Trump’s tariff proposals will bring down US economy

So far, Donald J. Trump’s approval ratings are in a leading position in many states. After he named his trade policy prospective in January, many economic analysts, politicians and businessmen hold opposite attitude and point out that the Trump’s trade policies will hurt US economy.

160303121404-donald-trump-recession-780x439

                                                                                                                                      Source: money.cnn.com

“If we Republicans were to choose Donald Trump as our nominee, the prospects for a safe and prosperous future would be greatly diminished, and I’m convinced Donald Trump would lose to Hillary Clinton.” Governor Mitt Romney gave a speech against Donald J. Trump on March 3.

I do believe Donald Trump’s trade policies will give rise to a US economy recession. In June 2015, Donald Trump said he would impose 35% tariff on Ford vehicles from Mexico. In January 2016, Trump proposed to impose 45% tariff on all products imported from China. Trump believes that these tariff policies can bring back the income which originally belongs to US. But these tariff policies may also lead to a recession, taking tariff policy against China for example.

First of all, retaliatory tariff from China is inevitable, if Trump impose the 45% tariff on Chinese goods. In fact, there is a lesson from the past. President Obama had already attempted the same tariff idea seven years ago, but it did not go well. During 2009, the Untied States was importing tires from China at a huge rate per year. Due to the low labor cost in China, the increasing number of “made in China” tires had a great comparative advantage and rapidly took over the US market. In September at that year, Obama increased tariff on tire imports from China for three years. However, in early 2010, China imposed tariff ranging from 50.3 to 105.4 percent on American poultry imports, which caused great loss for the US poultry factory. Because Obama’s administration violated WTO’s provision, China have the right to impose the retaliatory tariff. Thus, both country will suffer a great loss for the reasonless tariff. It is not good for the US economy and may cause recession.

Moreover, tariff will hurt American consumption, especially for the poor and middle-class consumers. “Made in China” goods would become more expensive than before due to the tariff. Consequently, it would pass this cost on to American consumer and immediately raise the poor and middle-class family budgets. Throwing back at Obama’s tariff policy, statistics show that consumers in 2009 spend $1.1 billion more on tires than before. Even worse, huge budget costs for consumers can cause people to spend less since they worried about the price would be higher in the future. Less consumption would probably cause recession.

Furthermore, imposing tariffs will not stimulate productivity of US manufactures. Many companies in US import the raw materials and industries supplies from China given the lower cost. After imposing tariff, these firms have to pay more in order to maintain normal operation. The heavy cost burden may cause layoff or wage cut, ultimately causing recession. Although there may have some US manufactures benefit from the tariff policies, it would not last for a long time. A tariff on Chinese goods would immediately make Japanese, Vietnam, Indian, Mexican and other foreign countries have a good chance to compete in American market. Thus, according to Trump’s theory, he would impose tariff to all these countries import and have no trade with other countries eventually. At that time, there would be a great recession.

“I think he doesn’t fully grasp the law of unintended consequences of what seems like a silver bullet, a quick fix. There are no silver bullets and quick fixes to our problems in the United States.” said Meg Whitman on March 4, who is Hewlett Packard (HP) Enterprise CEO.

If Trump still simply believe tariff policy can solve the problems in US and make the country to be better off, the actual movement of US future economy inversely turn out a great disappointment.

 

References:

http://www.detroitnews.com/story/news/politics/elections/2015/06/16/trump-press-ford-cancel-mexican-plant/28816173/

http://www.nytimes.com/politics/first-draft/2016/01/07/donald-trump-says-he-favors-big-tariffs-on-chinese-exports/

http://money.cnn.com/2016/03/03/news/economy/donald-trump-economy/

http://www.iie.com/publications/pb/pb12-9.pdf

 

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3 Responses to Trump’s tariff proposals will bring down US economy

  1. anqiwangwang says:

    Hi Songfeng! Thank you for your interesting post on this topic. I think it is a very popular topic, especially in the current situation. I agree with your thesis that such tariffs will harm US economy, but I have different opinions on the reasons of why it is harmful to US economy.

    First of all, I believe that such tariff will not necessarily hurt poor people in the US. For example, poor working at factory will be more likely to get employed if there is high tariffs imposed on imports from other countries. Thus, such tariffs are likely to bring more benefits to the side effects. In fact, I think it is these people who vote for him.

    In addition to that, I agree with you on the reason of less consumptions. Like we discussed in class, imposing tariffs will lead to deadweight losses on both consumers and on producers, thereby decreasing the efficiency.

    Very interesting topic and I am looking forward to discussing this topic with more classmates on this topic.

  2. xiaochanwang says:

    Thank you for adding your thoughts on this heated discussion about the trade proposals by Donald Trump. Donald Trump want to indirectly subsidize U.S. manufactures via higher prices that American families and business would be forced to pay for these domestic producers’ goods. I agree with your point that high tariffs would hurt American consumption.
    What I want to add is that higher American household spending will lead to higher tax payment, and higher tax payment will increase the opportunity cost of money and decrease the consumer surplus. For example, suppose the average American household spends about $12,000 on food, clothing, and other similar items each year, a 10-15% tax on these goods translates to an extra $1,200 to $1,800 per year that American families would have to spend under Trump’s plan. This amount of money could have been otherwise saved, invested or spent on other important necessities like housing or health care.
    I also agree that Trump tariff plan don’t most of the manufactures in US. As you mentioned that many manufactures use the raw materials directly imported from China. I also want to add that the U.S manufacturing sector is a small share of both U.S. gross domestic product and jobs. For WSJ data source, Manufacturing jobs only take 8.5% as a share of all non-farm employment in the U.S. However, Donald Trump wants to tax about 90% of all U.S. businesses and workers, many of whom work in finance, business services and innovative sectors, which represent most of domestic economic output and employment, in order to subsidize the manufacturing sector.

  3. Hi Songfeng, I am really interested in this topic. You have made great points about the possible consequences that may result from Trump’s trade policy proposal. I strongly agree that the trade policy brought up by Trump will possibly lead to a recession.

    I would like to add some of my opinions here to prove why Trump is wrong about the policy in the perspective of the tax situation. Trump said that “There’s a tremendous tax that we pay when we go into China, whereas when China sells to us, there’s no tax. I mean, it’s a whole double standard, it’s so crazy, and they cannot believe they get away with it.” China’s tariffs are higher than those imposed by the United States. But Chinese exporters do face a tax when they sell in this country. Regardless, no expert or report suggested that taxes present a challenge to American firms that sell in China. The problem that Trump is trying to address though the tariff policy actually stem from other things China does, especially the way it applies regulations to foreign sellers. For example, in 2014 China used food safety rules to block beef imports. By simply imposing on such a high tariff on China, US is not going to achieve its goal if it ignores other trade regulations on which need more focus than the tariff, let alone the possible worldwide recessions may be caused by this horrible policy.

    I would like to discuss more with you about the possible outcomes of this trade policy on other aspects and about what else Trump is ignoring in putting up these trade policies. Lastly, thank you for this great post!

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