There Are Only LOSERS In A Trade War
For the last two years, Donald Trump has promised to "Make America Great Again." So what has he done?
Dismantle the Federal Reserve?
America enjoyed unbelievable prosperity in the 1800s as the dollar appreciated in value. Since the creation of the Federal Reserve, the dollar has lost 98% of its purchasing power. That perversely means that if one saves their money, they become poorer.
No. Trump hasn't touched that one.
Rebuild America rather than destroy (and then rebuild) other parts of the world?
In his farewell address, George Washington urged America to have "Peace, commerce, and honest friendship with all nations - entangling alliances with none."
Today the American Empire has a presence in over 150 countries, with 165,000 soldiers garrisoning the world. All of that is a huge drain on the American economy producing no benefit at all (except to weapons makers, the "Merchants of death").
Instead, Trump has placed America under embargo by initiating import tariffs on Chinese goods. He did so to make America "a much stronger, much richer nation."
How has that worked out?
Rather than throw a load of statistics at you, which can be used to justify either position, we will deal in first principles. The truth is simple.
Tariffs Are Extortion
For those who don't know, a tariff is a form of extortion levied by a government against companies outside its bailiwick. They do so in order to "protect their citizens" and "build domestic industry."
What actually happens is that those citizens end up poorer or with inferior products. Either way, they suffer.
Import tariffs are one disguise of the Broken Window Fallacy. This is NOT the "broken window theory." You were not taught it at school. In fact, this knowledge has probably been deliberately suppressed.
The fallacy was first written in 1850 by the French economist Frédéric Bastiat in his essay What We See and What We Don't See.
It goes something like this:
One day a young punk picks up a rock and hurls it at a baker's front window. The glass shatters! The punk runs off and the baker is left with glass fragments crunching beneath his shoes.
His neighbors see this and offer their sympathies. They tend to agree though that it is not all bad. What would happen to window makers if windows were never broken? This destruction has actually benefitted society.
For now, the baker will pay the windowmaker $100 to fix the window. The windowmaker will then pay his employees who can feed their families. Their families will spend money which will help others, on and on and on.
The punk, they say, has "stimulated" the economy.
Has he though? If breaking one window is good, wouldn't breaking 10 windows be better?
Shouldn't this punk be considered a hero? They should give him a Nobel prize!
You can see very quickly that something is wrong here. What is it?
Imagine that the punk had never broken the window. Instead of giving the windowmaker $100, the baker instead bought something new, a suit for example. Now the suitmaker has the $100 and can spend it as he pleases.
The baker has his window and a new suit. When the punk breaks his window, the baker only has his window. The punk has cost him and society a new suit.
Can you see now what you did not see before?
Back to the "Real World"
What does this have to do with the trade war between the USA and China?
When Trump forces Chinese companies to pay an extortion fee to sell their product to willing customers in America, those companies pass that extra cost onto their buyers, forcing Americans to pay more.
Without tariffs, American buyers would have their Chinese product plus the amount of the tariff. They have more cash in their pocket which they could use to "Make America Great Again."
With tariffs, the American buyers now have lost that extra cash, and just have their Chinese product or an inferior American product.
Trump is making Americans poorer and economically ignorant Americans are cheering him on.
The Sword Cuts Both Ways
This article was originally published on my Wechat official account. I put the following story in for them and for foreigners who are unaware that China also has incredibly high tariffs.
Most of our subscribers are Chinese and I imagine these tariffs may feel unfair.
Importing foreign products into mainland China also has incredibly high tariffs.
This is a personal Youbanfa 有办法 story:
Seven years ago I co-founded a peanut butter company called Peanut Butter Americano. I helped create some of the world's most delicious peanut and almond butters.
Me on the right. Summer 2013.
After leaving the company and moving to China, I had plans to independently import the peanut butter for sale in mainland China.
What did I find???
Tariffs adding a whopping 100%+ price increase! That's what!
I'm fuzzy on the exact amounts but there were three individual tariffs ranging between 25% and 35% which compounded onto each other for a 100%+ markup.
Chinese buyers missed out on the world's best peanut butter, and now have to eat Skippy, with all the garbage they put in. Michael got to host Bitcoin Startup Parties, so that's not too bad.
The same principle applies to foreign cars or anything else. The consumer suffers, either with a higher price or inferior product. A tariff is a country putting itself under embargo.
If you are Chinese and think the American tariffs are unfair, which you have every right to feel, then to be honest and consistent you must also be against tariffs for foreign goods entering your own country.
Otherwise, you are just like the spoiled child on the playground, who wants the rules of the game to apply to everyone else, but not to him.
