Economics of a Bully

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This just in:  Trump’s tariffs have started a global trade war in which there are no winners.  Not unless you call the smug satisfaction Trump gets when he is bulling someone a “victory.”

Here is what tariffs do.  They are a tax on an imported good.  For example, if China once sold a cell phone in the United States for $400, then a 25% tariff would increase the cost of that phone to $500.  We put a tariff on China and Americans pay more for goods they buy from China.

To be clear…the tariff on imported goods is a tax on Americans.

If this is true, why would anyone implement tariffs?

Setting Trump aside for the moment, there are times that tariffs are practical.  For example, let’s suppose China has a huge technological and cost advantage when it comes to producing solar panels.  Let’s also assume that the United States would like to encourage the development and production of solar panels domestically.  Since China has such a huge advantage and can sell panels much cheaper than we can make them, any company in the United States that produces panels will not be able to compete.  Their panels will not be as advanced nor as cheap as those from China.

Enter the tariffs…

By putting tariffs on Chinese solar panels, their panels will now cost Americans more to buy.  In fact, the Chinese panels are now so expensive that we will buy American panels instead.  This allows a domestic industry to survive and grow.   Eventually, we will be on par with China and the tariffs, no longer needed, will go away.

So, the tariff increased the cost of solar panels but in exchange, we got a foothold in a huge global market for our domestic panels.

Let’s bring Trump back into the picture.

As president, he is allowed to unilaterally implement tariffs up to 25% if it is in the interest of national security.   For example, to protect an American industry that contributes to defense.

What Trump has done is to impose arbitrary tariffs on China, the E.U. and Canada without any clear rationale.  No one, including those in this cabinet, know what it is that he is actually trying to do.  No one can tell us what the “national security” issue is.

And what’s worse, those countries he is imposing tariffs on don’t know what he wants.  They don’t know what he is trying to negotiate for.  He says things like “China is treating us unfair” without clarification.  He puts tariffs on Canadian milk as if this will prevent a national security breach.  He puts a tariff on German cars and leaves the E.U. to scratch their collective heads in confusion.

Trump does all of this for two reasons.  The first being because he can.  The Republican Congress has indicated to Trump that they will not challenge any issue he wants to take on.

The main reason for tariffs is that Trump is a bully.  He puts tariffs on counties for the same reason the biggest kid in 3rd grade beats up on the other, smaller kids.  He is mean and insecure.  Being a bully is the best way he has come up to deal with this.

So, the world is entering a trade war because Trump basically needs a nap.

And as the result, Americans will pay more for many for the products they buy every day.

Vote in November and get the Republicans out of our house.

Up, up and away…

Jim

 

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