Past economic gurus believed taxing goods made overseas was a way to generate revenue. The taxing process is known as tariffs.
These tariffs were also a way to protect and make goods made in the United States more profitable. What is currently being ignored today is that the U.S. is one participant in a world economy where countries are dependent on each other. Some world leaders believe it is vital to protect their products and workers. However, according to Douglas A. Irwin, in his book Peddling Protectionism, the 1930 Smoot-Hawley tariff, which raised duties on many imported goods to record levels, was America’s most infamous trade law. It is associated with the onset of the Great Depression; the collapse of world trade.
Fast forward to the 1990s and the topic of trade wars, globalization, started up again with Ross Perot’s campaign for POTUS in 1992. He talked about jobs disappearing to Mexico. In 1993 Gallup Poll showed many Americans opposed NAFTA (North American Free Trade Agreement with Canada and Mexico). That same year, a Pew Poll showed that many Americans opposed President Bill Clinton granting China most-favored-trading status. The current administration seems to be arguing the same Perot points of protectionism, more jobs here in the U.S., and more manufacturing here to remain a “superpower.”
Now, the current administration has targeted China for a $50 billion increase in tariffs. China has responded with a $3 billion tariff on goods from the United States. China has a list of approximately 128 products: 78 assorted dried and fresh fruits and nuts, wine, ethanol, stainless steel pipes, pork products and scrap aluminum. The increase will be between 15%-20%. This is according to China’s Ministry of Commerce website. Another consideration is that the United States has a trade deficit with China. On April 4, the POTUS tweeted “$500 billion DOWN” referring to the deficit with China. Actually, according to the US Census Bureau, in 2017 that number was $375 billion. US exports to China were $130 billion, while imports were $506 billion. The primary cause for this deficit is that China can produce consumer goods for lower costs than other countries. Needless to say, Americans want these goods at the lowest prices. Two factors that enable them to do this: (1) they have a lower standard of living which allows them to pay lower wages, (2) an exchange rate that is partially fixed to the dollar. If and/or when China raises tariffs, the higher prices will be passed onto the American consumer. Furthermore, China is also the largest lender to the US; they like US Treasury notes and own approximately $1.17 trillion; this is roughly 19% of our total debt owned by foreign countries.
The question that begs to be answered is who would win a trade war between China and the United States? Depends on how you define “win.”