Tariffs ‘Protect Insiders, While Americans Pay The Price – Analysis

 

“The Blessings of Protection,” lithograph criticizing steel industry tariffs. Louis Dalrymple. Puck, 1901. Original caption: “The poor foreigner couldn’t get his rails for Twenty-four dollars if we didn’t elect to pay thirty-five.”

 September 14, 2024  

By AIER

By Vance Ginn

Tariffs, often promoted as a tool to protect American jobs and industries, are a hidden tax that disproportionately burdens consumers and producers alike. Both the Trump and Biden administrations have embraced these protectionist policies, and future administrations may likely do the same. But these policies do more harm than good, undermining the very people they are designed to protect.

Recently, protectionist policies have been championed by the Trump-Pence administration, continued by the Biden-Harris administration, and likely doubled down upon by Trump-Vance or Harris-Walz. Tariffs may seem like a good way to shield domestic industries from foreign competition by making imports more expensive, but the reality is starkly different. Tariffs are taxes on imports; like all taxes, the costs are inevitably passed down to the consumer. When the federal government imposes tariffs, it raises the prices of goods that many American businesses rely on, leading to higher costs. This isn’t just an abstract economic concept — it affects every American who buys a car, electronics, groceries, or other everyday items.

In 2023, the US imported over $3.8 trillion of goods and services while exporting $3.05 trillion. This nearly $7 trillion in trade volume highlights how imports and exports play a role in the US economy, supporting millions of American jobs, but is a relatively small share of the $27.3 trillion economy. While the US ran a current account deficit as imports exceeded exports by $773.4 billion in 2023, this amount doesn’t tell the whole story. 

For instance, the US had significant trade surpluses with regions like South and Central America ($54.9 billion) and countries like the Netherlands ($43.7 billion) and Hong Kong ($23.6 billion). Conversely, it recorded deficits with China ($279.4 billion), the European Union ($208.2 billion), and Mexico ($152.4 billion). Notably, while substantial, trade with China represents only 8.4 percent of the total US international trade volume, even as it accounts for 36 percent of the current account deficit. This deficit and the total trade deficit are met with a capital account surplus, with funds flowing into the US, including investments that help finance the national debt, support lower interest rates, and support capital to businesses.

International trade provides mutually beneficial exchanges between people in different countries, supporting peace and prosperity.

The Real Economic Impact of Tariffs

Proponents of tariffs often argue they are necessary to rebuild America’s manufacturing sector, but the problem isn’t foreign competition — it’s at home. US manufacturers’ core issues stem from excessive government spending, high taxes, inflated minimum wages, overregulation, and a lack of right-to-work laws. Instead of addressing these root causes, tariffs exacerbate the problems by acting as an additional tax on American businesses and consumers.

When tariffs are imposed, the costs of imported goods rise. These goods are finished products, raw materials, and components that American producers rely on in their supply chains. This increased cost of production ripples through the economy, making American goods more expensive both domestically and internationally and hurting US businesses’ ability to compete.

Take, for example, the tariffs on steel, which were implemented to protect US steel producers. While they may have helped some steel manufacturers, they raised costs for industries that depend on steel, such as the automotive and construction sectors. These industries were forced to pass on these costs to consumers, making American-made goods more expensive and less competitive. Rather than revitalizing manufacturing, these tariffs hinder growth, slow job creation, and harm consumers.

Moreover, tariffs fail to address the real reasons behind the loss of manufacturing jobs. Automation and technological advances have displaced many jobs, allowing US manufacturing output to reach record highs with fewer workers. The Rust Belt’s loss of manufacturing jobs is less about foreign competition and more about the evolving nature of the global economy, tariffs do nothing to solve these domestic challenges.

When tariffs increase, they tax what we purchase from other countries. This tax directly affects producers and consumers who rely on foreign goods. The process reduces the demand for foreign currencies to purchase foreign goods while raising demand for the dollar, especially when the federal government runs deficits that result in higher interest rates. This results in an appreciated dollar by roughly the size of the tariff itself. This currency appreciation helps keep the cost of the taxed goods from rising too quickly, but it simultaneously disrupts the supply chain and other factors of production. As the dollar appreciates, US exports become more expensive for foreign buyers, leading to fewer exports and more imports. This dynamic undermines the goal of balancing or reducing the trade deficit with the targeted country or others.

