Her column The Truth Will Set You Free is geared towards all age groups, backgrounds and professions. Katelyn aspires to inform readers of major legislative, political and humanitarian activity, in order to supply the general public with an unbiased analysis that allows them to cultivate opinions by their own free will. This column will not engage in ideological favoritism or promote party identification to any degree.
Has a failed game of chicken turned into a tariff war?
American media is currently reeling over President Donald Trump’s tariff agenda and its’ recent developments. While the rest of the world seems to be in a frenzy, this article is intended to provide background, context, and a historical analysis of tariffs throughout U.S. history. It’ll begin by bringing to light the current state of things as reported by mainstream media. Then we’ll set that aside to learn about tariffs, protectionist policies, the stock market, etc. Lastly, all of the pieces will be put in perspective to hopefully dilute surmounting fears. So bring your curiosity and speculation, and let’s take a step away from mainstream news to grasp the bigger picture.
ADDRESS WHAT’S HAPPENING
The following research was reported last week but much of the context remains the same. President Trump’s 90-day tariff suspension is still in motion, the world is watching for any teetering in the global market, China and the U.S. are still fighting with raising tariff rates (U.S. new rate at 245% as of April 16th). The stock market is still fluctuating daily.
On April 9th, AP News reported that the S&P 500 stock market index that tracks the stock performance of the leading 500 companies in the U.S. had risen to 9.5%. Other headlining stocks like Dow Jones and Nasdaq also saw similar increases. The next day it was reported that stock markets were falling, and the S&P 500 lost 3.45% among other losses. Then on April 11th, it was reported that these stock indexes were on the rise again. All this shows us is that the nature of the stock market is very fluid with its ebbs and flows. It is constantly affected by supply & demand, investors, interest rates, trade relations, natural disasters, geopolitical tensions – the list continues. It is vital for readers to understand that the stock market is simply unpredictable, as it rises and falls every day. But has something specific caused this recent fluctuation? In a way, yes. However, it’s becoming much more political than need be.
One of President Trump’s biggest initiatives for his second term is to tackle the country’s exacerbated trade deficit – when a country’s imports exceed its’ exports (Investopedia). Basically, the United States has been buying more goods than what’s being sold from our own industries, which leads to an imbalance of trade in the domestic and global markets. Trump acted to fix this by imposing additional 10% tariffs on specific countries, most notably China, Mexico and Canada. [We’ll discuss what tariffs are in a second]. This week, Trump paused most of these tariffs on the country’s biggest trading partners for 90 days. As a result, U.S. financial markets jumped thereby explaining the fluctuation of the stock market. In response to the initial dip within stock indexes, Trump conveyed a point of caution that there will be a “transition cost”, but “you have to be flexible” (New York Times & The Guardian).
Now, the biggest source of controversy is coming from China and the European Union (EU). China has not cooperated with Trump and is instead going bar-for-bar in raising tariff rates. On April 9th, the U.S. tariff on China was raised to 125% and then to 145% the next day. China had raised its’ own tariff on the U.S. to 84%, then to 125% on April 11th. In a statement addressing this escalating tariff war, Trump said that he would love to negotiate with China, but Xi Jingping has not shared the same sentiment. NPR reported on April 10th that the Chinese president advises the U.S. to “show an attitude of equality, respect, and mutual benefit” if the two are ever to meet at the negotiation table.
As for the EU (minus Hungary), they initially responded by approving retaliatory tariffs on a list of U.S. products on April 9th. The European Commission had called Trumps’ implemented 10% tariffs “unjustified and damaging, causing economic harm to both sides as well as the global economy” (NPR). These retaliatory tariffs were proposed as a countermeasure to coerce the U.S. in establishing a “fair and balanced negotiated outcome”. As of April 10th, the EU stated that it is willing to negotiate within the 90-day tariff pause. Ironically, European and Asian stock markets have experienced a similar increase from the 90-day tariff ordeal. The FTSE 100 in London increased by more than 3% and witnessed a mutual raise in Paris and Frankfurt. Japan’s Nikkei raised to 9.1%, South Korea’s Kospi 6.6% and higher, as well as some in Taiwan that have spiked to 9.25%.
WHAT’S THE DEAL WITH TARIFFS
At its most basic form, tariffs are a sort of tax or duty that make goods coming from another country more expensive than those made at home. They are implemented as a “protectionist measure” meaning that the government imposing the tax on foreign goods implements a tariff policy that restricts this international trade, because they want to incentivize the growth of their own (domestic) industries. In order to see this growth happen, the impact of foreign competition on domestic industries must decrease by limiting international competition. In this way, the government also tries to incentivize consumers to buy domestic products.
The overall goal of protectionist measures is to protect domestic jobs, support infant industries in developing countries, promote national security, and balance trade as a whole. For developing countries, those that have lower income levels, low human development, weak infrastructure and high poverty rates (Haiti, Ethiopia, Pakistan, Colombia, etc.) are often the subject of many tariffs imposed by developed countries (U.S., European Union, etc.). These countries want to incentivize developing countries to “get on their own two feet”, essentially.
