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Peter Schiff: No, It’s Not Easy to Win a Trade War

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It looks like Donald Trump is launching a full-blown trade war. Not to worry though. According to the president, a trade war is “easy to win.”

When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”

Peter Schiff has a little different take. He said in his podcast last week winning a trade war isn’t so easy. In fact, America can’t do it.

Last week, Pres. Trump announced significant tariffs on steel and aluminum, imports. The president said duties of 25% on steel and 10% on aluminum would be formally announced this week.

Trump didn’t back down over the weekend. He threatened European automakers with an import tax on autos if the EU retaliates against his steel and aluminum tariffs.

Canada said it would retaliate if the US follows through on its metal tariffs. This is significant given that Canada ranks as the number one exporter of steel to the US.

Trump likes to talk about China undercutting the US market by dumping cheap steel, but the tariff would have far more impact on America’s neighbor to the north. According to a 2017 report from the US Department of Commerce, 16% of US steel imports come from Canada, and the country supplies about 56% of US aluminum. China doesn’t even rank among the top 10 exporters of steel to the US.

Peter said Trump is right about one thing – the massive trade deficits are a problem. In fact, Peter has said the twin deficits in trade and the federal budget will doom the stock market. But Peter said Trump is wrong in thinking tariffs are going to solve the problem.

They won’t. They will make the problem worse. This is the irony of these tariffs. They will result in larger trade deficits, not smaller trade deficits. And that’s even without any foreign retaliation.”

Peter also said the tariffs will ultimately result in the loss of US manufacturing jobs.

Peter does offer a solution. He said the real key to boosting US manufacturing and shrinking the trade deficits is to cut regulations and shrink government spending on a massive scale. That would allow businesses to expand.

What we need is more savings. We need more capital investment in plant and equipment. But that’s not happening. These larger deficits are going to crowd out what little capital investment we have. So, Trump is going about it the wrong way.”

Peter said you have to remember that when you hear tariff, it really means tax. So, in effect, Trump is proposing a tax increase. And who pays taxes? The American taxpayer.

So, it is not a tariff on Chinese steel. It is a tax on Americans who want to buy steel – whether they buy it from China or anyplace else. It is a tax on buying steel. That is all it is. So, Trump wants to raise taxes, and he thinks that raising taxes is going to be good for the economy. It’s not.”

In theory, a tax on foreign steel will increase domestic steel sales. That will increase steel output and revitalize the US steel industry. But as Peter points out, in order for the US steel industry to increase output, it will need to invest capital and expand its capacity. That isn’t going to happen.

All that’s going to happen as a result of these tariffs is that US steel manufacturers are going to raise the price of their steel by the amount of the tariffs. That’s it. So, American steel companies and aluminum companies are going to sell the same amount of steel and aluminum. They’re just going to sell it at a higher price. They’re going to make a bigger profit.”

And what will the companies do with the profits? Most likely, they will not invest it to increase production. They’ll use it to buy back their stock. After all, who knows how long the tariffs will stay around?

Steel companies are not going to invest in building more plant and equipment based on an artificial price that is based on a tariff that may not be there by the time the plants are ready with the extra capacity. All they are going to do is raise their prices.”

This is a phenomenon known as “regime uncertainty.” When businesses can’t accurately gauge the future, they will hunker down and take the most conservative approach.

So, if Trump follows through on the tariffs, the winners will be the US steel and aluminum companies that can charge a higher price and increase profits. Foreign companies will sell roughly the same amount of steel, but at a higher price. The government will collect a portion of that higher price in the form of a tax. The real losers in this scenario are all of the US companies that will have to pay higher prices for steel and aluminum.

Think about a company like Whirlpool. All of a sudden, they will have to pay 25% more for steel. Their competitors, manufacturing appliances in other countries, will not have to pay 25% more for steel. The result for Whirlpool isn’t hard to predict.

So Trump’s tariffs, while they will do no permanent good for US steel manufacturers, in the short run, they can put a company like Whirlpool out of business – for good.”

So, Trump is wrong. It’s not easy to win a trade war. In fact, it’s really, really, easy to lose one.

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