Tag: exports

Understanding Tariff Issues in Five Minutes

When I was an economics professor with John Brown University, the subject of tariffs was just a part of one class session. I never thought I would see the impact it is currently having on the world economy and trade. Everyone should have a general understanding of how increased tariffs will affect their lives and should pay special attention to the present turbulence in international markets. Let’s take a five-minute quick course on tariff issues.

Tariffs are taxes governments place on products and services imported from other countries. They are a percentage of the prices of the imports, just like a sales tax. But the tariff is paid by the supplier, not the buyer. For a realistic example, if a Volkswagen is imported from Germany with the original price tag of $40,000, and the U.S. government places a 2.5% tariff on it, the manufacturer will charge the wholesale consumer $41,000 for the vehicle to make up for the $1,000 tariff charge. Conversely, if a Ford is exported to Germany with the original price tag of $40,000, and Germany places a 10% tariff on it, the manufacturer will charge the German wholesaler $44,000 for the vehicle to make up for the $4,000 tariff charge.

Proceeds from these tariffs go to the government which imposes the tariffs. So, the $1,000 U.S. tariff on the Volkswagen is paid by the car’s German manufacturer to the U.S. treasury. The $4,000 Germany tariff on the Ford is paid by the car’s U.S. manufacturer to the German treasury. No one in the sales transactions gets any of the tariff money. Tariffs are supplements to the treasuries of both governments. In fact, tariffs were the primary source for funding the U.S. government prior to the introduction of income taxes in 1913.

Tariffs are an immediate financial burden for both the supplier and the consumer. The manufacturer and service provider’s export customers have to pay a higher price for their products and services than the consumers of domestic products and services pay. This is true of both countries involved. Therefore, it is more difficult for these manufacturers and service providers to compete with their foreign competitors whose same products and services are lower in price. On the other hand, the consumers in each country have to pay a higher price for desired imports from the other country.

In the example above, the Ford maker is disadvantaged in the German market, since Fords are $4,000 higher priced than Volkswagens. Similarly, the Volkswagen maker is disadvantaged in the U.S. market, since Volkswagens are $1,000 higher priced than Fords. The U.S. consumers will probably buy more Fords than Volkswagens, because the Fords are $1,000 lower priced. The German consumers will probably buy more Volkswagens than Fords, because the Volkswagens are $4,000 lower priced.

The offsetting advanatage to each automaker is that the tariffs tend to protect the domestic market. Ford will sell more Fords in the U.S., and Volkswagen will sell more Volkswagens in Germany, since the exports are higher in price. Often, this advantage of tariffs is more profitable than having a more equatible international market.

Note that the example demonstrates a greater advantage for Germany than for the U.S. The 10% German tariff on U.S. cars is stardard throughout the European Union nations. This uneven playing field for international trade is mostly what is driving President Trump to raise tariffs rather dramatically. For decades of world trade, tariffs in other countries have been greater than U.S. tariffs. This is one of the reasons the U.S. has a substantial trade deficit with the majority of other nations, meaning the other nations export more to the U.S. than the U.S. exports to them. With the uneven tariffs in the example, many more Volkswagens are purchased in the U.S. than Fords in Germany. This is true of products and services traded with most countries.

China is an outlier in this world-wide tariff standoff, refusing to negotiate and slapping unprecedented tariffs on the U.S. in retaliation. Although all tariff tensions have a political dynamic, China’s President Xi is taking it to a whole new level with a 125% tariff on U.S. imports. President Trump has responded with a 145% tariff on China imports. This essentially shuts down most trade between the two nations and can’t possibly remain in effect very long.

After years of this tariff and trade imbalance uncorrected by previous administrations, President Trump is invoking unusually high tariffs to shock the world trade markets into lowering their tariffs. Many nations are panicking and running to the U.S. negotiating table. Until this economic instability settles, American consumers will pay higher prices on imported products and services, and manufacturers and service providers will have fewer sales abroad. Of course, this instability results in nervous investors and a volatile stock market. I believe, eventually, we will find a more equivocal balance of trade with fewer tariffs or more reciprocal tariffs–each nation matching the tariff percentage of its trading partner. When we will reach that international trade utopia is anyone’s guess. But we had to do something, and the president is doing it.

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Have Democrats Forgotten About American Workers?

tariffs-trade-war

If you had asked Democrats a decade ago what the soul of their party was, most would have said the working class. They don’t say that anymore.

Liberals for years marketed themselves as advocates for the blue-collar worker with a high school education, a union job, and the American dream. Nowadays, the Left has become obsessed with the socialism movement of cultural Marxists and the destruction of capitalism. In essence, the Democrat Party has lost its soul to the radical fringes of its base. And nowhere else is this trend more clearly illustrated than the Democrats’ most recent attack on President Trump’s increased tariff imposition.

