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Trade wars are good, and easy to win

Professor Anthony Krautmann  /  5/2/2019  / Twitter / Facebook

Professor Anthony Krautmann

A recent article in the Chicago Tribune highlights the inefficiencies associated with government policies intended to protect domestic jobs. President Trump came into office two years ago and immediately alienated the country from many of our economic allies. First, he broke away from NAFTA, and formed a new pact called the United States-Mexico-Canada Agreement (USMCA). He then imposed heavy tariffs on a number of foreign products, including imported washing machines and dryers. One of Trump’s targets was the South Korean manufacturers industry — dominated by Samsung and LG. A recent study by three economists at the University of Chicago’s Becker Friedman Institute concluded that the burden of this tariff fell primarily on U.S. consumers. They found that as a result of this tariff, both domestic and foreign companies raised their prices on washing machines and dryers by about $100. The Trump administration was quick to point out the recent job gains in the domestic washer-and-dryer industry: Samsung and LG opened a few new factories in the U.S. (creating about 1,600 new jobs); while Westinghouse increased domestic production (adding a few hundred additional jobs). But these new jobs come at a staggering cost — domestic consumer expenditures on washers and dryers increased by $1.5 billion due to the higher prices. This amounts to more than $800,000 per job created.

Another example is Trump’s recent threat to increase tariffs on Chinese products. Not surprisingly, China retaliated by imposing a 25% tariff on American soybeans — reducing its purchases of American soybeans by more than 50%. Farmers who had been exporting most of the beans to China now are watching their beans spoil in their grain bins. Even more aggravating, China has turned to Brazil to make up for their need for soybeans. 

Trump’s policy of imposing tariffs as his favorite trade weapon may be coming to an end. A recent ruling by the World Trade Organization has set a very high bar to invoke Article 21 — the “national security” justification for imposing trade restrictions. The European Union has warned that misusing Article 21 would open Pandora’s box and allow any country to arbitrarily impose trade restrictions. For example, the EU recently hit Harley Davidson motorcycles with heavy tariffs.  What really infuriated Trump was that while he was threatening the EU with retaliatory tariffs, Harley Davidson announced plans to move production from the U.S. to overseas factories to avoid EU tariffs. Trump’s response: “So unfair to the U.S. We will reciprocate!”  Here we go again!​​​