The Ugly Tragedy of Tariffs

No nation was ever ruined by free trade. ~ Benjamin Franklin 

The US-China trade war is continuing and will get much worse on Tuesday. First initiated during President Trump’s initial term, US tariffs on specific imported Chinese products ranged from 10% to 50%. As of February 4, tariffs on all Chinese imports will be 10% above any existing tariffs. The president didn’t forget the other 2 nations that we trade most with. He also increased US tariffs on Canadian and Mexican imports to a stunning 25%. Kaja Kallas, the European Union’s chief diplomat, correctly labeled them saying, “There are no winners in trade wars.” 

The president’s Order contains a clause that will increase US tariffs if Canada, China, or Mexico retaliate. All three governments already have promised to answer Mr. Trump’s higher levies with their own retaliatory tariffs on US exports including Florida orange juice, Tennessee whiskey, Kentucky peanut butter as well as other goods. 

On October 15, 2024 Donald Trump stated that of the 470,000 entries in Webster’s English Dictionary, “Tariff is the most beautiful word in the dictionary.” Now as president again, he’s attempting to beautify America. His new tariffs will not be beautiful; they will be ugly, especially for consumers. 

Tariffs have a long history of creating revenue for public potentates. The world’s first tariffs of record were established by English King Henry VII in 1489. 

Henry VII (1457-1509)   Wikipedia

Three (3) centuries later, the US Tariff Act of 1789 was promptly enacted by the newly-created US Congress. This law allowed only the US government to levy uniform tariffs, no state can create tariffs. Tariffs remained the primary source (up to 90%) of US federal revenue for well over a century. Tariff revenues now provide about 2% of federal revenues. Before the president’s January 31 tariff proclamation, the average US tariff across all products was 2.77%. 

Today the US has increased tariffs on all imported Chinese goods. Such an escalation will raise prices for companies and consumers likely accelerating domestic inflation. Higher US tariffs have incited additional retaliation from Canada, China and Mexico, further ratcheting up a trade war that has already exacted economic harm for each country. 

Hundreds of products’ prices were subsequently increased by President Trump’s first Chinese tariffs started in May 2018. They were imposed on $200 billion (B) of Chinese imported goods that represents 40% of Chinese imports to the US. The list of tariffed Chinese items included everything from “frozen retail cuts of meat of swine” all the way to “furniture of plastics.” China predictably retaliated with new tariffs on roughly $60B US exports into China, that represented 46% of 2017 US exports to China. Although China has certainly stretched WTO rules to its advantage, it’s doubtful that the president’s current hardball tactics of raising tariffs will be worth the pain and cost that will harm US exporters and consumers. 

A prominent paradox of the president’s tariff increases is his nascent administration’s justification for the new tariffs’ anticipated loftier tax revenues. Higher tariff revenues will serve as a means of justifying the president’s extension of sizeable tax cuts for the wealthiest Americans. 

The US imports more goods from China than any other nation in the world. In 2022, China accounted for 16.5% of all US imported goods. This fact is reflected in the sizeable, continuing trade deficits the US has with China, $279.4B in 2023. China’s dramatic economic growth over the past decades has been principally export driven. It is the leading exporter of goods in the world, ahead of the US. China’s exports of goods represent a hefty 18.6% of its GDP. In 2023, total US goods’ and services’ exports represented 11% of our GDP. 

In this assessment of our trade conflict with China, I focus specifically on US farmers who have endured heavy and direct economic cross-fire from the president’s trade war. More than 20% of US agricultural exports face reciprocal tariffs from China and other countries. 

I examine an incongruous pair of agricultural products, soybeans and lobsters that have been subject to Chinese tariffs. Before the president initiated his new tariffs, the US exported to China $21.6B of soybeans and $128.5 million worth of live lobsters. I will soon dive into marine crustaceans, but let’s first consider the humble soybean. 