For a half-century, America has ignored a growing trade imbalance with almost every international trading partner. Since the 1970’s the US has seen imports trending higher compared to exports except for small trade surpluses in 1998 to 2001. In 2018, our nation’s exports were valued at $2.5 trillion while our imports were valued at over $3.1 trillion, a deficit of over $600 billion. That equates to 3% of our GDP.

Over $400 billion of that deficit is from our trade with China, up from $34 billion in 1990. The bulk of the rest is from the Canada, Mexico, and the EU. Most of these nations’ businesses enjoy government subsidies and low labor costs. All of them levy substantial tariff taxes on most American goods and services while we levy much less or nothing on theirs. Thus, America’s appetite for cheaper foreign goods and services, although satisfying consumers, is taking jobs and higher wages from our workers. The great economy we are currently enjoying would be even more robust without the imbalance in tariffs.

While the Left has been more than happy to ostracize the American worker by ignoring tariffs, the Trump Administration has taken the opposite approach. The president has embraced workers in domestic commerce, defending our nation’s manufacturing from the corrosive policies of our international trade partners. As a professor of economics, I have long advocated free trade on a global scale. However, when other nations establish barriers to free trade, the US must respond in kind to remain competitive. Temporary declines in exports and imports due to our increased tariffs are a short-term price worth paying for an eventual level playing field that benefits both consumers and employees.

Here is one example. In 2018, the president approved relief for the U.S. appliance industry, specifically washing machines. After an independent investigation by the U.S. International Trade Commission (ITC) found that “US producers had been seriously injured by imports,” the president took action. He announced tariffs on foreign-produced washers to protect domestic manufacturers and, in effect, American workers.

Liberals were quick to try to delegitimize the president’s efforts to buttress America’s labor force. Last April, a trio of academics released a study attempting to demonstrate the economic harm caused by the president’s washer tariffs. Unfortunately for academia, the study was full of holes. The authors overlooked many glaring flaws to arrive at their preferred conclusion that the tariffs were harmful. Not only did the authors fail to consider the thousands of manufacturing jobs saved and created by the tariff, but they also failed to account for the more than 15,000 jobs indirectly supported by the president’s action.

President Trump’s administration is succeeding exactly where liberals have failed: in protecting America’s vulnerable blue-collar sector. While Democrats are increasingly content to advocate for socialist policies designed to attract the dependent segment of society, the president has shown his willingness to fight for the jobs of all Americans. It’s clear that Democrats in their push for social experimentation have forgotten about the American workers. Thankfully, President Trump hasn’t.

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GDP Growth: Why Should We Care?

The most important current news item is not Cohen’s tape, Putin’s visit, or what the president knew when. The news media is focused on those Trump bashing stories that hardly affect you and me in order to foster their liberal narrative. America’s Gross Domestic Product, or GDP, just increased significantly, and that’s a personal win for us. Of course, the media is playing it down. So what does GDP mean to us exactly?

GDP is the globally recognized measure of a nation’s economy. It is is the market value of all currently produced final goods and services within a country in a year by domestic and foreign-supplied resources. In other words, America’s GDP is every dollar spent on everything purchased by this country’s consumers no matter where it was produced. This includes personal spending by American households, investment spending by businesses, government spending, and net export spending (Americans’ spending on foreign products and services minus foreigners’ spending on our products and services). Last year the U.S. GDP was $19.4 trillion. That is one-fourth of the world’s total economy.

A figure that big is almost meaningless until it is compared to that of other nations. The next highest GDP is China’s at just under $12 trillion. Japan is next at $4.9 trillion followed by Germany at $3.7 trillion. The U.S. GDP is higher than all nations of the European Union combined. By the way, Russia’s GDP is $1.5 trillion.

The more important factor is how we are trending in GDP. Generally, a healthy economy is considered to have an annual growth rate of 4%.  For the last three years, the U.S. has posted percentage increases of 2.9, 1.6, and 2.2 respectively. The last time America enjoyed a 4% annual increase was in 2000, 18 years ago. Annual increases during the entire Obama administration averaged 1.6%. Although GDP is an annual statistic, it is measured quarterly. The quarterly measurement is “annualized” to estimate what the annual result of the quarterly numbers would be. The increase just announced for the second quarter (April through June) was 4.1% annualized. In other words, if the U.S. economy continues to perform at the present pace, we would have a 4.1% increase in GDP for 2018. The last quarterly increase north of 4% was in 2014. Almost all economists, regardless of their political leanings attribute the good news to President Trump’s policies of tax cuts, job creation, regulation reforms, and trade negotiations.

What does this growing economy mean to you personally? It means production increases that bring lower prices, more jobs creating upward mobility in the work force and less government subsistence, more government revenue keeping taxes down, more entrepreneurial opportunity, better infrastructure creation and maintenance, hopefully lower national debt, and a strong dollar keeping import prices down. A healthy, growing economy adds quality to the life of every American.

