Tit For Tat Tariff – Who Wins?

On (you pick it, ABC, NBC, CBS, Reuters, France24,…) the news shows, a major topic is the Chinese “matching” the announced Tariffs from the USA (via Trump).

So if it is so “balanced” and “proportional” from China, just who wins? The implication is “nobody wins, China will just match our Tariffs”. But is that true? Or even possible?

Well, as a percentage basis, yes; but on a total $ of trade goods basis, no. It is simply not possible for China to put as much “pressure” on the USA as we can put on them.

Why?

Because their Mercantilist practices have let them dominate the trade balance essentially since trade began. Manipulated currency exchange rates. Mandated 1/2 State ownership. Handing over intellectual property. We simply don’t do any of that, so we can’t be hurt if it stops. In fact, we will be significantly helped. That’s the whole point, to stop it. At present, we are sorely losing. Simply halting the process is an improvement.

Then there’s the simple dollar math (or Yuan math). It’s a percentage of something that matters. Not just a percentage. IF you don’t know the something, you don’t know the result.

https://www.census.gov/foreign-trade/balance/c5700.html

2018 : U.S. trade in goods with China

NOTE: All figures are in millions of U.S. dollars on a nominal basis, not seasonally adjusted unless otherwise specified. Details may not equal totals due to rounding. Table reflects only those months for which there was trade.

Month 	        Exports 	Imports 	Balance
January 2018 	 9,835.3 	45,788.0 	-35,952.8
February 2018 	 9,806.1 	39,067.6 	-29,261.5
TOTAL 2018 	19,641.4 	84,855.6 	-65,214.3

So, let’s suppose that there’s a 20% tariff proportionally applied by both countries. China takes in $1,967 Million of fees. The USA takes in $7,190 Million in fees. Let’s say this causes a 50% cut in trade between the two countries. The USA takes a $4,917 Million drop in exports. China takes a $17,976 drop in exports.

We take in more money, they have to deal with a drop of exports that’s 3.6 times as large. That’s called winning.

But wait, there’s more…

Our exports are largely agricultural and things like wine and specialty brands. Ag products are fungible and global markets are very large. China WILL turn to another source (say, Brazil) and the USA can then sell our ag products into whatever market was “shorted” by Brazil swapping their destination. Now compare to some Chinese socks or rubber duckies. Is there REALLY going to be a massive increase in demand for socks or rubber duckies in the rest of world? If China buys 20% of the Spanish wine supply instead of Californian wine, think folks who can’t get Spanish wine will be OK with buying some from California instead? Now compare Chinese made USB Thumb drives. A sudden excess supply is not going to induce folks to go buy more of them in Europe. That demand is relatively inelastic to supply.

The simple fact is that the party that is winning in imbalanced trade due to mercantilist practices is the one that loses in a “trade war”. They have all that loverly “gain” at risk, where the party having their economy gutted has a sudden increase in economic growth and retains more money at home to circulate at home and stimulate their economy. Similarly, the Mercantilist economy / government pays out much more in tariffs than it can collect, while the exploited economy / government gains much more than it pays.

The standard platitudes being spouted on the Yellow Stream Media (or the Friends Of Soros Press ;-) that “nobody wins a trade war” or that “tariffs just hurt both parties” is ONLY true in the case of fair and balanced trade. In highly imbalanced and mercantilist trade relationships, it can protect your economy from destruction and stimulate grown of the economy at home rather than in the mercantilist economy. In short, it’s a lie that all ‘trade wars’ are bad.

Now also compare what’s going on with the EU vs Britain. What’s the big cudgel there? Being “inside” the tariff walls of the EU. Now tell me this: IF it is SOoooo good for the EU to have tariffs at the border, why is it BAD for the USA? IF the claim is the UK would be better off behind that tariff barrier, WHY is it bad for Texas to be behind such a barrier vs China? Hmmm? Double-speak in full throat.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money, World Economics and tagged , , , , , . Bookmark the permalink.

9 Responses to Tit For Tat Tariff – Who Wins?

  1. Larry Ledwick says:

    Very important point you made here:

    They have all that loverly “gain” at risk, where the party having their economy gutted has a sudden increase in economic growth and retains more money at home to circulate at home and stimulate their economy.

    If a us consumer buyes some widget from China the money goes over seas and only a small fraction of it comes back into the US economy (for example the shipping fees earned by UPS to deliver the Chinese goods.

    If the same or similar (adequate substitution) product is manufactured and sold to that same consumer from a US based company all that money minus that small fraction that pays for services and raw materials that come from over seas, stays inside the US. It becomes wages for the factory workers, revenue for the wholesalers of key components, shipping fees, taxes etc.

    It becomes a classic velocity of money equation. The over seas sale is essentially a one sale and gone from the economy,where the money spent on the locally manufactured substitution will turn over in the the economy up to 6 times before it all gets eaten up by taxes and fees, or gets socked away in someones savings account and stops participating in the money flow of commerce. This local revenue multiplication effect is intentionally ignored by the anti-tariff folks.