Moreover, foreign countries often respond with retaliatory tariffs, raising costs for their producers and consumers while driving a wedge between trade relationships. This creates direct costs and increases economic and political uncertainty — something businesses dread when planning for the future. Although tariffs don’t directly cause inflation — an issue controlled by the Federal Reserve’s monetary policy — they raise prices on specific goods through the added tax. These increased costs can ripple through the supply chain, affecting many products. International trade is complex, and protectionist measures like tariffs only exacerbate the complexities, worsening the situation.

The current account deficit with other countries is balanced by a capital account surplus, where foreign savings flow into the US, helping finance our national debt and keeping interest rates lower than they would otherwise be. However, the flow of funds is slowing as some countries shift away from the US dollar, opting for gold and other assets. This trend poses a risk to the US economy by potentially restricting our ability to trade with other countries and raising the cost of borrowing as interest rates rise. This shift from the dollar, known as de-dollarization, underscores the importance of maintaining strong international trade relationships and avoiding protectionist policies alienating trading partners. As global confidence in the US dollar wanes, the economic benefits of foreign investment could diminish, leading to higher costs for Americans.

Tariffs Worsen Broader Problems at Home

As noted above, the broader economic problems facing the US stem from high taxes, overregulation, and government policies that make it more expensive for businesses to operate. Tariffs worsen these problems by raising costs for American businesses and consumers. By taxing imports, tariffs increase the prices of goods that US producers need to remain competitive. This adds to the burdens already imposed by high taxes and government mandates, effectively taxing Americans twice — once through tariffs and again through the costs of domestic overregulation.

Rather than addressing the domestic policy environment that has hindered US competitiveness for decades, tariffs only complicate matters. US companies struggle with excessively high corporate taxes, incentivizing them to move operations overseas. Before the Tax Cuts and Jobs Act of 2017, the US had the highest corporate tax rate in the developed world. While the Act lowered the federal corporate tax rate to 21 percent, proposals to raise it to 28 percent would once again make US companies less competitive globally.

Like Texas, right-to-work states in the South have demonstrated how pro-growth policies can attract manufacturing jobs by creating a business-friendly environment. These states have attracted jobs lost from the Rust Belt by fostering lower taxes and fewer regulations. On the other hand, tariffs stifle economic growth by driving up costs, making it harder for these states to sustain their competitive advantage.

In sum, tariffs don’t solve American businesses’ real issues — they make them worse. Instead of protectionist measures, the US needs to focus on reducing domestic costs by lowering taxes, cutting red tape, and fostering an environment that encourages innovation and growth.

Protectionism: A Failed Policy

The economic data between 2016 and 2021 highlight the failure of protectionist policies, including raising tariffs that began in 2017. 

Consider that global manufacturing output was $14.1 trillion in 2016, with China leading at $4 trillion and the US following at $2.3 trillion. In 2021, it rose to $16 trillion, with China’s part increasing to $4.9 trillion and the US’s to $2.5 trillion. Global manufacturing output grew by 13.5 percent. While China’s manufacturing surged by 22.5 percent, the US had a more modest increase of 8.7 percent. Of course, this period had significant initial and retaliatory tariffs between these countries and lockdowns in response to a global pandemic.

Since 2017, the Trump and Biden administrations have imposed $79 billion in tariffs as part of protectionist policies meant to shield domestic industries. Despite these efforts, global manufacturing continued to grow, and the economic pie expanded — but China captured a larger slice, increasing its share from 28.3 percent to 30 percent. The US trade deficit with China continued to widen, undermining the asserted goal of protectionism. Meanwhile, US manufacturers struggle with higher production costs, passed down to American consumers through increased prices on specific goods.

The Case for Free Trade

The US should abandon protectionism and embrace free trade policies that foster innovation, improve efficiency, and lower costs for consumers and businesses. When countries engage in free trade, all parties benefit from the specialization of labor and resources. Protectionist measures like tariffs distort markets, raise costs, and create uncertainty, hurting American consumers and producers.

Free trade doesn’t mean ignoring unfair trade practices by bad actors like China. However, the best way to address these challenges is not through blanket tariffs but by expanding trade with allies and non-hostile nations. For example, the Trans-Pacific Partnership (TPP)offered an opportunity to strengthen economic ties with 12 countries, pressuring China to play by the rules or risk losing access to major markets. Unfortunately, withdrawing from the TPP in 2017 was a missed opportunity to enhance American competitiveness while holding China accountable.

