Trump’s tariffs have become a flashpoint of controversy as opposing sides battle it out. Is Trump leading the U.S. into an economic dark age? While that may be the message from Democrats, Republicans are singing a very different tune. Who is correct? What’s really going on?
Trump’s Tariffs: Why Now?
Trump ran on a platform of reducing the size and scope of the federal bureaucracy. Most understand that Congress needs to reduce its spending, and that the U.S. cannot thrive economically if Washington continues to run massive budget deficits ($1.8 trillion in fiscal year ending Sept. 30, 2024). In addition to the efforts of Elon Musk and DOGE, the trade deficit is a key point of focus. In short, balancing tariffs between trading partners should have a positive financial impact on America.
In the realm of tariffs, our current trade agreements tend to favor our trading partners over America. According to data from the World Bank for calendar year 2022, the average applied tariff imposed by China on U.S. products was 7.1%. The average tariff imposed by the U.S. on imports from China was 2.3%. Thus, China had a much higher tariff rate. The following chart shows the average applied tariff rates imposed by several U.S. trading partners compared to the average rate charged by the United States. Again, the data is from 2022. India charged the highest average tariff on U.S. imports at 9.4% while the United Kingdom had the lowest at 0.7%. It should be noted that Mexico’s average tariff rate on imports from America was 5.2% while the U.S. had no applied tariffs on Mexican imports. This may explain why so many auto manufacturers have factories in Mexico. It’s close to America, labor costs are low, and there are no tariffs. America’s trade disparity is finally being addressed by the Trump administration.
How Did Tariff Rates Become So Unfavorable To The U.S.?
How did America’s trade agreements become so one sided? Part of the reason goes something like this. Let’s say you are the CEO of a major U.S. corporation, and you must import several different components from, say, China to manufacture your product. You do not want the price of imports to rise because it would force you to raise your price and negatively affect your profit. So, you hire lobbyists to convince Congress to vote against any legislation that would raise your cost of production, such as higher tariffs or costly regulations. Lobbying at the federal level is a common practice employed by thousands of corporations.
Lobbyists use incentives to ensure Congress complies with their request. Some of these incentives include dinners, trips, and other, more substantial gifts. For example, Bob Menendez (D-N.J.) was recently charged, convicted, and sentenced to 11 years in prison on 16 counts of bribery and corruption for using his influence as a U.S. senator to benefit himself, three U.S. businessmen, and the governments of Egypt and Qatar. In return for his support, Menendez received cash, gold bars, and a Mercedes. In 2023, special interest groups spent $4.2 billion lobbying federal lawmakers and $1.4 billion lobbying state officials.
Should Tariffs Be Eliminated?
Some suggest that in an ideal world there would be no tariffs at all, allowing free trade to flourish. You may question the wisdom of this since many foreign nations can produce products at an extremely low cost given the cheap wages paid to their laborers. Doesn’t that present an unfair advantage against U.S. companies? We already have an unlevel playing field as many foreign countries have higher tariffs on U.S. goods compared to what the U.S. charges on imports.
Trump’s Tariffs: Uncertainty, Chaos Or Brilliance?
Trump’s tariffs have created a great deal of uncertainty around the globe. For example, Trump employed a 25% tariff on imports from Mexico on March 4. On March 6, he paused this and extended the deadline by four weeks. This “on-again, off again” approach has left many businesses in limbo. Corporations value certainty when making plans to hire, expand, etc. Uncertainty is chaos for corporate planners. To put it another way, corporations don’t care much about which political party is in office. They care more about understanding the rules so they can plan accordingly.
When America increases tariffs on imports, it reduces sales of imported goods, causing a reduction in income for the affected foreign companies. Thus, when Trump announces broad tariffs on a country, affected businesses in that country may pressure their government for help. This pressure can help bring that country’s leaders to the bargaining table to renegotiate their trade agreement with the U.S.
Is there a method to Trump’s madness? While there’s something to be said for his behavior at times and his stretching of the truth, we are seeing some amazing results. Taiwan Semiconductor, the world’s largest semiconductor manufacturer, has pledged $100 billion plus to build five production facilities in Arizona. This is expected to create hundreds of billions of dollars in economic activity. Eli Lilly is planning to invest $27 billion in building four new plants in America. Apple recently announced it would invest $500 billion in the U.S. over the next four years. There is clearly a shift to move production back to America. I suppose Ross Perot’s “giant sucking sound” is reversing. There are more examples of companies bringing production facilities back to the U.S. to avoid tariffs.
Dealing with the issue of tariffs and trade may be a long process, but given the current disparity in America’s trade agreements, it should be worth it in the end. There will be disruptions (i.e. pain) in the short term, but long-term, new agreements along with cutting spending should bring about a more efficient and effective federal government, plus many additional jobs. A renaissance in U.S. manufacturing should also provide a major boost to the economy.
Abraham Lincoln once said, “Government of the People, by the People, for the People.” I think he summed it up well. It’s time to transition from being ruled by the federal government to being served by Washington. That requires an overhaul and tariffs and trade are a big part of that. Stay tuned.
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