Soybeans.  Soybean plants are widely grown for their edible bean. US farmland is awash with soybeans. They are now planted on 86 million acres of American farmland, more than any other crop. Thus, soybeans are very BIG agriculture in the US. They are our nation’s single largest agricultural export; almost double that of corn. This is one reason why China imposed a retaliatory 25% tariff on US soybean exports. Another reason is based on where soybeans are grown – in bright red, Trumpian mid-western states. In addition to being the source of all things in the tofu universe, soybeans are widely used in animal (especially pig) feedstocks, and as an ingredient for biodiesel fuel and astoundingly even crayons. Fermented soy foods include soy sauce. 

About 60% of US soybeans are exported. The Chinese market dominates US soybean exports. However, the Chinese tariffs on US soybeans have transformed that situation. China retaliated in 2018-19, with tariffs on US soybeans entering China which caused US exports to plunge by 98% into the country. 

The Chinese imported only $15.1B of US soybeans in 2023. They’ve been buying more Brazilian and Argentinian soybeans instead. Also distressing for US soybean growers is that 2024 year-end prices per bushel have collapsed to August 2020 soybean prices. The USDA/ERS expects 2024 net farm income (a measure of farm profits) to drop by 1.1%. “It’s a big concern,” said David Williams, a Michigan soybean farmer. The trade conflict, which President Trump initiated with steel and aluminum tariffs in 2018, has spread far afield. 

US soybean farmers have taken it in the beans with respect to their livelihoods due to Trump’s tariffs. These reliably Republican farmers notably complained to the Trump administration about the first Chinese punitive tariffs. The US government responded to these grievances by providing $3.6B in unplanned, taxpayer-paid fiscal assistance to soybean farmers to offset their financial distress caused by price and income drops. 

Lobsters.  Lobsters are large marine crustaceans. North Atlantic lobsters are found off the ocean coasts of New England and Canada. The largest lobster ever caught weighed 44 lb. They are sold and shipped as living animals. The biggest producer and exporter of American lobsters is the state of Maine. Lobster is an acquired taste for some, but they’re eaten by increasing numbers of consumers. It is a staple in North American seafood markets and is featured on many restaurants’ menus. 

For New England and especially Maine, lobsters have long been a fragile business. In 2023, Maine’s 4,800 lobster fishermen (there are very few women who commercially catch lobsters) “landed” 93.1 million (M) pounds of live lobster; that’s just 58% of 2016’s catch and the lowest since 2009. The lobster industry has often experienced significant ups and downs. In 2019, US lobster exports to China dropped more than 40% due to China’s retaliatory tariffs and stringent inspections. But in 2023, the US exported $182M worth of live lobsters to China, after the Chinese eliminated both their tough Covid-related inspections for imported food and some of the punitive, retaliatory tariffs that eliminated virtually all US lobster exports to China during several prior years. 

    Mark Barlow is the owner of Island Seafood, a large business that ships live Maine lobsters around the world. Barlow mentioned that as soon as China slapped its 25% tariff on US lobster exports, he told his sales team, “China’s dead.” His Chinese customers confirmed his expectation. “I don’t think there is [a] way to import US lobster,” one Chinese buyer stated. Barlow confirmed the Chinese tariff was a significant blow for Maine. As he put it, “The orangutan in Washington woke up from a nap and decided to put tariffs on China, and then Chinese stopped buying [Maine lobster] immediately. We’re getting absolutely slaughtered.” Maine’s drop in lobster sales became Canada’s bounty. Instead of buying Maine lobsters, the Chinese purchased Canadian ones. Trumpian tariffs threw US lobstermen overboard. 

Although it's unlikely, introducing stronger US tariffs on hundreds of imported goods might eventually benefit some US manufacturers who are not subject to the tariffs. But Maine lobstermen and Minnesota soybean farmers will suffer again from their lobster losses and soybean sorrows. Their travails will coincide with millions of US consumers who will be paying extra for imported goods like vegetables, petroleum, automobiles and medical drugs. Mexican avocados will become pricier, and Trump’s happier, go figure. 

One estimate of the increased costs we will face because of these tariffs is at least $1,170 per household. The president’s provocative tariff policy – mimicking President William ("I am a tariff man.") McKinley’s failed policy preferences – does not appear to be a winning economic strategy, even if he blames it on DEI programs. 