Some sources say that the U.S. did see positive growth and success from implementing tariffs during the 1870s until 1913. They argue it’s because tariffs were a major source of government revenue however, other sources argue this growth was due to the expanding U.S. labor market. I will not make a definitive conclusion about this dispute.
On the flip side, there are negative repercussions for implementing harsh tariffs, or tariffs in general. The biggest is the created potential for tariff wars. This is an economic conflict created by two or more countries’ back-and-forth tariff taxes. In this heated situation, harsh tariffs are often designed to harm an opposing economy and discourage consumers from purchasing their goods or investing in their economy. The general idea here is: pressure leads to change. If a country has committed horrendous crimes, violated human rights or harmed another country in some unjust way, other countries will charge them with high tariffs.
Here’s an example – China is the largest importer of soybeans, and the U.S. is the largest exporter. However, Brazil also exports soybeans to China. The U.S. has put harsh tariffs on China because of a dispute so, China retaliated by putting a 25% tariff on U.S. soybeans (making it more expensive to sell to China). China did not place a tariff on Brazil so, they begin importing more soybeans from Brazil. This creates a problem for the U.S. because their farmers now have too large of a supply of soybeans because the big customer (China) isn’t buying as much from them. Farmers now have high sale losses, and the government has to compensate them for the loss. Now, because China has been buying more from Brazil, Brazil decides to raise their prices to make a larger profit. China begins to pay more but is actually paying the same price they would have paid if they went through the U.S. tariff. In the end, China does not benefit from their retaliatory tariff. Though the tariff war commenced as a way for China to say, “take that Americans”, nothing was effectively gained. The same is usually true for any other country within a similar situation.
Other negative repercussions can result in supply & demand imbalances (as we saw with the farmers), reduced innovation within domestic industries that normally sell internationally, and high consumer prices. Do not freak out – this is not an argument for either ridiculously politicized perspective on how tariffs affect or don’t affect consumer prices. This is just my explanation of my economic research.
We’ve already established that when a government imposes high tariffs on foreign products, they become more expensive to incentivize domestic industry growth. This means that foreign products are more expensive. For domestic manufacturers that rely on foreign/imported parts, this then increases the cost for purchasing that part that is used to assemble a product. Logically speaking, these manufacturers will then raise their prices on the finished product in order to cover the cost of parts that needed to be imported. In the end, consumers will pay a certain higher price than they may have paid before.
US HISTORY WITH TARIFFS
The political battle of implemented tariffs has been around for centuries. It is nothing new for the United States.
The Great Depression happened from 1929-1939, essentially laying out the groundwork for political strife over tariffs that would later ensue; and still takes over our current political society. During this time, U.S. farmers made up 20% of the U.S. population. In Europe, food prices were soaring as World War I had concluded but U.S. farmers were suffering from harsh competition and overproduction. In 1930, the Smoot-Hawley Tariff Act was passed in order to safeguard U.S. businesses and farmers who were suffering from the Great Depression. The U.S. raised tariffs by 20%, but retaliatory tariffs soon followed. Because of this, U.S. export sales severally decreased from $7 billion in 1929 to $2 billion in 1932. Global trade overall declined by 65%.
Critics argue that the Smoot-Hawley Tariff Act did nothing but worsen the effects of the Great Depression. Luckily in 1934, former U.S. President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act that effectively lowered tariffs to support trade independence and collaboration. These improvements fell out after World War II, as trade was drastically reduced, retaliatory tariffs began to rise again, and consumer prices rose.
Since then, most of the world has been on a tariff rollercoaster.
PUT IT IN PERSPECTIVE
Presently, President Donald Trump has sought to combat unfair trade practices, reduce the country’s trade deficits, and boost domestic manufacturing by reigniting tariffs. Some of the most combative tariffs have been placed on Canada, Mexico and China as a means of promoting immigration enforcement and the end of drug trafficking.
As for the legitimacy of imposing tariffs, Congress has the constitutional power to regulate the country’s commerce with international entities; and the President can impose/raise tariffs. Reasons for doing this include confronting unfair trading practices, protecting consumers from harmful products, and protecting domestic industries that have been injured by foreign competition.
The reality of the dilemma is that “almost every country imposes some sort of tariffs” (Council on Foreign Relations). This is NOT an American-specific issue. Furthermore, both Republican and Democrat political officials have used their authority in favor of tariffs throughout American history. Though the media has taken charge of displaying every single twist and turn of current economic events, it’s important to zoom out to see the bigger picture and take a deep breath. Tariffs have been raised before, countries have retaliated before, the stock market fluctuates every day and is impacted by many other things beside tariffs, so it’s not worth losing our heads over.
Of course, be attentive to current events and inform yourself. I do recommend, however, that we mitigate our consumption of mainstream media that forces us into tunnel-vision. Read, inform yourself, reflect on the context, and then go outside.
RESEARCH
AP News
CNBC
The Guardian
NPR
Tax Foundation
EU Trade & Economic Security
International Trade Administration
The Council on Foreign Relations
Investopedia
Britannica
World Economic Forum
CATO Institute
https://www.cato.org/policy-analysis/doomed-repeat-it-long-history-americas-protectionist-failures
U.S. Global Investors
New York Times
Washington Post
The Independent
Wall Street Journal