth of steel imports is going to make steel across the board more expensive in the US. The same is true for aluminum.

This will support some firms who are competing head-to-head with foreign producers because they can now charge higher prices in the US selling to US consumers who are no longer be able to access foreign imports cheaply. But downstream, all of those industries that rely on steel and aluminum to make their products, and of course all consumers who purchase these goods, are going to pay more.

Sean Illing

So this will be good for companies who make steel and aluminum and it will be bad for companies who use steel and aluminum and consumers who buy products made from these materials?

Emily Blanchard

Yes, that’s exactly right. But it’s important to point out that not even all of the workers who make steel or aluminum will be helped by this. Even these companies need to rely on, say, raw aluminum to make their aluminum products, and so they could be punished on the back end by retaliatory tariffs.

Sean Illing

And in any case, there are far more companies that use aluminum and steel than there are companies who make it, which means this will hurt more people than it helps.

Emily Blanchard

Absolutely.

Sean Illing

What kind of reactions can we expect from other countries?

Emily Blanchard

Other countries are going to be upset by this and we’ve already seen statements being made by trading partners who are very concerned about this, particularly Canada, Mexico, and the European Union. The EU has already announced a list of products that it would hit with retaliatory tariffs if Trump moves forward with this. So this could be very costly for US firms and workers.

Sean Illing

Will Trump’s proposed tariffs lead to a trade war?

Emily Blanchard

There’s every reason to expect that this will result in a trade war — and in a trade war, everybody loses and nobody wins.

Sean Illing

What does a trade war actually look like? How are they waged?

Emily Blanchard

We haven’t really seen a big trade war since the end of World War II, and that’s because we created an agreement called the General Agreement on Tariffs and Trade (GATT), which ultimately evolved into the World Trade Organization. We created a system of rules so that trade wars would not happen.

That said, trade wars do happen even with these rules in place, usually on a smaller scale. Normally, it involves one country imposing a tariff on a product, like steel, and then another country will retaliate by raising tariffs on a separate product as a form of punishment. These tit-for-tat disagreements have been happening on a small scale for a long time but they’ve tended to stay within the bounds of these prescribed rules.

There’s a concern among many people now that this trade war would be different and may start breaking that system of rules apart — and that’s a very scary prospect.

Sean Illing

What are the risks of allowing a trade war to ensue?

Emily Blanchard

The short-term risk and the near-certainty is that there will be retaliatory tariffs and they will be very large. We know that Canada and the EU and South Korea and Mexico and Brazil and Russia and China are major trading partners who, under the rules of the existing system, will be allowed to retaliate against the US.

And of course, they get to pick which products they target for tariffs. The products they pick will be designed to inflict as much political and economic damage as possible. So I’d be very worried if I were in US farming or agriculture or dairy because these are areas where the US has incredible comparative advantages, and there are farmers around the world who would be delighted to have less competition from American farmers.

Sean Illing

And the long-term risks?

Emily Blanchard

My fear is that the global trading system will start to crumble, and if that happens, this will just be the opening salvo in a much larger trade war in the world. If it does unfold that way, our problems will get much, much worse.

Source: vox.com

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