Tariffs and Trade Offs -August 2018

I have to admit that I have been obsessing over the news on tariffs and trade wars. Obsessing because so little background information is given to the public. There is no big picture. There is no context presented to know how serious a trade war is. What we are hearing about now is the negative economic impact tariffs will have on businesses large and small. Like cranberry growers.

The Wall Street Journal recently published an article about the impact of tariffs on cranberries. “U.S. Cranberry Industry Feels the Bite of Retaliatory Tariffs” (August 5th, 2018). As I read the article I kept thinking how tariffs and trade wars become a zero-sum game. Or a race to the bottom. No one wins. And I feel compelled to stand up for the cranberries.

In 2017, we (the US) bought $2.9 trillion dollars’ worth of goods (stuff) and services from the rest of the world. We sold $2.3 trillion dollars’ worth of goods (stuff) and services. The difference was a negative $552 billion dollars. This is the trade deficit.

One of the arguments for imposing tariffs on our trading partners is that the U.S trade deficit is getting bigger and bigger. Yes, the “number” is getting bigger but is it really a problem?

On a global basis the U.S. has had a trade deficit since 1976. That means for the last 42 years we have purchased more goods and services from the rest of the world (imports) than we have sold (exports).
To put some perspective on this let’s look at the U.S. economy. The size of our economy, also referred to as Gross Domestic Product (GDP) has four major components:

• Personal consumption – what you spend money on
• Private investment – how much businesses invest in plants, equipment, and construction
• Government Spending (how much federal, state, and local government spend and invest)
• Net exports – the difference between how much we buy and how much we sell

The U.S. economy, using the 4 components of GDP, is a $20 trillion-dollar economy.

The size of the cranberry market is $270 million. It is a market that is so small relative to our economy it can barely be measured.

The history of tariffs dates back to 1789. Tariffs were used to protect an American economy struggling to develop. Alexander Hamilton, yes THAT Hamilton, was Treasury Secretary to George Washington. He was the first great protectionist and argued that tariffs should be discontinued when protected industries established themselves in the American economy.

The problem with imposing tariffs today is that in a global economy it is easy to retaliate. The European Union imposed a 25% retaliatory tariff on US cranberry imports June 22nd. Last month China imposed a retaliatory tariff of 25% on U.S. dried cranberry imports, on top of an existing 15% tariff. Mexico and Canada have imposed retaliatory duties on cranberries as well.

The primary target of our tariffs is China. The Chinese economy is the second largest economy in the world. The GDP of China is $14 trillion.

The U.S. trade deficit with China is $335 billion or 60% of our total trade deficit.

Although the US and China are the two largest economies in the world, there are significant differences in how the two economies function.

We are a nation of spenders. What we buy is 70% of GDP. We don’t save much. There are different ways to measure savings but for our purposes it is 6-7%.

In China, the savings rate is 48%. The biggest portion of China’s GDP is government spending. The population of China, 1.3 billion people, is not a nation of spenders. I don’t think our tariffs are going to change their culture and way of life.

This is one scenario to consider: We stop spending and increase our savings rate. The irony is that if we stop spending GDP (growth) drops. When growth drops it is followed by higher unemployment as businesses start to suffer. Layoffs occur. The outcome could be a recession. If US growth drops it also means we are not buying as much from China or the rest of the world.

Does that mean that the trade deficit shrinks? No, it doesn’t.

If our imports decrease (we stop buying) from $2.9 trillion to $1.9 trillion and our exports decrease (who is buying our stuff now, with tariffs in place) from $2.3 trillion to $1.3 trillion, the deficit is exactly the same number.

Back to the cranberry. Clearly the size of the cranberry market has no impact on the trade deficit. The cranberry has been targeted because it is American. It is the quintessential symbol of Thanksgiving. The trade deficit is not the issue at all. This is personal.

Now we see how tariffs backfire badly and quickly. No one cares that cranberries are a tiny struggling industry. Imposing tariffs is not a way to protect the cranberry business. We all lose in a race to the bottom.

Tariffs are the new political weapon of mass destruction.

Save the cranberries. Buy your Thanksgiving cranberries now!!

Sources for this newsletter include:
“U.S. Cranberry Industry Feels the Bite of Retaliatory Tariffs”
August 5th, 2018 by Julie Wernau and Chelsey Dulaney

Bureau of Economic Analysis: www.bea.gov/

U.S. Census Bureau, Economic Indicator Division: http://www.census.gov/foreign-trade/guide/sec2.html#bop.

“The Secrets of Economic Indicators” by Bernard Baumohl

“Macroeconomics” Ninth Edition by N. Gregory Mankiw

“They Did Their Homework (800 Years of It)” The New York Times. July 3rd, 2010 by Catherine Rampell.

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