Thursday, July 26, 2018

Trade Deficits and Tariffs

President Trump is big on Tariffs and talks about how bad the trade deficit is.  What do these things really mean to you?
Trade Deficits vs. Trade Surpluses is a measure of how much we bought vs. how much we sold.
 In other words a trade deficit with China means we buy more from them than they buy from us.
That is a choice by consumers, mostly because goods made in China are cheaper.
So is it bad? Depends who you are. It means consumers made a choice and freedom is what America is all about.  So that is good right? I mean what is more American than being able to spend your hard earned money where and how you want to?
There is a bad side though, and that is American producers sell fewer goods so make less money. That might mean fewer jobs as well, though automation is the primary source of jobs lost in manufacturing.

Republicans generally believe in what is called Free Trade. The idea is that there should be no barriers and companies set whatever price they want and the market will bear. That means if people are willing to pay for it its good and if not the company goes out of business which is also good.
Democrats prefer a more measured approach and want regulations to prevent things like price fixing.

Both parties like subsidies in some cases, not in others.
Subsidies are corporate welfare where the taxpayer gives them extra money to stay in business. Sometimes its to help retool, or offset research costs (Then the government is supposed to own part of that research, but doesn't always happen), and sometimes to offset an emergency like disaster relief.
And often its payback for campaign donations.
So sometimes subsidies are good, other times bad. Ideally there should never be a need for corporate subsidies in a capitalist economy.

Some countries such as China subsidize their companies which gives them an advantage, but we do that as well. Free Trade people should be against subsidies on principle, though they may accept exceptions such as for emergencies.

So About Those Tariffs...

A Tariff is a tax applied to an incoming or outgoing product. Pretty much a sales tax, except the money doesn't go to the city or state but the federal government.
That is right folks, the Republican party cut income and corporate taxes then raised and added sales taxes to the stuff American consumers purchase.
Is that good or bad?
If your a Free Trade type it goes against your principles, so Republicans, especially Conservatives and Libertarians it is bad. If your a consumer it means you pay more for foreign products on which Tariffs are imposed. If your a manufacturer, farmer, or produce things it means Americans may buy more of your stuff since its now cheaper compared to foreign goods.
So its the Federal government trying to force the American consumer to buy American by price fixing. Not exactly good old American values of Freedom of choice but those companies and industries your trying to protect might like it and foreign companies sell less to us which hurts them.
So a mixed bag, right?

The real problem is that obviously the other country is going to retaliate.
In this case other countries threatened their own Tariffs in response, some have already done so and thus we have a Trade War.
Those Tariffs mean stuff we try to buy cost us more and stuff we try to sell have a higher price so we sell less.
Everyone having to pay more hurts everyone, can lead to a recession if it goes on too long and even in the short term lost jobs as well as those higher prices.

Are Tariffs Ever Good?

They always hurt consumers but sometimes they can achieve an objective. Imposing Tariffs on a country hurts them. We have done this in the past and successfully achieved our objective. The catch here is that if your going to penalize a country for selling stuff or buying stuff from you and really hurt them you have to be the only game around.
If they can buy or sell to other countries your Tariffs are less effective. We can effectively hurt a country using Tariffs but our efforts work better if several countries team up and give the target country no place to go.
Unfortunately our President decided to impose Tarrifs on almost every country in the world at the same time.  That weakens our power and hurts us the most as everyone else can just trade with each other and leave us out in the cold.
Its already started and will get worse if this continues very long.  Getting those customers back will be harder as well since they will be making new trade deals wih each other and without us.

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