Our Huge Trade Deficit with China Does NOT Give Us the Upper Hand in Tax (Tariff) War
Photograph Source: Tia Dufour, White House – Public Domain
Many reporters and commentators have claimed the United States has the upper hand in a trade war with China because we have a large trade deficit with China. We import almost $440 billion a year in goods from China, while they import only a bit over $140 billion from us. That means we can impose tariffs on far more Chinese goods than they can on US-made goods.
While that claim is true, it loses sight of what tariffs are. Tariffs are a tax on goods we import. If we do the simple arithmetic on Trump’s 104 percent tariff on China’s goods, he is imposing a $460 billion annual tax on people in the United States. (It would be far less because imports from China will plummet, but we can use this as a first approximation.)
A tax increase of this size, more than 1.5 percent of GDP or $3,700 per household, would ordinarily have people screaming bloody murder. Republicans went crazy over tax increases by Clinton, Obama, and Biden that were far smaller.
It’s true that China cannot tax as many imports from the US, but it is not as though the taxes on our imports from China are costless to us. They will mean higher prices and a lower standard of living for people in the United States.
We just had an election in which inflation or “high prices” were the central issue. If anyone thinks that high prices from Trump tariffs are not a big problem for people here, then the media must have lied to us about the importance of high prices in the election.
It’s also worth mentioning one other potential weapon China has at its disposal. Companies in the United States make an enormous amount of money off their intellectual property (IP): the patent and copyright monopolies they have on prescription drugs and other products and the copyrights they hold on movies, music, and software.
We have often claimed that China does not adequately enforce our IP domestically. While there surely is some difference in their level of enforcement and ours, for the most part our companies do get money from China for their IP claims.
However, China could go full throttle in the opposite direction. It could make a point of ignoring US patents and copyrights. And it could do this not just for its domestic market but also for export, making cheap versions of Pfizer’s blockbuster drugs available to the whole world, along with free copies of Microsoft software and Disney movies. That would make the US, or at least US corporations, big losers in a trade war.
This originally appeared on Dean Baker’s Beat the Press blog.
Trump’s Trade Tariffs and America’s Small Businesses
Photograph by Nathaniel St. Clair
President Trump vows to “make America wealthy again” as he pursues a global trade policy that favors new, sweeping tariffs, a price hike on foreign-made goods arriving for sale in America. Invoking his authority under the International Emergency Economic Powers Act of 1977, he will impose a 10% tariff on all countries to begin April 5. Further, the U.S. president will impose an individualized reciprocal higher tariff on the countries with which the United States has the largest trade deficits. All other countries will continue to be subject to the original 10% tariff baseline, effective April 9. https://www.whitehouse.gov/
What do some small business owners think about the impacts of more Trump trade tariffs on their enterprises and the U.S. economy generally?
We turn to Frank Knapp Jr., head of the South Carolina Small Business Chamber of Commerce.
“These tariffs are the prelude to stagflation,” he said, “rising inflation and a weak economy, which can result in a deep recession. The tariffs, taxes on imported goods paid by American businesses and consumers, will bring in $6 trillion over 10 years, according to the Trump administration. That’s $6 trillion pulled out of consumers’ pockets, money that Americans won’t be able to spend on goods and services, which slows the economy.”
Consumption spending accounts for two-thirds of the U.S. economy. It is worth mentioning that the federal government, which has a $6.75 trillion annual budget now, collects tariffs. On a related note of tax policy, the president also wants to extend his 2017 tax cuts. That would remove an estimated $5 trillion from the federal treasury over 10 years.
What of the president’s claim that goods made in America will become more price-competitive for businesses and consumers stateside? Knapp doubts that outcome.
“All products will rise in price,” according to him, “even if they are 100% made in America, because when foreign products go up in price, the price on all competitor products will rise. It’s the way the market works. The consumers, small businesses, and the economy will all be losers.”
Walt Rowen owns Susquehanna Glass Company in Columbia, Pennylvania. “These unpredictable tariffs threaten the very existence of family businesses like mine,” he said. “I’m already concerned about Christmas, which I start planning months in advance. I’d normally hire 20 to 30 seasonal workers, but with potential price increases, I can’t even plan production.
“When costs suddenly spike and planning becomes impossible, we’re left with impossible choices. Small businesses need predictable, smart economic policies that will help us thrive, not policies that could end our family legacy.”
Gabe Hagen, owner of Brick Road Coffee in Tempe, Arizona, is upset with the Trump trade tariffs. “Earlier this year we began construction on our second location,” according to him, “but these tariffs have forced us to adjust the budget for the expansion. With coffee and tea grown exclusively overseas, we have no choice but to import and absorb these increased costs.
“Small businesses like Brick Road Coffee employ almost half of America’s workforce, yet we’re the ones who feel these tariff changes the most because we lack the buying power of large corporations.”
It is no secret that firms with more capital than competitors can lose money longer and outlast the competition. In this way, the big fish can and do eat up the smaller fish. This market dynamic is not rocket science, folks.
Gladys Harrison owns Big Mama’s Kitchen & Catering in Omaha, Nebraska. “My mother’s vision for the Big Mama’s Kitchen was to do more than just serve food,” she said. “Through our scholarship programs for local students and our commitment to hiring those seeking second chances, we’ve created something much bigger than a restaurant, but that could be in jeopardy.
“These tariffs will increase costs for our imported spices, and like 71% of small business owners, I’ll likely have to pass these price increases on to customers. We all are going to pay more for everything, which is going to affect all of us.”
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