    Like all economic transactions there is some sweet spot of relative trade between countries where both countries maximize their revenues. Once you slide off to one side of that sweet spot one country effectively steals money from the economy of the other.

  2. BN says:

    A benefit we would see is lower prices on the AG goods. If there is a fall-off in sales as new markets are found there will be oversupply, so things like Whine, hogs, and soy will be cheaper and the US consumer will see lower prices. I think we win big in a Trade war.

  3. pouncer says:

    Larry, THANK YOU! For your remark “local revenue multiplication effect is intentionally ignored by the anti-tariff folks” YES!

    It drives me crazy that many of the people preaching the economic gospel and prophesy of (A) “stimulus spending” or “Keynesian Counter-Cyclical investment” or multipliers or fractional reserve banking or whatever are the SAME people who preach (2) free trade and open borders. I’m no doubt missing something but it seems to me that concepts related to (A) only work in closed systems, i.e. where leakage around (2) is not significant. If a player rakes off a pile of chips from the poker table, and leaves that game for the roulette wheel, it’s hard to see how subsequent play can make up the difference.

  4. pouncer says:

    Dang, my hot buttons got pushed again…

    Why are the people making arguments both passionate and well-reasoned against the negative (market distorting, price inflating, consumer-harming) effects of import tariffs so silent about the entirely comparable effects of domestic sales taxes on consumer consumption? Or, for that matter, the effects of local, state and federal programs of rent-control, minimum wage, crop price supports, inventory tax, Pigouvian externality taxes,… I can’t complete in a single day the list of ideas that standard economic consensus theory widely condemns as, at least, ineffective, and, most commonly, counter-productive, that isn’t as widely implemented among various US jurisdictions. Are tariff arguments self-entertaining, if spurred by mere novelty? Is it somehow fun and “retro” to drag old discussions from Bastiat and the Coolege administration back out of the archives and hash them out, recreationally? Or is there some serious rage at heretics who are re-opening questions thought settled? Or do the professionals of the discipline believe few of us lay people even remember the cautions and trade-offs of using dangerous trade tools, so that scary “warning labels” must be applied to every package considered?

    It seems to me that an import tariff is philosophically identical to existing taxes on sugared beverages, or coal production, or smokestack emissions, or even proposed taxes on AR-15s. The taxing authorities INTEND to distort the market! They are delilberately trying to punish consumers who purchase imports (Cokes, Coal, Colts) and are encouraging them to purchase domestically, (buy fruit juice, solar power, shotguns) instead. It’s the whole point. Anyone may reasonably argue that such intentions are intrusive, or unneeded, or exceed constitutional authority, or whatever. But picking winner and losers and killing unfavored industry is hardly what anybody should call exceptional.

  5. p.g.sharrow says:

    Every foreign product purchased regardless of it’s dollar cost results in less income for domestic labor. Cheap goods in Walmart is no benefit to those with no jobs. Taxes on those working must be raised on those that are working to support those that don’t. Only mutually beneficial trade results in increased wealth for all. There always some nations that cheat on their agreements to gain unfair advantage. It is foolish to continue to allow the cheaters to disadvantage us in the name of “Free Trade” that is heavily managed in one direction…pg

  6. philjourdan says:

    @Larry – on their rush to damn, the YSM does skip pertinent facts. Such as the multiplier effect.

    But you did gloss over the opposite side. While all that is produced in China can be produced here, it is usually at a higher cost. Which means less to spend on other things. So there is also the restricted cost of fewer goods being sold because the goods being sold cost more.

    E.M. is correct that China cannot win such a “war”. But at the same token, there will be pain here.

  7. Sandy MCCLINTOCK says:

    We seldom hear about purchasing power parity PPP see here https://www.investopedia.com/updates/purchasing-power-parity-ppp/

    If the basket of goods is defined as salaries for people like engineers, police and doctors the crazy imbalance in the exchange rate between USA and China becomes more evident. Last time I tried to compare salaries, I figured that the Dollar/Yuan exchange rate was out by a factor of 10 if compared with PPP.
    How could the USA accept an exchange rate that was so far in China’s favour? I heard a few complaints that it was 40% too generous to China but I never heard that it was 1000% to generous ;)

  8. E.M.Smith says:

    @Sandy:

    BINGO! Give Sandy a kewpie doll!

    It’s just crazy, really. China government selling their people’s wages for near zero, so they can absorb the US tech via mandate for entry, and drive US industry into ruin. Not doing this for actual economic gain, but for political advantage and eventual economic dominance. It is more a ‘take down” of the USA than a make money for the people of China.

  9. Zeke says:

    “Brooklyn? Isn’t that a bastion of the Left? Doesn’t Clinton have some kind of facility in N.Y.C. like in Harlem or some such?”

    I found it for you Chief. Hell’s Kitchen. It is also known as Clinton.

    Never mind.

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