Conclusion

Tariffs are not the right tool to address the challenges facing American industries. They are a tax on imports, raising costs for consumers and producers while failing to tackle the real issues at home: excessive government spending, high taxes, overregulation, and outdated domestic policies hinder US competitiveness. By embracing free-market solutions — eliminating tariffs, reducing spending, reforming taxes, and cutting regulations — the US can create an environment where American businesses can thrive without relying on harmful protectionist measures. The path forward lies in pro-growth free trade efforts — unilaterally or through agreements with other countries — and domestic reforms, not in tariffs that hurt those they aim to protect.

• About the author: Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC and an Associate Research Fellow with AIER. He is chief economist at Pelican Institute for Public Policy and senior fellow at Americans for Tax Reform. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20.
• Source: This article was published at AIER

AIER

The American Institute for Economic Research educates people on the value of personal freedom, free enterprise, property rights, limited government, and sound money. AIER’s ongoing scientific research demonstrates the importance of these principles in advancing peace, prosperity, and human progress. AIER is a nonpartisan research and education nonprofit 501(c)(3) organization focused on the importance of markets, with a full range of programs and publications on the social sciences with a primary emphasis on economics.

 

Trade Balances In China And The US Are Largely Driven By Domestic Macro Forces – Analysis

 September 14, 2024  

By Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu, Krishna Srinivasan and Rodrigo Valdés

Worries that China’s external surpluses result from industrial policies reflect an incomplete view

China’s widening trade surplus and the growing US trade deficit since the pandemic have renewed concerns about global imbalances and fueled an intense debate on their causes and consequences. There are increasing worries that China’s external surpluses result from industrial policy measures designed to stimulate exports and support economic growth amid weak domestic demand. Some worry that the resulting overcapacity could lead to a “China shock 2.0”—a surge of exports that would displace workers and hurt industrial activity elsewhere. 

This trade and industrial policy view of external balances is incomplete at best and should be replaced with a macro view. External balances are ultimately determined by macroeconomic fundamentals, while the link to trade and industrial policy is more tenuous. To understand the pattern of global external imbalances, we need to understand the macroeconomic drivers of desired saving relative to desired investment, not only in China, but also in the rest of the world including, importantly, the United States. While other countries contribute to global imbalances, the United States and China together account about one-third of the global current account balance.

Macroeconomic forces

China’s trade surplus increased substantially at the beginning of the pandemic. Initially exports of medical equipment surged and consumers around the world increased purchases of goods relative to services due to social distancing. Then domestic demand in China weakened substantially starting in late 2021 following a large-scale property market correction and repeated lockdowns in 2022 that hurt consumer confidence. 

The resulting drag on China’s real economy has been significant as household saving rates increased and investment contracted. At the same time that domestic demand in China weakened, global demand was boosted by significant dissaving—particularly in the United States, where the fiscal deficit grew substantially relative to the pre-pandemic era and the household saving rate halved.

The result is that China’s trade balance now stands at between 2 percent and 4 percent of gross domestic product, depending on the methodology (see China Article IV for details of the differences in methodology). This composition reflects both weak imports and a large rise in China’s global export share. 

The trade surplus as a share of economic output is smaller than during the “China Shock” of the 2000s (at its peak, around 10 percent of China’s GDP). However, China now accounts for a substantially larger share of the global economy, so much so that even though its trade surplus is smaller relative to its economy, as a share of global output it has remained fairly stable over time. Hence spillovers from trade developments in China continue to be quite sizable for the rest of the world. 

Our analysis—stylized simulations using the IMF’s Group of Twenty model—illustrates that macroeconomic factors are driving these external developments.  These include negative domestic demand shocks in China, due to the property market downturn and low household confidence, as well as a dissaving shock in the United States due to elevated government and personal spending. 

This “macro” view predicts outcomes close to what the data show. Largely because of weak domestic demand, China’s current account surplus is boosted by about 1.5 percentage points, close to the increase seen in the data relative to its pre-pandemic level. The persistent surge in China’s domestic saving results in a large depreciation of its real effective exchange rate, consistent with data since 2021. This relative price adjustment supports export growth and depresses import demand.

The US presents a mirror image. Largely because of strong domestic demand, the US current account balance deteriorates by around 1 percentage point in the model—close to the decrease seen in the data relative to its pre-pandemic level.

Importantly, the persistent decline in US domestic saving leads to a rise in US real interest rates that broadly offsets the negative effect of increased Chinese saving on global rates.

