Common Cents

Tariffs Woes

Ralph Murphy

(9/2018) Trade tariffs as "taxes on imports or exports between sovereign states" have been a focus of political debate this past year as the Trump administration has gone public with the issue. Initially the debate has focused on steel and aluminum imports. The President claimed this past March the tax was necessary due to a high world trade deficit as well as "trade abuses and intellectual property theft" and would make America a " stronger, richer country." Few economists agree and the additional fee when arbitrarily and now randomly applied on those vital commodities as well as countless others has caused real damage to international relations and host markets they were projected to help.

Steel is a relatively low technology commodity common in a vast array of industrial goods that was outsourced to developing countries such as China or India. By the 1980 s the American domestic industry found it cost effective to import it while concentrating on other production that used it. If it is taxed- the price of imports increase and that cost is passed along to all the goods that need it. When prices increase without a change in demand there is a decrease in output reflected by increased unemployment in all sectors, this actually weakens the economy. Tariffs have that type of impact.

Trade barriers are routinely needed to protect a valued, domestic industry from foreign output. A tariff tax, however, leads to a monetary exchange that outweighs the protective aspect of the measure. With the Trump tax- what started out as a commodity issue quickly embroiled almost any possible imports from Europe, Asia, and the Americas. It now appears an opportunity for faceless officials linked to the transaction to make money. Tariffs of between 10 and 25% were applied to goods and services depending on the nation and the market. Europe was quick to threaten retaliation, as was the China group that does appear the initial targeting objective since the March proclamation by Trump. The sanctions roiled well-established trade understandings developed by the U. S. Departments of Commerce, State, and the Treasury. These understandings were designed to consider and balance various interests and generate optimal yields.

There is now a period of flux as the Europeans evaluate their best path forward amid the European Union downsizing in recent years. Canada and Mexico as well as the NAFTA open borders accord have all but collapsed because of rational trade concerns. That anomie or confusion doesn’t justify the tax and seems more its symptom.

There has been official flexibility since the March announcement as to where the tariffs would be needed. By May, for example- South Korea, Australia, Argentina and Brazil were largely exempted and told barriers would be quotas or bans of threatening goods by the US authority. The other nations seem victim to a new angle in bargains but reciprocal sanctions seem to have been heard by Washington authority as the focus has shifted to the Far East.

In China’s case the situation appears more causal, targeted and structured. Also, one that is designed to broaden relations. In the 1980 s there was an economic reform push by this impoverished nation as it sought western inclusion and increased production. A policy of "one country, two systems" allowed that Hong Kong and Macau would or could remain capitalist. Even though various treaties granted Beijing sovereign control over these islands by the late 1990 s. The honoring of these old accords wasn’t a certainty and the new policy seemed to allay the fears in the West that their investments would not be lost in the banking and gambling areas.

A 1980s series of accords granted selective mainland regions and their foreign partners control of what were described as Special Economic Zones (SEZs). China was one of the poorest nations on earth at that time- despite its high profile diplomacy. Many western firms established a strong presence there- primarily because of its cheap labor.

Industrial cities concentrated mostly on the east coast became major production hubs after the British left Hong Kong in 1997. Through an accounting quirk - any production within a nation’s borders- regardless of its owner or sponsor - is considered part of the nation’s income. In China’s case that included the SEZ earnings. The SEZs and the foreign industrial presence amount to autonomous corporate colonialism, and need extensive political support from their home nations. Over the last twenty years it was tolerated, but now there seems a reverse trend as these associations have proven too costly.

An American-led SEZ group, is drawing in various European and Japanese investors and could easily count itself a top ten player. But if they were producing at home there would be an immediate benefit and the current penalties seem to encourage repatriation. It’s really a stretch to count China as the number two economy in the world without including rotational money as earnings.

Meanwhile the tariff issue simmers. In China’s case the US Trade Representative seems to have relative structure as it has announced a 10% duty would be leveled on $200 billion worth of imports from China. Economists call this inelastic demand. Someone will get that $20 billion and they seem to aspire for more but might think they can settle with it. That money could be easily traced and should be for propriety use by legal authority. It doesn’t seem destined for the U.S. Treasury. In the meantime serious damage has been done by this errant tax. Agriculture markets such as soybeans have simply been dropped by China and the American domestic lobby is demanding $12 billion in new subsidies to offset their losses.

If a protection need exists for a struggling domestic concern it has to be done through non-financial quotas, bans or cultural blocks- not through a tariff-type tax. Such a tax seldom achieves its initial objective, and it distorts trade patterns both foreign and domestic. Almost no one benefits from such taxes except the controlling official. It is hard to levy this type of social cost where the social cost is obvious. The Trump tariffs should be reviewed as a case where policy has gone astray.

Ralph Murphy is a former economist with the CIA