A Look at the Impact of China Tariffs – Economic Memo #65

Tariffs make no sense

You know when you get to be 74 you either retire and mow your lawn six times a day, and look forward to the next doctor’s appointment, or you keep doing what you love to do, look forward to the next birthday with vigor, and let your grass grow. Now I have solved the grass problem, then do what you love challenge, and the looking forward to my next birthday situation.

First, you buy a big-ass John Deere with four times the power and size you need and mow the grass in twenty minutes riding six feet about the ground with a huge smile.

Second, you simply keep doing what you love. In my case, teaching young men and women who want the knowledge that they can use for a lifetime to achieve a better standard of living.

The third one came as a surprise a couple of months ago. I was swimming at the local Y to try to keep my weight down (a problem not solved) and the “MASTER” swimming coach asked me to join the team. Note the word MASTER is generic for old as dirt.

I told her that I wasn’t very fast and probably would never be completive. She replied, “What is your age?” I told her, “74”. She got all excited. “Oh, boy,” she said. “When do you turn 75?” I replied, “March.” She clapped her hands and shouted, “That’s terrific; when you move into the 75-80 age bracket no one shows up. At the State meet last year there was only one person in that bracket. You have nothing but your future to look forward to.”

So, you see, I solved the third problem and am now the Master back-stroker for our team.

I’m looking forward to the Illinois Senior Olympics in September.

How is that relevant to the state-of-affairs that Trump has caused with his tariffs? All I can say is that I look forward to next year’s election and will work hard to defeat the man. My differences with him are many, but let’s take a look at the state of the economy we simply knew was going to happen as a result of his nonsense trade war.  Democrats, Republicans, Conservative Economics, Liberal Economics and just about everyone on the planet agreed would be a disaster.

Let’s go over the impact of tariffs before we look at the result.

Say you have a toaster from China that costs $10 and one from the U.S. that costs $12.00. Everyone who is a rational consumer will buy China’s toaster. So, Trump puts on a 25% tax. The China toaster now costs $12.50. The sensible consumer will buy the U.S. toaster.

The consumer loses by paying higher prices. (Of course, Trump, despite his economic advisors saying so, says it ain’t so.) The Chinese are outstanding business persons with a great deal of patience. So, they look at it and know

Profit = Total Revenue minus Total cost, where total revenue equals price times quantity.

What does the china toaster maker do to get the market back? Follow the example below:

Before tariff, say profit is $50 with the price at $10 and they sell 10 units, and the cost is $50.

After the duty, the price is now $12.50, and they sell no toasters.

Their response is simple, make 10 toasters and sell them at $11 (getting the market back) and lower your costs to $40.

Profit ($70)   = ($11*10) – 40

How did they manage that?

Simply, they were forced by the market and tariffs to increase productivity by putting in robots and hiring less-educated workers.

The net effect of all this is out-of-work U.S. toaster workers since the Chinese have recaptured the market and the Chinese have fewer workers to buy U.S. products that are competitive. This leads to a slow down in both economies as the market responses take effect slowly. Since Germany and Europe are big traders with China, they slow down as well, and the U.S. has fewer places to sell goods.

The ultimate response in the U.S. when the protection wears off is to innovate, but the U.S. will be slow to do so since they are a protected industry. Despite the protection, they have no choice over time to get on the bandwagon.

Now, this is all theory according to the Trumpites, and China will not respond and agree to not steal our technology and keep their money cheap, which are legitimate problems but should have been dealt with in other ways. Everyone knew the tariffs were a disaster.

Is the real world showing signs of theory?

The steel industry initially increased production and reopened plans. Internet headlines on March 7, 2018, toted: U.S. Steel restarting Granite City Works in Illinois because of Tariffs.  August 19, 2019 headlines on the same website. U.S. Steel plans to lay off hundreds of workers in Michigan.
The August 19 article goes on to state:
“Last week in Pennsylvania, Trump said his 25% tariff on foreign imports has turned a “dead” business into a “thriving” enterprise.
Domestic steel prices did rise in the immediate aftermath of Trump’s tariffs. But they have fallen dramatically amid improved supplies and weakening demand from the auto and farm machinery sectors.
Prices of the hot-rolled coil are down nearly 37% from their 2018 peak.
U.S. Steel’s stock price has plunged 73% since March 1, 2018, when Trump announced his decision to crack down on foreign imports.
          Now there are some economically smart workers and government officials who are far from Trumpities located in our back yard in Gary, Indiana. The same article on August 19, 2019, states:
“An official at the United Steelworkers union, which represents U.S. Steelworkers, said layoffs were also planned for the Gary Works facility in Indiana. U.S. Steel’s spokeswoman, however, said the company “currently” doesn’t expect “any employment level changes” at the Indiana plant.
The city of Gary and the state of Indiana have offered U.S. Steel a $47 million tax break package to help it invest $750 million in modernizing Gary Works, its largest North American plant.
The state’s tax credits and worker training grants were tied to the condition that U.S. Steel retains at least 3,875 jobs at Gary Works.”
So you say, “Well okay the steel thing did not work out, but the President says it did so it must be right! My response is: “This Emperor has no clothes.” That is the nicest thing I can say about his economic actions.
Okay, let’s assume he is right, despite the evidence. OPPS, can’t do that because an article six hours later headlined: “Farm Tensions Escalate as USDA Staffer Is Threatened in Midwest.” Written by Bloomberg reporters Mario Parker, Michael Hirtzer and Isis Almeida
Take a look at an August 7, Bloomberg report.

Farmers’ discontent over President Donald Trump’s escalating trade war with China erupted into the open Wednesday as his agriculture secretary was confronted at a fair in rural Minnesota. Gary Wertish, President of the Minnesota Farmers Union, drew applause as he leveled criticism of the administration’s trade policy at a forum with Agriculture Secretary Sonny Perdue in front of thousands of farmers gathered in a metal barn for a panel discussion.

American farmers took a fresh financial hit from Trump’s trade war over the weekend as China announced a halt to all U.S. agricultural imports after the president threatened Beijing with another tariff increase.

Wertish criticized Trump’s “go-it-alone approach” and the trade dispute’s “devastating damage not only to rural communities.” He expressed fears Trump’s $28 billion in trade aid will undermine public support for federal farm subsidies, saying the assistance is already being pilloried “as a welfare program, as bailouts.”

Others joined in. Brian Thalmann, president of the Minnesota Corn Growers Association, complained about Trump statements that farmers are doing “great” again. “We are not starting to do great again,” he said. “We are starting to go down very quickly.” Joel Schreurs of the American Soybean Association warned American producers are in danger of long-term losses in market share in China, the world’s largest importer of soybeans.

About Larry Hill

Dr. Larry Hill is Chair and Professor of Economics. Areas of interest include economic analysis, energy economics cost benefit analysis and economy. To subscribe to the email list of Dr. Larry Hill's Economic Memos, contact Tracey O'Brien at obrientr@lewisu.edu. Credentials include 1967 B.S., Indiana State University, 1968 M.S., Indiana State University, 1976 Ph.D., Northern Illinois University He is a member of honorary fraternities in economics and social science. He is currently writing a book on Managerial Economics and revising previous book, "The Basic Macroeconomics of the American Economy"

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