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Truth Behind Tariffs and Trade Wars

The talking heads on your television have been in a tizzy over tariffs and trade wars. Here’s why:

It all started when President Trump signed two presidential proclamations placing a 25% tariff on steel and a 10% tariff on aluminum. (Read the proclamations for yourself: aluminum/steel) A tariff is a tax or duty (like a tax but on goods) to be paid on a particular class of imports. Trump argues he did this in the name of “national security” and states such in the proclamation. It reads, “The Secretary [the Secretary of Commerce Wilbur Ross] found and advised me of his opinion that aluminum is being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.”

Soon after, President Trump started announcing proposed tariffs on Chinese goods and services. The Chinese responded quickly with tariffs of their own.

As President Trump announced the first proposal, and then the second, people erupted — some with fears and some with cheers. Some feared a trade war would commence bringing a halt to globalization and free-trade that have ushered in a new era of economic prosperity, while others believe these actions are long overdue due to China’s protectionist policies and intellectual property theft.

The Reality:

Some believe these proposals are the beginning of a trade war and will damage economic growth. The tariffs do go against the “free market” and “globalist” mentalities that most economists agree have been, and will continue to be, beneficial to economic growth. They’re so disliked by economic minds that Gary Cohn resigned from his post as an economic advisor to the President because these proposals go against his views. However, as of right now they have not resulted in a trade war, and there’s good chance they won’t.

While President Trump has spoken in protectionist terms for a few decades, he’s a businessman and does know how to negotiate — regardless of how you feel about him. Many believe this is simply an anchor position in a negotiation which he’ll then scale back to his ultimate goal.  We’ve seen some evidence this may be the case, with the exemptions of Canada and Mexico from the steel and aluminum tariffs that resulted in many countries rushing in to be exempted themselves.

On the flip side, this is a dangerous game President Trump is playing. If President Trump does maintain the tariffs, there is a chance a trade war will develop. In response to the first round of tariffs, the EU already announced a plan to retaliate by implementing protectionist policies against some American goods. And in response to the tariffs levied against the Chinese, the Chinese government responded quickly stating they have no hesitation implementing tariffs of their own.

So, in reality, we’re not at a trade war…just yet. Those who are calling this a trade war are jumping the gun. However, there’s a good chance it can lead us into one if the Trump Administration continues down the protectionist path or plays their hand too aggressively.

As for those discussing job creation, tariffs will most likely have a negligible or negative effect. Jobs shouldn’t even be part of the discussion.

For all the jobs gained via protectionist measures, such as the reopening of the steel plant in  Illinois, the same amount of jobs, or more, may be lost from the extra costs taken on by companies who use steel and aluminum as raw goods for a finished product. As this article from Fortune states, “while the number of American workers in the metals industry could increase by an estimated 33,464 jobs, the decrease in other industries would be more significant: an estimated 179,334 jobs. This means that the net loss could total 146,000 jobs.”

So, what could this all mean?

If President Trump simply uses the tariffs as an anchor and negotiates “better deals” for the US in trade partnerships, these tariffs are nothing more than a bargaining chip. If President Trump continues with protectionist policies, a trade war could erupt, resulting in a major headwind for the global economy. Bottom line, we’re not in a trade war, we’re simply in a high-stakes negotiation.

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