January 20, 2019

CHANG | What’s in a Trade War?

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Most trade decisions have hidden or understated effects, especially in the short-term. The litany of free trade agreements signed beginning in the 1970s meant very little to voters until recently, when the failure of free trade deals to re-distribute the wealth from international trade flows came to a tipping point. The dual economic threats of offshoring manufacturing jobs to countries with cheaper labor and lack of trade adjustment policies that compensate the losers of free trade resulted in voters’ willingness to support economic nationalism and protectionism.

All of this, combined with high executive power over import restrictions and international trade, more generally have allowed President Trump to do what he does best: upset the international order while vaguely fulfilling promises to his base.

Tariffs can essentially be viewed as an import tax. A 10 percent tariff on a $10 good raises the price to $11, with the $1 levied going to the U.S. government. In this way, tariffs are always going to put inflationary pressure on the economy, by raising the price level generally. Often, this wouldn’t be a problem, because the Federal Reserve is able to raise interest rates sufficiently to slow (if not reverse) such inflationary pressure. But in this case, Federal Reserve action is likely to be too slow to act on fast tariff increase, especially when the trade restrictions are expansive and uncertain. As a college student, I’m extremely worried about inflationary pressure not only because of the widespread economic impact but also because goods like food and technology all become more expensive. Which is bad for my wallet, and probably yours too.

The last time tariffs were utilized as a national security tool, President George W. Bush was in office, and I was only two years old. After widespread industry and national protest, President Bush realized the tariffs were, on balance, a terrible idea that went against every Republican principle of free-market international trade. In 2001, the tariffs weren’t in place for long enough for an economic impact.

In 2019, if tariffs aren’t resolved by negotiations between Chinese and U.S. officials by March 2, further escalation appears likely. President Trump and the U.S. Trade Representative Robert Lighthizer have pledged to increase tariffs to 25 percent. Unlike the trade agreements and import restrictions outlined previously, tariffs are likely to have a large and relatively fast impact on international trade and the economy.

Last year, when the tariffs were first imposed on steel and aluminum imports worldwide in July as well as high-level technology from China in September, the economic impact wasn’t as widespread. Largely, this was because of tax cuts that stimulated spending and investment and the generally high growth of the economy in 2017 and 2018. But, it looks like 2019 may likely be the year tariffs have an impact that cannot be ignored.

Besides the inflationary impact tariffs have on prices, there are a laundry list of other economic indicators that would be destroyed by tariffs. For example, any sign that the president could increase tariffs in the short-term isn’t good for business confidence or investor certainty. If the trade war continues, businesses no longer have the confidence to expand their inventories because they don’t believe other businesses or foreign importers will buy their products in the coming months. Investors could decide that they no longer have confidence in the stock market, which would lead to a similar recession as the one that happened in 1929 and 2008. Finally, the possibility of state-based Chinese retaliation could even further destroy the economy because the Chinese economy can use tools the United States does not have to bolster their currency and exports.

Of course, this isn’t to say that protectionism is bad in every instance and free trade is good in every instance. As I noted above, the secrecy of executive free trade agreements has led to an unhappy electorate who are anxious they cannot find “good-paying jobs.” The process of making trade policy in the United States should be reformed, and an interesting proposal by Profs. Ganesh Sitaraman and Timothy Meyer, Vanderbilt School of Law, delineate the best solution as one that properly returns the trade power to Congress while leaving room for executive negotiations. The new path forward must solve both questions of executive authority over trade law and free-trade economics while accounting for American constituents. Regardless, the path forward is certainly not more closed borders to global trade flows.

Darren Chang is a sophomore in the College of Arts and Sciences. Swamp Snorkeling runs every other Monday this semester. He can be reached at dchang@cornellsun.com.