Of course, many factors are involved in the movement of a national economy. We should celebrate the 4.1%, but watch closely what happens in the next quarter. The Trump tariffs and potential trade wars could bring downward pressure on the GDP as could the status of our sanctions on Russia, Iran, North Korea, etc. External realities can offset a lot of good internal policies in shaping our economy. But, don’t get too caught up in all the liberal hype about losing our allies and putting our economic supremacy at risk. No other country or international trade organization is going to do much to provoke a country that holds a quarter of the world’s financial resources.

In my opinion, though, America desperately needs to turn off the soap opera of news stories that distract our attention away from much more important things like the economy. Let’s take a deep breath and focus on what’s good about America.

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Hey World, It’s Not Business As Usual for America Anymore!

 

After decades of other nations taking unfair advantage of America’s generosity, President Trump is reducing the outflow of our tax dollars to other countries and holding them accountable for more of their own security and prosperity. It isn’t setting well with nations which have been enriching themselves on our resources for generations. This will be a painful process for America and the rest of the world, but the adjustment is crucial for the future of all nations. Here is what it will require.

Most of the current inequity began with America’s compassion and goodwill demonstrated in the post-WWII reconstruction of Europe and Japan. Our subsequent prosperity during the 50’s and 60’s placed us head and shoulders above the rest of the world in economic and military power. Our Judeo-Christian values led us to share our blessings through foreign aid, the World Bank, imports, defense alliances, liberal immigration, response to disasters, etc. By and large, the rest of the world’s governments became dependent on us to supplement their subsistence. Allies depend on our military to supplement theirs. The oppressed depend on us to take them in. Foreign businesses expect to export to us without barriers, but don’t reciprocate. Even our enemies assume we will feed their economy while they threaten us. A world game-changing adjustment is well overdue.

Of course, America must always be America, the nation that shares its incredible blessings with those less fortunate both domestically and throughout the world. We have a moral responsibility to heed the words of Jesus, “Everyone to whom much was given, of him much will be required.” But, when the giving gets way out of balance and enables others to neglect their own responsibility, such enabling is wrong and the giver is to blame.

The controversial NATO Summit just concluded exemplified the new order of international relationships with America. Since 1949, western European nations have trusted in the U.S. to protect them from the former Soviet Union and now Russia. Although all the nations have military forces, the U.S. contributes well over half of the investment of those forces. The chart above shows that, of the 29 NATO nations, ours funds over 70% of the total military capability. Defense spending as a percentage of GDP is probably a fair comparison of skin in the game. Even at that, we spend 3.6% of our GDP on defense–much more than any other member country. All NATO countries agreed at the 2014 NATO Summit to spend at least 2% of their GDP on their military annually. Only four other countries are doing that. Yet the Russian threat is in their back yard and an ocean away from America.

Some European governments argue that all of their defense spending is in support of the NATO region while much of U.S. spending funds forces obligated to the Pacific and other areas of the world. That argument doesn’t consider the fact that, if Europe were attacked, almost all of our forces would be immediately deployed to the European theater.

And, there are other ways America is moving from business as usual to fairness and equity in international relations. For years, foreign governments have placed excessive tariff charges on imported U.S. products to keep their domestic businesses competitive. Then, their businesses enjoy exporting products to the U.S. with little or no tariff charges by us. That is a big reason we have such a trade deficit with other countries. We import much more than we export due to unfair trade barriers of our trading partners. President Trump’s tariff increases may cause some discomfort to our own citizens in the form of higher prices. Trade wars may make certain items scarce. But, it is a necessary temporary pain in order to ultimately create a level playing field for international trade. Free trade must be fair trade.

We are also seeing adjustments to the long-running open borders that have allowed almost anyone and everyone to enter our country, often illegally. We have long-established legal processes for reasonable immigration and asylum. But, millions of illegal immigrants have entered our land and are siphoning our resources. Business as usual trespassing on America is starting to be denied although not without major opposition from the liberal faction among us.

The U.S. GDP is greater than that of all European countries combined and almost twice that of the second highest nation, China. The U.S. military comprises over a third of the entire world’s fighting forces. There is almost no possibility of losing our world leader status anytime soon. Other nations will continue to look to America for help and direction for the foreseeable future, and we are morally obligated to maintain that role. However, the time has come for a global reshuffling of commitments and an environment of fairness among the nations. Mainstream media will decry it as betraying our friends, and protests will abound both here and abroad. But, just sit back and watch an essential and healthy cultural shift take shape. “Make America Great Again” is not a motto of arrogance; it is a reset toward fairness. It’s not Trump’s isolationist doctrine; it’s Trump’s fairness doctrine.

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