TRADING PLACES

Free trade is not based on utility, but on justice. ~ Edmund Burke

This weekend China’s President Xi Jinping is meeting with our president at his Mar-a-Lago resort. A key discussion topic will be trade between the 2 nations. This face-to-face meeting represents a substantial test for  Mr. Trump for several reasons. First, the US and China are the world’s 2 largest economies. Second, each man has very different perspectives on how to conduct international trade with each other, let alone the broader features of their economic and political firmaments and mutual interests. These challenges lead The Economist to cleverly christen this inaugural meeting Spar-a-Lago.

Our golfer-in-chief unfortunately will not be carting with Mr. Xi along his fairways, clubs at the ready. Officially, the Chinese government takes a sub-par view of golf, considering it a game for rich capitalists. Perhaps the 2 men can relax and create personal connection during a game of bocce ball instead?

They have plenty of trade issues to discuss. In 2016 the US exported $169.8 billion (B) of goods and services to China. We imported almost 3 times as much; $497.6B of imported goods and services from China. The US trade deficit with China isn’t recent. It has been negative for 31 years ever since Reagan was president, as shown in the figure below.

US-China Balance of Trade, 1985-2016 (10⁹ $)

Source: Economist.com, DOC/BEA

Overall, the current US balance of trade (BoT; exports minus imports) deficit with China is $309.8B. Mitigating the US-China trade deficit would be useful for us, depending on how it’s done. The president and Congress have power to change policies that can influence some but not all aspects of our BoT. During the past 3 years the appreciation of the US dollar relative to other key currencies like the Yuan and Euro – that neither the president nor Congress can effect – has not helped US exports.

Beyond the US and the Middle Kingdom, international trade anxieties are affecting other trading nations. The largest concern is that trade growth has slowed; the high-output growth engine of globalization-related trade has braked. As we already know, the political winds are shifting, causing international trade’s sails to luff in the doldrums of no supportive breezes. The World Trade Organization (WTO) expects that trade will remain “sluggish” and grew just 2.8% in 2016, like it did in 2015. Over the last decade, world trade growth has lagged world GDP growth. The world’s real GDP grew 3.0% in 2016. Average annual world real GDP growth between 2000 and 2016 was 3.0%; between 2000 and 2010 it was higher, 3.9%.

The post-WWII orthodoxy of increasing trade to improve nations’ growth and development is crumbling. Talk of tariffs and other protectionist policies is cresting these days, as individual nation’s economic growth has faltered and domestic-centered populism rises.

In addition to the general reduction in GDP growth mentioned above,  there are more specific reasons for this decrease in trade. First, growth of the BRICS (Brazil, Russia, India, China and South Africa) has slowed. These nations are the world’s largest emerging markets. Their collective economic growth has slowed from 9% in 2010 to about 4% in 2015. By 2015, 3 of the BRICS (China, Russia, and South Africa) had slower growth for at least 3 consecutive years and Brazil remains in a significant recession. Brazil’s GDP dropped 3.2% in 2016, it contracted 3.8% in 2015. Long-term growth expectations in these 5 key economies have been repeatedly downgraded since 2010. This lack of growth affects both our exports and imports. Second, imports into developing nations stagnated, growing only 0.2% in 2016, according to the WTO.

Mr. Trump has spewed several ill-considered actions for dealing with the threatening, hostile world he sees beyond our boundaries, including abolishing “unfair” trade agreements like the North American Free Trade Agreement (NAFTA), placing punitive tariffs on imports and restricting our borders.  

The pre-election Trumpian “action plan” included withdrawing from NAFTA that the candidate called “The worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” After becoming president, his extreme language has become less bellicose. Now he’s apparently willing to renegotiate, but hasn’t specified what that means; imagine our surprise. Time may tell.

In numerous public pronouncements the president has said he’s considering large tariffs on imports from countries like China and Mexico. Sometimes he’s mentioned a 45% tariff, other times a 10% tariff. Like all too many of his impulse-driven communications, they’re literally spread all over the map without substance. These specious ideas characterize his disjointed, no-dots-connected approach to creating policies that will hardly enhance our nation’s greatness. They’ll probably have the opposite effect. He seems oblivious to the likelihood that if he imposes tariffs on Chinese, Mexican and other nation’s imports these countries will retaliate with their own tariffs on our exports. In his fantasy world, US tariffs will only bring back low- and medium-skilled manufacturing employment; not higher prices on imported consumer goods and services, not curtailed exports from the ensuing trade war.