Don't be that kid.
Monsieur Bastiat
Besides introducing his Broken Window Fallacy, another sentiment has been attributed to M. Bastiat. Jack Ma used similar words while delivering a message to President Trump:
When goods don't cross borders, soldiers will.
Author Doug Casey has been pointing out that the world situation in the 2010s is eerily similar to the world in the 1930s. Our aim at Youbanfa 有办法 is that the 2020s are not a repeat of the 1940s.
If you enjoyed this article, or even if you hated it, share it! The world needs to know these truths!
有办法,
-Michael McGillicuddy
Arizona, United States
Further Reading:
Hey Michael, I know I could get lost down a Google rabbithole... but what happens with a tariff exactly?
If your peanut butter would normally sell for $5, and it was sitting on the shelves in China for $10... where does that 100% markup go? Does the supermarket in China send $5 to you, and $5 to the Chinese government? Are they effectively making money off your products?
I don't think consumers are ever for tariffs... I think the only people who benefit from a tariff is the exact industry that is protected... who then doesn't need to improve their products or efficiencies because they have an unfair advantage.
In the US the Steel industry is protected by tariffs... but every other company that uses steel in the US is hit by the price increases (either they have to buy expensive US steel, or now pay more for China steel). I think Ford said it cost them an extra billion dollars to make the same number of products... and the protection that the steel industry enjoys now costs other industries (ie, farmers in the Midwest) who then cop tariffs on the goods they send to China.
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Hey Aussieninja, how ya goin?
So when I tried to bring the PB into China, I would need to pay the import department of the Chinese government 3 separate taxes. They would get the money first and I would need to make it back on retail sales, by charging the customer $10 in this example. Good question, but pretty simple actually. They lock up the goods in the port until you pay.
I wrote this article with a Chinese audience in mind (and had it translated). At the moment, they're being programmed by the TeeVee to feel "OUTRAGED! UNFAIR! HORRIBLE" at the American tariffs when they do the same thing.
My point is not to say one side is right, it's to say that both sides are economically ignant morons :-)
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Ahhhhh, of course, that makes total sense. I'm sure I would have worked that out if I really thought about it. I guess it makes it all the more risky though... if you don't sell all your stock, you're pretty much operating at a loss. I guess though, it means that bigger companies can eat the tariffs themselves if they don't want to lose market share.
Hahaha, anyone that uses tariffs doesn't understand economics..... but I think in these cases it's not at all about economics, it's a superpower boxing match. Looks like the overall global economy might take a huge hit in this battle though.
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Glad it made sense.
It sure will. It's the world putting itself under embargo. We'll be poorer as a result. And yes, bigger companies can operate at a loss while it makes it much harder for startups.
If more people understood these things, they would not be cheering for them (right now segments of the Chinese and American populace are cheering them on). They think it's horrible when tariffs are placed on them, but oh so necessary and a "good thing" to do them to others.
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This is an awesome article! thank you. Upvote and reeeeeesteem!
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Hi there and thanks!
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You don't mention the Elasticity of Supply and Demand in your analysis of tariffs. In the long run, the tariffs will impact Chinese manufacturers more than American consumers. As is the case with all tariffs, there will be some deadweight loss to both economies but more so with elastic goods being by China. I.E. China has more to lose from these tariffs because of the particular markets being targeted.
Many countries including China already had tariffs on American goods in the form of a Value Added Tax. These VATs don't recognize the American taxation system and were charging sales tax on primary goods being imported from America. The tariffs level the playing field in certain industries. EU has VATs too.
Also, industrial espionage (patent violations) and copyright infringements are problems that need to be dealt with somehow. Tariffs are a better response than war.
You mentioned there are only losers. Some American Producers will benefit that have been outpriced by Chinese producers, this is a fact as the supply of most goods from China are elastic so US companies will become more competitive as a result of the protectionist policies.
The environment will benefit as well. Less trade means fewer ships crossing the Pacific Ocean. Less aggregate demand means fewer plastic goods are produced, less electricity is consumed and factories can retool to use fewer materials and power to remain competitive. The Environment is a clear winner if more goods are produced domestically and less abroad. (Negative externalities decrease)
If the tariff revenue is spent to offset income taxes, this could have enormous benefits. Taxing consumers more and giving breaks to income earners and producers could lead to a much-needed increase in the savings rate.
Globalism has exasperated climate change, maybe this isn't such a bad thing, future generations may thank The Donald for reducing pollution (not that that was his intention). Please read my post about the subject.
https://steemit.com/economics/@crypticat/trade-wars-are-good-for-the-environment
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