Trump's Commerce Sec. and NEC Advisor remark on China's proposed tariffs' impact on U.S. GDP

[usmbguest5318]

Trump's Commerce Secretary and National Economic Advisor have both discount the impact of China's proposed tariffs by asserting that they will have a negligible impact on U.S. GDP. I won't deny that China's tariffs will have a negligible impact on U.S. GDP; they're right about that. China has very carefully targeted its tariffs so they don't have a major GDP impact. They're designed to have a material political impact by way of focused economic impact. To glean that, one need only look at what products China's proposed tariffs affect and then evaluate where in the U.S. sales losses of them will have the greatest economic impact.

Here is list of the top 30 U.S. products that China is targeting. (The complete list entails ~130 products.)

1. Soybeans
2. Corn
3. Corn flour
4. Pork -- [The link in the first paragraph above discusses pork vis-a-vis Iowa, but the impact in Iowa may well not be nearly as great as it will be in North Carolina, Missouri and Oklahoma. Also, Pennsylvania will feel it.]
5. Certain fruits, including apples
6. Uncombed cotton, cotton linters
7. Aluminum straps
8. Sorghum
9. Brewing or distilling dregs and waste
10. Other durum wheat
11. Wheat and mixed wheat
12. Whole and half head fresh and cold beef
13. Fresh and cold beef with bones
14. Fresh and cold boneless beef
15. Dried cranberries
16. Frozen orange juice
17. Non-frozen orange juice
18. Whiskey
19. Types of tobacco, including cigars and cigarettes
20. SUVs with discharge capacity of 2.5L to 3L
21. Vehicles with discharge capacity of 1.5L to 2L
22. Passenger cars with discharge capacity 1.5L to 2L, 9 seats or less
23. Off-road vehicles with discharge capacity of 2L to 2.5L
24. Other gasoline trucks of less than five tons
25. Liquefied propane
26. Acrylonitrile
27. Other polyesters
28. Certain lubricants
29. Aircraft with an empty weight of more than 15,000kg but not exceeding 45,000kg
30. Certain plastics

The first link in this post takes one to a discussion about what counties -- yes, that's how focused the tariffs are; looking at a state as a whole is an insufficient level of analysis with regard to some of the products -- will feel the impact of the soybean and pork tariffs. I'll leave it to readers to research for themselves what counties' voters will feel the impacts. Just eyeballing the list, I can identify a bunch of them, and the ones I see strike at the hearts of red counties. Quite simply, the tariff is designed to make Trump voters literally pay for being Trump voters; it's to show that emotionally driven political choices have tangible personal financial consequences. That's how a trade wars go. (See the video at the preceding link.)

Some quick facts that illustrate that it's not just the PRC that's screwing red state voters. Trump is too.

• Trump Country May Be Hit Hardest by Chinese Tariff Retaliation

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Frankly, I think the average American doesn't realize just what it'd mean to engage in a trade war with China. (See the video at the preceding link.)

 

[OldLady]

Well, Trump's "base" is proficient at ignoring those things they choose not to see.
I do feel bad for the farmers, though; they are getting screwed with the NAFTA troubles, too.

We can still sell all those goods to other countries, though, right? It isn't as if China is the only customer in the world? There must be SOME justification for this trade war. Some reason that it makes sense.

 

[usmbguest5318]

Well, Trump's "base" is proficient at ignoring those things they choose not to see.
I do feel bad for the farmers, though; they are getting screwed with the NAFTA troubles, too.

We can still sell all those goods to other countries, though, right? It isn't as if China is the only customer in the world? There must be SOME justification for this trade war. Some reason that it makes sense.

We can still sell all those goods to other countries, though, right? It isn't as if China is the only customer in the world?

Tariffs don't stop producers from selling anywhere:

• In countries subject to a tariff, they increase the selling price of the tariff'd goods
• In countries subject to a tariff, and depending on how essential be the goods subjected to the tariff, the quantity of the tariff'd goods sold in those countries decreases.
  • The less essential (more elastically demanded) the goods, the greater the decrease in quantity sold.
  • The more essential (more inelastically demanded) the goods, the less the decrease in quantity sold.
• If the country that subjects its citizens to a tariff is among the top global consumers of the goods subject to the tariff, and the good (within that country) is inelastically demanded), the global price of the tariff'd goods also increases also because:
  • The tariff doesn't greatly reduce the quantity demanded, and
  • Firms see an opportunity to earn higher profits, so they increase their prices universally.
  • Firms attempt to make up for revenue lost

It is so that China is not the only customer in the world for the U.S.-made/grown products on which China has proposed to levy, however, they are big consumers of them; thus their levying a tariff on them will increase the price of those goods for everyone.

