When It Comes to the Trade War, Don’t Forget to Count the Cost
In a recent article, Peter Schiff called the ongoing trade war Pres. Trump’s last stand, saying, “it looks to me that Donald Trump … is charging into an economic version of the Little Bighorn.” Proponents of the trade war argue that we need to give Trump’s strategy time to work. They say the tariffs will force the Chinese to bend, and in the end, America will find itself in a much better economic position than it was before.
We can debate whether Trump’s tariffs are a brilliant negotiating tool or an economic disaster, but we shouldn’t ignore the fact that they are causing significant pain. And not just for the Chinese. Ultimately, American consumers are paying the price.
If you are a regular listener to the Friday Gold Wrap podcast, you have heard me say over and over again that we should never forget that a tariff is a tax. Every time somebody talks about raising tariffs, you should hear “raising taxes” in your head. And as Republicans used to say, “No country has ever taxed itself into prosperity.”
Again, we can debate the efficacy of Trump’s hard-line negotiating strategy, but we also need to count the cost.
Because there is a cost and it’s not insignificant.
In his famous essay “That Which Is Seen and That What Is Not Seen,” French economist Frédéric Bastiat emphasized the importance of looking for the unseen consequences of a given policy.
Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.”
It’s easy to see the squeeze higher tariffs put on Chinese companies. The media and government spokespeople remind us every day. It’s not so easy to see the impact of these taxes on everyday Americans. They are distributed unevenly throughout the economy. Some people pay a little, some pay a lot (i.e. soybean farmers who are getting billions in subsidies to ease their pain) and others probably don’t feel a thing.
Of course, most people with a basic grasp of economics recognize that higher tariffs on Chinese good means higher prices for Americans who want to buy those products. At least a portion of a tariff is passed on to the consumer. If she wants that product, she will have to pay a higher price, either for the Chinese good itself, or a more expensive substitute. Or she can go without. Whatever she chooses, she is not better off.
While we may understand this conceptually, I don’t think we really grasp the actual impact in real life. And most of the time we don’t feel it. We hear that we’re winning the trade war and go on with our daily lives. A lot of people probably don’t even realize the tariffs are sneaking dollars out of their wallets.
But every once in a while, the unseen reality peeks out from behind the veil and becomes visible. Here’s an example. This sign was posted at a granite countertop company.
So, even if you believe the trade war is a brilliant political move, you need to count the cost. It is having a significant impact on the economy. The longer it drags on, the higher that cost.
And if America loses – as Peter predicts – it could mean economic chaos.
Trump claims the tariffs are actually benefitting America in the here and now. He tweeted that the strong GDP number in the first quarter was due to the tariffs. As Peter said in a recent podcast the trade war has had some bearing on the strong Q1 GDP number, primarily the timing of some imports and the big inventory build. But he said the truth is, there were a number of one-off factors that masked a weakening economy.
By the second quarter, those factors will not be there and the weakening economy will be laid bare for everybody to see and it is going to be a lot weaker because America is not going to win this trade war. We are going to lose this war and we are going to lose it badly and the winner is going to be China.”
Remember, no matter what you think about this trade war – good, bad or indifferent – you need to count the cost.
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