So Much Winning: How Donald Trump's Tariffs Are Exploding the Trade Deficit

So Much Winning: How Donald Trump's Tariffs Are Exploding the Trade Deficit

The Commerce Department has just released the numbers on US trade deficits for October, and things don’t look good. The US trade deficit has grown to $55.5 billion for the month, which the AP reports is the highest it has been in a decade, and the fifth straight monthly increase. If you observe the chart above (released by the Commerce Department), you will see that October’s deficit is the also highest it has been during the Trump administration and steadily rising, indicating the actual effects of tariffs from the tariff man. The YTD trade deficit this year is 11.4% higher than the same period last year.

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What’s worse, our trade deficit with Trump’s public trade enemy number one, China, has soared since the Stable Genius has engaged China and China has retaliated. At $38.2 billion, the US-China trade deficit is doing as well as ever, despite Trump’s import tax on $250 billion worth of Chinese goods. The quarterly trade deficit with China is now nearly $100 billion, increasing by more than $10 billion in the last quarter alone.

On the flip side, though, American exports to China are taking a beating. Our exports of Soybean was cut nearly in half thanks to Chinese retaliation against Trump’s hotheaded mess. Trump’s tariffs have been devastating to farmers, which is to say, to Trump country. We are importing more steel for car parts since the institution of Trump’s steel tariffs.

One may ask here why China is not suffering as much from their tariffs on us as much as we are suffering from ours on them. The answer lies in a fundamental misunderstanding of tariffs. The protectionist argument goes like this: tariffs will hurt other economies more than ours, because it will make it harder for them to export cheap goods to the US. Also, corporations, seeing the rising cost of imports and shrinking profits, will buy and hire at home.

That sounds good, as most simplistic arguments do until they are subject to critical thinking and actual data. Ultimately, the cost of trade barriers are not paid by corporations; they are paid by consumers in the form of increased prices. Since consumers don’t like spending a crap ton of more for the same items, at a time of increasing trade barriers, companies will look to keep the price increases to a minimum in order to retain customers.

The problem a developed economy has is that the cost of domestic production is already high - if it weren’t, we wouldn’t have to import this much in the first place. So when trade barriers are raised, the only way to hold price increases to a minimum is to import more, not less, from places with much lower production costs. There simply are not enough tariffs in the world to bring the cost of production in developing economies in line with those of developed economies in the short term without causing an economic collapse that will make 2008 look like the good times.

Another unique advantage America has when it comes to the global economic order is the US Dollar. It is the world’s reserve currency, extremely stable compared to nearly all other currencies, and the unofficial second currency accepted in place of local currencies in numerous developing nations. But the dollar’s command as a global currency also creates a unique disadvantage for trade barriers. Trade wars cause economic volatility, which often sends other currencies tumbling against the dollar. Why? Because volatility increases demand for the most stable and de-facto reserve currency of the world and decreases demand for other currencies. Note that this has nothing to do with currency manipulation, and you have likely noticed this effect if you have traveled internationally recently.

So what happens when the value of the dollar goes up against other currencies? It becomes cheaper for American businesses to buy foreign goods and services, mitigating some of the effects of American tariffs on international products. At the same time, it makes it more expensive for foreign businesses and consumers - and even American businesses and consumers - to buy American goods and services. Add retaliatory tariffs to that, and it’s a double whammy for American production.

Taken together, the effects of tariffs and trade barriers - the pressure on businesses to hold price increases to a minimum while also answering to shareholder demand for growing profits coupled with increasing value of the dollar - are nearly perfectly counter-intuitive to the populist protectionist narrative. In short, trade barriers increase prices for consumers and increase trade deficits for developed economies. Note that the relative low cost of production and a weaker currency, on the flip side and relatively speaking, actually help our trading competitors - like China - even if only in the short run.

The fact is that trade barriers are objectively bad for everyone, but they are especially bad for developed economies like the United States. Despite the fervent wish and belief of the Trump cult, Donald Trump is in fact subject to this economic law of gravity, as by the way, would be any Leftist anti-trade policymaker.



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