As a teacher of college economics, I am generally a free trade advocate. Tariffs are usually hindrances to free trade. However, the complex issues of a huge international trade deficit and a sharp decline in manufacturing in America warrant consideration of increasing tariffs on some of our most critical imports. Our future economic health requires leveling the playing field between us and our international trading partners.
The subject of international economics is, of course, far too intricate to accommodate in a short blog post. But, we need to understand a few fundamentals in order to make sense of what is at stake in the current controversial tariff decision by the president. A capitalist free market is without question the best overall trade system known to man. In the best of all worlds, open competition driven by profit incentive and unconstrained by government yields the highest quality of life for everyone. Unfortunately, this utopian economic system is always subject to corruption by the selfish, power-seeking participants.
America’s domestic free market is protected from bad players by various anti-trust laws, monopoly restrictions, and price stabilization controls. Buyers and sellers are virtually free to deal according to supply and demand, but within certain parameters that ensure fairness. This free, but guarded, economy has made America the richest nation in the world. Although a few international trade agreements attempt to provide similar protections for world markets, the restraints are minimum. International trade is a different environment occasionally requiring government intervention.
Two realities place America at a disadvantage in trading with other countries. First, our economic advantage has become our economic disadvantage. We have attained a quality of life that requires a level of individual wealth not enjoyed by most other countries. Therefore, Americans are not willing to produce at the lower income levels accepted by foreign workers. That means other countries can produce most goods and services at lower prices than we can. Second, to keep the price gap wide between American and foreign products, other countries often add burdensome tariff taxes or place limiting quotas on products we export to them. Conversely, the U.S. rarely places tariffs or quotas on imports from those countries. These practices make American products more expensive in foreign countries, while foreign products enter our country at prices far less than like products made in America. That results in high demand for foreign products in America, and low demand for American products in other countries.
This situation has caused a serious trade deficit in America in the amount we export versus the amount we import. In 2017, we imported $2.895 trillion in goods and services while exporting only $2.329 trillion. That is a deficit of $566 billion, a serious outflow of America’s wealth (20% gap) to other nations. To sustain a healthy economy, the export-import ratio should be zero–exports equal to imports–or even a net-export surplus. The dilemma is how to level the playing field without hurting our own citizens.
American consumers benefit greatly from lower prices of foreign goods and services due to lower labor costs of the other countries. At the same time, our corporations and employees suffer in sales decreases, job losses, and pay reductions due to export restrictions and lower prices on imports. President Trumps tariff proposals on steel and aluminum are a step toward resolving this dilemma, although there are valid downsides.
Such tariffs would allow American steel and aluminum producers to compete in price with foreign producers, since the higher taxed foreign products would cost more in our country. Of course, higher priced raw materials will drive up the prices of steel- and aluminum-based products for all American consumers. We Americans will have to feel some pain in order to meet our national economic objectives. The reductions in sales of foreign products to America should provide incentive for other countries to lower or withdraw their tariffs on American products as a move toward a more balanced market. Other countries need to get the message that flooding the American market with lower priced imports is no longer an option unless they allow our exports to enter their market without tariff.
Some lawmakers decry the tariffs as provoking an international trade war with other countries banning American products and America banning theirs. We may see some of that, but the risk is worth the reward of ultimately balancing our imports and exports. The bottom line is we can’t continue our increasingly negative trade balance that is so detrimental to our economy.
I hope the Chicken Little reaction from the left and even some conservatives will cease, and we will all give the president’s plan a chance. Let him have the bargaining tools he needs to make America great again.
I encourage your feedback.