Trump’s tariff trade war could result in manufacturing and services moving to other countries – not to the U.S. While the U.S. is a huge consumer of goods and services, so too are many other countries, especially if they choose to work together.
China, for example, could come out of this trade war economically stronger – as some countries may now choose to source from China and other Asian countries – rather than the U.S.
Thus, Trump’s policy is a high stakes gambit and it could backfire and make things for the U.S. economy- much worse, long term, by demonstrating the U.S. is an unreliable trading partner. Or it could be a lever for negotiating better trade deals over the next 1-3 months.
Perhaps, the administration will use these trade policies to aggressively and rapidly re-negotiate better trade deals and a more equal trade policy. Perhaps. There is no guarantee that will occur nor that if it does, it will result in better deals for all parties. But there is that upside potential, and it could deliver positive financial benefits to the U.S. in the future.
The concept of free trade is it leads to economic efficiency. Classic examples are in agriculture – the U.S. cannot really grow bananas, chocolate or coffee. But there are many areas of the world where those grow well – meaning it is more efficient to grow them there than in the U.S.
Due to labor arbitrage, there are some manufactured goods that use a lot of labor to produce – and those are more economically produced in places where labor is inexpensive. Thus, free trade provides obs in places were labor is in good supply, and lower priced goods for consumers elsewhere.
There are numerous products that have small domestic markets, but a reasonable market on a global scale. It makes no economic sense to set up factories for small market products in the United States – instead, they are made for a global audience in say China, Thailand or Vietnam. Because it makes no sense too build them in the U.S., U.S. consumers who need these products will have to pay 25-50% tariffs.
Effectively, tariffs become a national sales tax.
Trump has established a global, baseline national 10% sales tax on all imported goods, rising to 25%-50% depending on the country.
Which means Trump enacted the largest tax hike in U.S. history.
If the tariffs applied by other countries have been unfair to the U.S. for decades, why did previous administrations not address this unfairness?
Possible outcomes are:
- A U.S. economic recession, possibly hitting some other countries
- High inflation in the U.S. – leading to stagflation – weak economy with inflation.
- Depending on inflation, a recession might result in lower interest rates, which the U.S. needs as it needs to refinance $9.2 trillion in debt that rolls over in 2025.
- Trump’s theory is his tariffs result in moving manufacturing back to the U.S. But this is a process that takes years, and facilities construction can cost tens of millions to billions of dollars – which many may not wish to invest in doing if they think the tariffs might be reversed in a few years. Additionally, the U.S. has low unemployment and a looming labor shortage due to demographic trends. We do not need to increase the number of jobs when the labor supply is decreasing.
- The U.S. successfully re-negotiates more favorable trade deals, and does this rapidly.
- Or, other countries group together to form their own free trade groups, and exclude the U.S.
- The U.S. reputation as a trading partner is trashed
- Or, this is merely a negotiating tactic and the U.S. ends up with far better trade deals. We may know much more in a matter of weeks.
If this does not turn around quickly, Trump’s policies will halt Republican influence in government – voters will take it out on local, regional, state and Federal office holders.
Unfortunately, Democrats have no leadership either – and want to maintain a status quo that engages in excess spending, is supportive of government inefficiency and leads to serious economic consequences: in 10 years, debt payments become 30% of Federal revenue, and in 20 years, the U.S. enters the “debt death spiral”. Our leadership is inept across the board.
This is the problem