Two important lessons emerge: 

• Unlike the 2000s, when excess saving originating in emerging Asian economies contributed to global imbalances and depressed world interest rates, there is no global savings glut this time. Global real rates outside China have increased, not decreased.
• The contribution of the Chinese saving shock to the US external balance is small, and so is that of the US dissaving shock to China’s trade balance. External surpluses and deficits in both countries are mostly homegrown.

Homegrown surpluses and deficits call for homegrown solutions that require setting the macro dials appropriately. Sustained growth in China will come from addressing long-standing domestic imbalances such as the property sector’s continued drag on activity or the challenges of an aging population. Attempts at stimulating growth through its external sector are likely to face significant headwinds. The economy is just too large—a sign of its success—to generate much growth from exports. This is also reflected in our medium-term outlook for China, where an export-led growth model is no longer the economy’s blueprint.

More fundamentally, China needs to rebalance its economy through comprehensive macro and structural reforms. The right approach consists of a multi-pronged strategy that includes implementing a policy package to make the property sector adjustment less costly; a demand-side stimulus focused on households; and reforms to structurally strengthen safety nets, reduce income inequality, and improve resource allocation. 

For the United States, external balances will benefit from a significant fiscal adjustment. This can be achieved through a variety of ways, including raising indirect taxes, progressively increasing income taxes, eliminating a range of tax expenditures, and reforming entitlement programs.

Subsidies and industrial policy

But what about industrial and trade policies spurring concerns among trading partners about “overcapacity” in China? Regardless of the overall external balance, state support in certain exporting or import-competing sectors can boost activity in those sectors. They may also significantly improve cost competitiveness through learning by doing or economies of scale. The resulting macroeconomic impact could be significant, depending on the size and criticality of the sector and the magnitude of the subsidy. 

Data from the Global Trade Alert show that China has implemented around 5,400 subsidy policies from 2009 to 2022, which is equal to about two thirds of all the measures adopted by G20 advanced economies combined. China’s subsidies are concentrated in priority sectors such as software, automobiles, transportation, semiconductors, and more recently, green technology. Yet, the country’s manufacturing trade surplus is not concentrated among any specific industries and the share of the major sectoral contributors has remained fairly stable over time. Subsidies for electric vehicles and other green technology goods have received widespread attention as exports have surged. Indeed, China was the largest manufacturer of EVs in 2023, producing 8.9 million EVs (about two-thirds of annual global EV production) and exporting 1.2 million—making China the leading exporter of electric vehicles. But as of now these exports only account for about 1 percent of Chinese goods. 

Staff analysis indicates that these subsidies do play some role in generating international trade spillovers in the respective sectors. After the introduction of a subsidy, China’s exports of subsidized products are 1 percent higher than those of non-subsidized products. Imports of subsidized products are lower, indicating some domestic substitution. The estimated effects are however modest, suggesting that industrial policies have a limited impact on aggregate external balances. That said, lack of data on legacy subsidies, on the monetary value of subsidies, and on how they are financed and deployed does not allow a full assessment of their aggregate impact. As the World Trade Organization’s recent Trade Policy Review of China pointed out, lack of transparency on subsidy policies in China hinders a comprehensive and informed assessment of their global implications. Steps should be taken by the authorities to address these data gaps.

Two additional aspects are important. 

First, beyond China, many countries like the United States, are rapidly ramping up their use of industrial policies. Emerging economies, where such measures were historically more prevalent, still retain a large number of them. Even if they may not be the major factor driving countries’ overall external surpluses, they still matter. These may well generate sizable negative spillovers in trading partners, by undercutting the competitiveness and market access in other countries, exacerbating trade tensions. To avoid undue distortions, both domestically and internationally, industrial policies in all countries should be confined to narrow objectives: those where externalities or market failures prevent effective market solutions and be consistent with international obligations.

Second, to the extent industrial policies distort the level playing field, some redress is appropriate and should be obtained through WTO-consistent tools. Multilateral trade rules also provide some guardrails on subsidies, allowing for remedies either through multilateral dispute settlement or countervailing duties. 

At the same time, longstanding and recently-exposed gaps remain in international trading rules, shaped by developments such as the emergence of global value chains; the global importance of economies in which the state plays a central role, and the urgent challenge of climate change. Unilateral responses through tariffs, nontariff barriers, and domestic content provisions are the wrong solutions.  They increase the risks of retaliation, and policy uncertainty, undermine the multilateral trading system, weaken global supply chains and increase geo-economic fragmentation. Instead, governments should come together to strengthen WTO rules and norms in these areas.

