A CLOSER LOOK AT PRES. TRUMP’S ECONOMIC PLAN
Christopher Ebbe, Ph.D. 4-25
Pres. Trump is trying to deliver on a campaign promise to provide jobs particularly for his MAGA followers who feel left behind by globalization after U.S. businesses moved factories overseas since they could make things cheaper overseas using lower-paid foreign workers. He is trying to do this by creating protectionist trade barriers (tariffs) around our country so that (he thinks) more manufacturing can take place here again, but bear in mind that manufacturing work left the U.S. during globalization because the work could be done more cheaply overseas thus making the price of those products lower, for U.S. consumers as well as for others around the world. Very few products are now made solely in the U.S. with all U.S. parts.
The logic of this effort is that tariffs make foreign products more expensive for Americans, which might mean that Americans will buy fewer foreign products and will instead buy those same products that are made in America. This could allow new factories to be built in the U.S., and the resulting products to be sold in the U.S. at prices that are competitive with the foreign-made products (plus tariffs) because the cost of their manufacture overseas plus our tariffs will be as high as or higher than the price of those products newly made here. The foreign-made product will still be cheaper than the U.S.-made product in other countries, so these newly made U.S. products will only be sold in this country and not around the world. (This price differential will continue until foreign workers are paid as much as American workers, which is still some years away, but we would predict that if those foreign companies continue to succeed, they will gradually pay their workers more.)
As long as American workers are paid significantly more than foreign workers for the same work, then, the tariffs will have to remain in place if the new manufacturing is to continue (though perhaps lowered gradually, as foreign workers get raises). Thus, these tariffs, if they are to work, will be with us for quite a while and are not just jolts to other countries to induce them to lower their own tariffs or renegotiate mutual tariffs. All countries establish tariffs to protect or nurture specific manufacturing in their countries, whether that is computer chips, cars, vaccines, cheese, or soy beans. As long as those tariffs cover only a small percentage of a country’s areas of manufacturing, a system of tariffs around the world can survive, but if tariffs cover everything manufactured, then it becomes a matter of whose citizens are willing to pay the most to still get the foreign products in question. Tariffs always result in higher consumer prices, and U.S. consumers will be paying those higher prices for some time to come. (I have never heard of a foreign country paying some of the tariffs, as Pres. Trump claims.) Estimates vary, but this could amount to between five and ten percent more than U.S. consumers currently pay for the same products.
One exception to this would be if the new U.S. manufacturing efforts could be done more cheaply than the foreign competition, through whatever new efficiency was possible, in which case there would be no need for tariffs, since U.S. products would then be competitive. It is likely in a global economy that all the various efficiencies (robots, computer designing, AI, etc.) are already available to every country now, and it’s hard to imagine a new efficiency that only the U.S. would know about or employ to give it a unique edge. If U.S. manufacturers could use cheaper resources (ores, oil, timber, etc.) in their manufacturing, that would help them out, but that would mean using up those American resources at a higher rate, so that we would run out of them sooner than later.
Pres. Trump has made much of his belief that the tariffs of other countries and the trade agreements that they had with the U.S. have been “unfair,” but he has not explained how or why they were unfair. Either all tariffs are unfair, or no tariffs are unfair, because all countries are free to establish them or change them. The U.S. has always had some tariffs that made it harder for foreign makers to sell things here, but we haven’t considered that “unfair.” It was just a financial ploy, the same as tariffs established by other countries. Tariffs are simply an element of doing business, and the President certainly understands about business. The U.S. has always had tariffs, sometimes higher and sometimes lower, and applied to different products over time, but we don’t think that our tariffs are unfair to other countries, just as their tariffs are not really unfair to us. His purpose in his new tariffs is not to correct anything but to create a business environment in which investors will believe that money can be made by more manufacturing in the U.S. and will fund the establishment of these new plants and companies, but in order to compete world-wide, we will have to make them more cheaply than foreign companies; otherwise, these products can only be sold to U.S. consumers since they will cost consumers in other countries more than the same products made elsewhere.
Since this is such a divergence from the way the U.S. has handled tariffs in the past, foreign governments have to be wondering about the future. Perhaps our new tariffs will disappear after Pres. Trump leaves office, in which case those foreign governments will calculate whether their workers and consumers can stand to wait four years to see if they go away, rather than giving the U.S. any concessions regarding their own tariffs in the meantime. Again, this is not an issue of fairness.
In the meantime, American businesses will be hurt by any new tariffs imposed by other countries in retaliation for our tariffs, and our government will have to consider propping up some of these businesses with direct money if necessary. During Pres. Trump’s first term, his agricultural tariffs resulted in business catastrophe for some farmers, and his administration sent them checks to help out while the administration waited for those foreign governments to want to negotiate some reductions in tariffs (since we wouldn’t want our farmers to go out of business completely, because we need their food to feed our own people even if they can’t export it).
Given this analysis, what will happen is that either no new manufacturing will take place, because investors don’t believe it could be done cheaply enough or they don’t believe the tariffs will continue past Pres. Trump’s term in office, or new manufacturing will occur in the U.S., making more expensive products, and U.S. consumers will pay higher prices for those goods (because our tariffs make foreign products as or more expensive than U.S. products). And, so if these tariffs must be employed for a number of years to protect our new manufacturing, this will amount to a redistribution of income from U.S. taxpayers in general to those workers in the new manufacturing enterprises, since they are unlikely to be able to sell enough to support themselves (because they can only sell in the U.S., since foreign products are still cheaper for the rest of the world than U.S. manufactured products). The irony of this is that to Republicans, such redistribution (like taking from the rich and giving it to the poor) has always been anathema! The same outcome could be achieved by simply raising taxes a bit and using that money to directly support the businesses that we want to compete better in foreign markets, which is what China does, but then the purpose of this spending would be more transparent, and we couldn’t pretend that we were correcting an “unfairness” and not supporting those businesses directly (since we criticize China for this practice).
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