Trump’s tariffs – costs, benefits, and the trade deficit

Recent commentary on the tariffs that President Trump has been imposing on trade with countries including China and Mexico highlights connections to many of the concepts we have been discussing in class recently.

This September article from the BBC enumerates ways these tariffs are harming farmers and food manufacturers in Wisconsin. This includes a ginseng farmer who is now facing 30% tariffs on importing his crop to China, essentially swallowing his whole profit; a potato farmer who uses aluminum and steel machinery whose costs have become higher and more unpredictable; a cheese manufacturer that has had to raise its prices to account for its higher costs; and Harley-Davidson, which has moved some of its production overseas.

The explanation given for Trump’s reasoning in imposing these tariffs is that “his trade war strategy might mean short-term pain, but would ensure long-term gain, and bring jobs and prosperity back to US.” This reasoning reflects cost-benefit analysis thinking; presumably, this strategy is based on the understanding that future benefits will outweigh immediate costs in terms of higher costs and lower profits for producers.

However, the way things are playing out so far does not convince me that these future benefits are, in fact, coming. The example of Harley-Davidson moving its production abroad  is an example of a cost that was not factored into the cost-benefit calculation for these tariffs. Rather than bringing production back to the U.S., it seems that at least in some cases these tariffs are pushing more of it abroad. In addition, retaliatory tariffs imposed by other countries mean that this is not a simple case of boosting U.S. production over imports.

This article from Business Insider highlights this last point by discussing the trade deficit. While Trump has argued that these tariffs will close our trade deficits with other countries, making it so that the U.S. exports more than it imports, so far this does not seem to be the case. In fact, the trade deficit is growing.

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While this may not be the best overall measure of how our economy and our international trade is doing – relevant to our in-class discussion about the acceptability of absorbing some level of deficit if the economy is growing, the article points out that ” many economists think the focus on trade deficits is misguided” – Trump has talked about it as the measuring stick for his policy. If his policy is not working as he assumed it would, and is in fact having negative repercussions for many farmers, producers, and small businesses in the U.S., perhaps it is time to reconsider it.

 

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