Imagine a bakery located in the US. It uses imported flour, sugar and cacao to make delectable cakes based on a closely-guarded secret family recipe handed down for generations, and it employs dozens of bakers to do this. Now suppose a bakery in China has tried to copy the recipe, and is exporting cheaper copies of the cake into the US. Soon, the local bakery is on the ropes and laying off workers.American factories are like this bakery, turning raw materials, like imported electronic parts and circuit boards into finished products like phones and TVs, but these factories are largely extinct now thanks to the flood of cheap goods from China — often times bearing the labels like “Designed in California, Made in China.”
The logical remedy to this situation would be to put a tariff on the import of cakes and use the proceeds from the tariffs to subsidize raw ingredients so that local bakeries can stay in business and continue to keep Americans employed. Or, in the case of an electronics factory, we would tax the import of finished goods like phones and TVs and use the tax to subsidize the import of raw materials like electronic parts and circuit boards, thus leveling the playing field and encouraging American designs to stay in American factories.
However, the current tariffs enacted by the Trump administration reveal quite the opposite. Import of raw materials, such as many of the components and parts that go into a smartphone, are taxed, while import of finished goods such as the smartphones themselves are not. This policy intends to penalize China without immediately driving up the prices of consumer goods. However, it’s like taxing the import of flour, sugar and cacao, while baked goods remain duty-free.
While this policy does stabilize the pricing of cheap import cakes, it drives up the cost of the local production. The owner of the local bakery now has to make a hard choice: either raise prices and risk going out of business due to reduced sales, or produce the cakes outside of the USA to avoid the tariffs on raw materials, and possibly lose control over the age-old family recipe. With the current tariffs, you can have your cake and eat it today, but tomorrow you’ll be out of a job.
The other argument made for imposing tariffs is the need to reduce the trade deficit. However, narrowing a trade deficit through tariffs makes about as much sense as insisting Walmart buy as many goods from you as you buy from Walmart. When you buy a shirt from Walmart for $10, you effectively have a “trade deficit” of $10 with Walmart — you bought $10 of goods from them, but they bought nothing from you.
This is OK. You spent $10 on the shirt because you’ve got better things to do with your time. Instead of cutting and sewing shirts, maybe you’re teaching high school students, running your bakery business or writing software. In other words, the $795 billion total US trade deficit with China and other countries frees up the time of Americans to create its enormous $20 trillion worth of GDP — more than 25 times as big a value as the US trade deficit. Do Americans want to spend their time assembling low-cost items, or do they want to spend it creating, growing and innovating?
Trade tariffs are tricky. Tinkering with the core mechanics of trade can have unintended consequences. The administration’s announcement this week of a unilateral tariff exclusion process may blunt some of the impact on American businesses by allowing them to petition for the elimination of tariffs on specific items, but does nothing to address shifts in international trade preferences that will leave Americans worse off in the long term.
The tastes of consumers worldwide are fickle. For example, Chinese counter-tariffs on American goods may encourage Chinese consumers to try European or Canadian goods. And if the Chinese develop a taste preference for these goods, even when the trade war ends, Chinese consumers may not return to the American brands, eroding decades of effort invested in promoting American brands overseas.
America’s economic dominance was built on free trade. Imbalances and injustices in trade between countries should be rectified with scalpel-like scrutiny of specific investments and business practices, rather than the sledgehammer of blanket tariffs on large classes of imported goods to avoid unintended consequences. An example of a more measured, targeted move is the recent move to block China Mobile’s entry into the US telecommunications market. This move mirrors barriers China had previously erected; they had hampered US telecommunications companies from entering China.
This administration knows how to protect US business interests without harming everyday consumers and job-creating businesses — so are the new tariffs a negotiating tactic or political theater to appear tough on trade? Either way, the tariffs will have a chilling effect on the American economy, and long-term effects should be taken into consideration. As it stands, the Trump administration’s combative, fast-and-loose trade policy is putting American jobs at risk by encouraging businesses of all sizes to seek alternatives to building finished products in America.