Trump’s Trade War


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President Trumps promise to impose tariffs to boost employment in the US will have consequences. It will make the US and the world poorer.

If the US imports foreign goods then there has to be an exact same amount of exports whether that is in goods, services or assets. Any payment the US makes for overseas goods can only be used to purchase something in the US. The only thing that US dollars can be used for by the the foreign seller is to purchase things in the US domestic economy just as only sterling can buy things in the UK or Euros can be used to buy things in Europe.

If the effect of the tariff is to level the price between imported steel say and US steel so increasing the ability of US steel producers to sell their product in the domestic market then that will be good news for US steel workers. The tariff makes no difference to the efficiency of the US steel industry.

To pay for that transfer of wealth to the US steel workers an equal amount has to be transferred from somewhere else in the US economy. It cannot come from anywhere else since dollars to US steel workers has to come from dollars consumed in the domestic market by someone else. President Trump’s view is I am sure that foreigners will be paying for the increased employment in US steel workers but they won’t at least not directly. They may pay for it with an increase in domestic unemployment but that won’t help the US. Only the US economy is able to make the redistribution of wealth within the domestic market. If the overseas exporter still wishes to sell in the US the price simply rises to US customers. If the overseas producer pulls out of the export market then the reduction in US imports will be matched by a fall in overseas purchases of US goods, services and assets. It is probable that this will effect President Trump’s wealthy backers as foreigners stop buying US real estate, companies and goods.

What happens in the exporting country? The fall in exports to the US has to result in a fall in imports from the US since US currency can only be used in the US domestic market. That means that even without tit-for-tat tariffs US exports must fall. The exporting country industry would need to make an adjustment resulting in unemployment and workers forced into new areas coupled with a deflation in prices as supply adjusts to a lower level of output.

Maybe President Trump is hoping that the tax give away to the wealthy will be redistributed to the Steel workers or at the very least compensate the wealthy for the loss of foreigners buying their assets. I suspect the burden of the transfer will actually fall on the rest of the US population to adjust their consumption in order that the consumption of poorer workers can increase. That’s good news for the US steel workers but bad news for everyone else.