He Starts the War, You Pay the Price: How Trump’s Trade War is Negative for All Involved
The economic war that Trump has recently decided to escalate will be a net negative for all involved. The outcome will be that many, including you reading this article, will have to pay more for certain products and services. Products that require steel (cars, building equipment, watches, etc), food items (rice, livestock, vegetables, etc), and many other things like flashlights, blades, alarm clocks, toasters will become more expensive. And now that China has retaliated with their own set of tariffs, certain US businesses, like Soy farmers who sell billions to China, are in danger of falling off a cliff.
For those of us with decent jobs and some level of economic security, this is fine. As for the 43 million living in poverty, the nearly 100 million with $1000 or less in their savings, and the nearly 80 percent of workers who say they’re living paycheck to paycheck? Not so much. As usual, the poor will pay most dearly for the decisions made by politicians safely distanced from the frontlines.
These tariffs, and the price increases that will come, mean that consumers will have to pay more for less. In fact, a recent study carried out by economic firm “Trade Partnership Worldwide” calculated that this trade war will cost the average American family of four up to $2300 a year. Consumers will have less money to buy products and services which are not “essential,” and businesses which sell these things will suffer. As a result, these businesses will decide to invest less, hire less, and cut spending due to expectations for unfavorable conditions. This will, in turn, further the decline in the average consumer’s ability to purchase things; fewer jobs, less money to be circulated. Consumers spending less means businesses make less profit, which means even less hiring, more slowing, bad stuff.
In the short term, the US will likely “win.” Money and investment will flock to the US, keeping up afloat the value of the dollar, bonds (especially), and maybe the stock market, in pursuit of some degree of security. That is, the US will be the only game in town for a while as other countries around the world start further showing signs of decline. However, much of this influx of money will likely go to large corporations and those who are already wealthy— exasperating inequality in an already unequal society.
The next phase will be the US’s decline. The rising cost of products and services will lead to fewer products and services being bought, less room for smaller competitors in markets, smaller profit margins for many, etc. The slowing economies around the globe will lead to fewer people for American businesses to sell to and buy from, higher production costs for US businesses, and fewer growth opportunities. In fact, economists have found that tariffs are associated with a decline in both GDP and labor productivity and that negative effects can last for years after the tariffs have been employed.
All of this just weeks after Trump promised all his followers that a deal was close.
Normally, a recession is not a major deal. Economies naturally decline and recover over time. And, it used to be that a recession in one part of the world was contained to it. However, the 2008 market crash taught us two things.
First, an economy highly dependent on debt and access to it — in just one area of the economy — can come crashing down hard when people run out of money to pay it back. In a study of economic downturns, researchers at the Bank of England found that downturns that immediately followed a rapid rise in private debt had both deeper and longer recessions. The Federal Reserve, with its historically low rates, has encouraged and enabled this private debt growth for the past decade. As a result, overall business debt has surpassed what it was right before the 2008 collapse, leveraged corporate loans (a risky form of a loan) have ballooned to nearly 6% of the country’s GDP, and high-interest credit card debt has risen to over $1 trillion alongside a steady incline in defaults since 2015.
And second, no economy is an island. A collapse in one country, in today’s globally connected economy, causes a collapse in another, and so on, like dominos. In 2008, we witnessed the collapse of the US housing market, which ended up causing the collapse of the entire US economy. The fall of the US economy caused global economies who depended on US consumers for growth to falter. After the US fell, in the first quarter of 2009, Germany’s economy declined by 14.4%, 15.2% in Japan, 21.5% in Mexico, and “developing countries” were hit even harder. No one major economy falls on its own; it brings down others around them that rely on them for their own health.
And, Trump didn’t just start this “war” with China. He placed tariffs on Germany, Mexico, Canada, and others. And currently, signs are pointing to countries in Europe, Asia, Latin America, and others, heading into a recession. Argentina, for example, has an inflation rate of 55% and a contracting economy. The “Eurozone,” thanks in part to steel and car tariffs and a weaker Chinese economy, is beginning to show signs of a recession in the near future. And, Canada’s economy has effectively ground to a halt, expecting an anemic 1.3% growth for 2019. Eventually, that pain will be felt here at home — the US. Will more debt save us? Maybe. But that’s a dangerous game to play, one in which the poor will be the biggest losers.
Some say that it’s a battle that must be fought. China has been an economic bully. They’ve prevented foreign competitors from entering their markets, spied on competitors and governments using corporations like Huawei, stolen US university secrets, and generally have given Chinese corporations an advantage over foreign companies operating in China. This is why, they say, these tariffs must be leveraged. They argue that if the US doesn’t challenge China now, while the US economy is “strong,” the costs will be greater in the future as China’s global economic and geopolitical dominance will grow to surpass the US’s. It’s short term pain for long term gain.
From this argument, I will grant two things. China is a bully that should be confronted. And, these tariffs might actually work to produce a more fair and open marketplace in China.
However, granting the first point, that China is an economic bully, doesn’t necessitate the methods Trump has employed to confront them. That is, Trump’s methods will cause a global recession that will not only hurt China’s economy but the economies of our allies and developing countries. Many of these countries will grow to resent the United States for its willingness to disregard the wellbeing of their economies. Many of these countries will be less cooperative next time the US requires some assistance from them.
And, granting the second point, that these tariffs might actually work, doesn’t negate the fact that there’s a possibility all of this pain will be for nothing. That is, it’s possible that China doesn’t cave, and instead results to escalating the trade war even further to the point that the US economy starts to falter along with it. After all, Chinese politicians don’t need to worry about elections as American Politicians do. Trump is up for reelection in 2020. The Chinese could, if they wanted to, continue to escalate this war, help usher in a recession in the US, and disgruntle US citizens to the point of not wanting to reelect Trump. Then, they wouldn’t have to deal with this trade war any longer as the next politician — most likely a Democrat — will likely look for ways to amend and restore the situation in order to get the economy back on track.
In other words, It’s possible that the US will lose the war.
In my opinion, this trade war will produce nothing but economic slowdowns, resentment from allies, and the loss of jobs and livelihoods, mostly by the world’s poor. The tariffs will cause a spike in prices which small businesses won’t be able to keep up with, leading to further loss. Businesses which depend on international trade for their growth will also falter, leading to less hiring and investment domestically. Many of these people will fail to be able to pay back their debts, which could in turn help accelerate the world’s economic decline by causing a cascade of defaults. Trump escalated the war, but we will all pay the price.