About the authors:

• Pierre-Olivier Gourinchas is the Economic Counsellor and the Director of Research of the IMF. He is on leave from the University of California at Berkeley where he is the S.K. and Angela Chan Professor of Global Management in the Department of Economics and at the Haas School of Business. 
• Ceyla Pazarbasioglu is Director of the Strategy, Policy, and Review Department (SPR) of the IMF. In this capacity, she leads the work on the IMF’s strategic direction and the design, implementation, and evaluation of Fund policies. She also oversees the IMF’s interactions with international bodies, such as the G20 and United Nations.
• Krishna Srinivasan is the Director of the Asia and Pacific Department (APD). In this capacity, he oversees the institution’s work on all countries in the Asia-Pacific region. He was previously a Deputy Director in APD, overseeing the work on several systemically important countries, including China and Korea.
• Rodrigo Valdés, a national of Chile, is director of the Western Hemisphere Department since May 2023. Prior to this, Rodrigo was a professor of economics in the School of Government at the Catholic University of Chile. He also held the position of Chile’s Minister of Finance from 2015 to 2017.

Source: This article was published at IMF Blog

Pierre-Olivier Gourinchas

Pierre-Olivier Gourinchas is the Economic Counsellor and the Director of Research of the IMF. He is on leave from the University of California at Berkeley where he is the S.K. and Angela Chan Professor of Global Management in the Department of Economics and at the Haas School of Business. Professor Gourinchas was the editor-in-chief of the IMF Economic Review from its creation in 2009 to 2016, the managing editor of the Journal of International Economics between 2017 and 2019, and a co-editor of the American Economic Review between 2019 and 2022.

US Celebrating the 30th anniversary of Violence Against Women Act

Zimbabwe to cull 200 elephants amid severe drought and food shortages


Zimbabwe is home to an estimated 100,000 elephants, and has the second-biggest elephant population in the world after Botswana. — Picture by Farhan Najib

Saturday, 14 Sep 2024 11:53 AM MYT

HARARE, Sept 14 — Zimbabwe will cull 200 elephants as it faces an unprecedented drought that has led to food shortages, a move that will also allow it to tackle a ballooning population of the animals, the country’s wildlife authority said yesterday.

The country has “more elephants than it needed”, Zimbabwe’s environment minister said in parliament on Wednesday, adding that the government had instructed the Zimbabwe Parks and Wildlife Authority (ZimParks) to begin the culling process.

The 200 elephants will be hunted in areas where they have clashed with humans, including Hwange, home of Zimbabwe’s largest natural reserve, ZimParks director general Fulton Mangwanya told AFP.

Zimbabwe is home to an estimated 100,000 elephants, and has the second-biggest elephant population in the world after Botswana.

Thanks to conservation efforts, Hwange is home to 65,000 of the animals, more than four times its capacity, according to ZimParks. Zimbabwe last culled elephants in 1988.

Neighbouring Namibia said this month that it had already killed 160 wildlife in a planned cull of more than 700 animals, including 83 elephants, to cope with its worst drought in decades.

Zimbabwe and Namibia are among a swathe of countries in southern Africa that have declared a state of emergency because of drought.

About 42 per cent of Zimbabweans live in poverty, according to UN estimates, and authorities say about six million will require food assistance during the November to March lean season, when food is scarcest.

The move to hunt the elephants for food was criticised by some, not least because the animals are a major draw for tourists.

“Government must have more sustainable eco-friendly methods to dealing with drought without affecting tourism,” said Farai Maguwu, director of the nonprofit Centre for Natural Resource Governance.

“They risk turning away tourists on ethical grounds. The elephants are more profitable alive than dead,” he said.

“We have shown that we are poor custodians of natural resources and our appetite for ill-gotten wealth knows no bounds, so this must be stopped because it is unethical.”

But Chris Brown, a conservationist and CEO of the Namibian Chamber of Environment, said that “elephants have a devastating effect on habitat if they are allowed to increase continually, exponentially”.

“They really damage ecosystems and habitats, and they have a huge impact on other species which are less iconic and therefore matter less in the eyes of the eurocentric, urban armchair conservation people,” he said.

“Those species matter as much as elephants.”

Namibia’s cull of elephants has been condemned by conservationists and the animal rights group Peta as short-sighted, cruel and ineffective.

But the government said the 83 to be culled would be only a small fraction of the estimated 20,000 elephants in the arid country, and would relieve pressure on grazing and water supplies. 

— AFP