American companies that have used China and Mexico as a production base would struggle to revamp their supply chains. If US firms brought production back home to escape the tariffs, prices would increase dramatically and take considerable time to set up. As a consequence of much higher tariffs, Goldman Sachs estimates that the cost of producing clothing domestically would increase by over 40% and smartphones by over 35%. None of these consequences seems to concern Mr. Trump.

His muddled, myopic mind doesn’t see any connection between exports and imports. They are completely separate from each other, not mutually bound by trade agreements and economic reality.

The president seems equally unaware that the ultimate objective of bilateral and multilateral trade agreements is to benefit every signatory and that the negotiations to reach agreement will always involve trade-offs that need to be recognized and made. Trade agreements are founded on the world being a positive-sum game, where each party can gain. Should trade agreements be reviewed and modified over time? Surely, but Mr. Trump’s world view is at best zero-sum.

That zero-sum concept is not supported by historical facts. For example, under NAFTA US farmers – who most likely voted for Trump in large numbers – have exported significant amounts of corn and other ag commodities. In 2016 these farmers sold 13.8 million metric tons of corn to Mexico. Corn exports to Mexico have increased 5.5% every year since NAFTA was implemented in 1994. Mexico has said if the US walks away from NAFTA or imposes tariffs on Mexican goods, it will buy corn from other exporters including Argentina, not the US. How are you going to explain that in Dubuque or Omaha Mr. President?

Then there’s Trump’s Wall. Building the Wall along the US-Mexican border was a prominent specter in Trump’s candidacy. When mentioned in his campaign speeches, it wasn’t a question of if, but how tall and how long it would be – and, of course, that Mexico would pay for it. The Wall was only one piece of Mr. Trump’s actions to close our borders.

Other pieces include his disastrous 2-part orders to stop people from 8 (then 7) principally Muslim nations as well as other visa-holders from entering the US. To date, federal courts have fortunately taught Mr. Trump that his actions are subject to court interpretation; despite his protests (which themselves were cause for public astonishment and distain).

But back to The Wall. The total length of the US-Mexico border is 1,989 miles. It’s been difficult for anyone outside the White House to get specific information about Mr. Trump’s plan for the Wall. Until Jan. 20, Mr. Trump's border wall existed only as campaign rhetoric not supported by a real plan for building or paying for it. Its length and height depended on to whom and where he was talking. Now that he’s president, a plan appears to be arising. In mid-March the Department of Homeland Security (DHS) issued a request that stipulated the wall must be 30ft high, look good from the US side and be hard to climb or cut through. It must take at least 1 hour to cut through. The request apparently didn’t state how long the wall should be. Irony abounds beyond walls because some of the firms that may submit bids are minority-owned, Hispanic companies.  

Others have speculated that the Wall could be up to one-half of the border’s length, with natural barriers such as the Rio Grande River taking up the rest of the length. Guestimated costs range from $12 to $21 billion. The President’s draft budget, which was sent to Congress last month and generated scathing reviews, indicates only about $2.9 billion is now earmarked for the Wall — most of which will come from sizeable cuts to key agencies within the DHS, like the Coast Guard. Oh, will the bill eventually be sent to Mexican President Enrique Peña Nieto, as Mr. Trump proclaimed dozens of times? Nope, he was just kidding in trolling for votes. US taxpayers appear to be on the hook, which is no laughing matter at all.

The president’s international trade policies are quixotic at best; they are misdirected and inconsistent. It’s hard to see such policies as the product of reasoned, competent, coordinated analysis. This goes beyond just trade. Such concern was reflected in a recent column by David Brooks where he stated, “Trump’s greatest achievements are in the field of ignorance. … It’s not so much that he isn’t well informed; it’s that he is prodigiously learned in the sort of knowledge that doesn’t accord with the facts of our current dimension.” Trading places with Mr. Trump would involve more than relocating to 1600 Pennsylvania Avenue. Fasten your seat belts and resist.