Additionally, unless consumers in nations not subject to China's tariffs begin to consume enough of the product to make up for the reduced demand in China, the suppliers of the tariff'd products will sell less of their goods than they did before the tariff was levied. The decrease in sales can, in turn, reduce the revenue the suppliers earn. To attenuate the impact of reduced revenue, those suppliers, in turn, undergo near-term and long-term changes of various sorts. In the near term (~1-3 years), they cut back on labor and convenience spending. In the long term, if the mechanism exists to do so, they'll exchange labor for capital. If none of the approaches available to them result in their being adequately profitable (by the supplier's assessment of what "adequately" means), they'll exit the industry/market.

There must be SOME justification for this trade war. Some reason that it makes sense.

There are two general classes of justifications for tariffs:

• Economic:
  The economic aim of a tariff is to protect domestic suppliers/producers (firms). Whether the tariff protects them depends on the elasticity/inelasticity of overall demand (macroeconomically) for their products.
  • If the product affected is inelastically demanded (macroeconomically), the protection-effect happens because consumers don't have an alternative (or they have very few alternatives) product to the one subject to the tariff.
  • If the product affected is elastically demanded (macroeconomically), protection happens for the largest producers/suppliers (firms), but not for many of the smaller ones who operated, prior to the tariff, close enough to the margin that the drop in the quantity of sales pushed them from being profitable to being either unprofitable or not profitable enough. Such smaller suppliers exit the market. (The same thing can happen to large suppliers (firms), but only to those who operated with margins as thin as do/did smaller firms that also couldn't endure the drop in sales volume.)
• Political:
  The political aims are myriad and not nearly as succinctly or accurately identified and described. Generally, a country implements tariffs to curry favor with some segment of the electorate or citizenry.
  
  As go trade wars with China, the Central Committee just made Xi Jinping, in effect, a an absolute monarch, thus insulating him from political consequences of levying tariffs, particularly those that can be portrayed as retaliatory.

There is one class of argument against tariffs: economic.

• Tariffs increase prices paid by consumers.
• Tariffs reduce GDP.
• Tariffs increase inefficiency by creating/boosting "moral hazard." How precisely this works is somewhat complicated (see also: Information and economic efficiency) The short of it is that as a result of having a tariff to protect a domestic industry, given its (its firms') current operational model, competitive pressure is reduced and the firms' in the industry have less motivation to continuously optimize the economic efficiency of their operations.
  
  The textbook example of that is the U.S. automobile industry. Tariffs levied on European automobiles made them expensive enough that for years, most consumers purchased American made cars, which, despite their lower overall automotive efficiency and build quality, were comparatively low enough in price that consumers preferred to pay the lower up-front cost and deal with the higher (or more frequently incurred) maintenance costs as they became necessary to incur. It took a while for the U.S. auto industry's inefficiency to come to a head, but come to a head it did when you, I and everyone else had to bail them out back in, what 2008 (?), 2010 (?).
  
  Even with the bailout, we watched two major car makers -- Olds and Pontiac -- go the way of the dodo. Remember what I wrote above about makers exiting the market? The holding company for them, GM, didn't exit the market, but two of its operating companies did.
  
  Absent the tariff, GM's operating companies would have been forced to match/best the automotive and production efficiency of their competitors from overseas. Having to do so could very well have resulted in Olds and Pontiac ceasing to exist, but even if it did, that would have been a gradual happenstance rather than immediate one. Given, however, that production efficiencies are scalable throughout organizations as large as GM was, it's quite plausible that had GM invested far earlier in efficient operating and production models that Olds and Pontiac would still be around.
  
  After all, there's no question that GM had and has the financial resources, engineers and scientists needed to design and build vehicles that were every bit as efficient and as efficiently as their competitors. They didn't, mainly because of the "morally hazardous" line of thinking that said "gas is cheap, so American consumers don't care about MPG; thus we're not going to invest (aka, take less profit) in making more efficient vehicles. But gas didn't stay cheap, and when it got expensive, American automakers were "behind" in terms of having the in-house know-how about building efficient vehicles....and the rest is history....