Tariffs on products
Tariffs on products
Trump's administration has obligation to US voters to eliminate trade deficit. The same obligation had previous administrations and all governments in countries with trade deficits. How this will be done is a different issue. If it is done the right way it can be beneficial. If it is done the wrong way, it can be catastrophic and cause a recession which is the worst scenario.
USA has set the agenda. It made very clear that reducing deficits is a major goal of Trump's administration. It has managed to bring many countries at the negotiating table which is something very positive. It is also something very good that there is a ninety day pause. In USA they should reconsider their tariffs plan and make a new start after three months.
NWO media and politicians have been claiming that Trump's tariffs will boomerang and there will be a recession. As always, they have been deceiving people. They are presenting the worst scenario as certainty. Tariffs could boomerang and hit USA severely, only if they are handled the wrong way. A fast trade war with many countries would be catastrophic for USA most of all.
USA should take trade war with China out of the way the soonest possible and then proceed cautiously and slowly with tariffs. Russia has already good relations with China. It will greatly improve relations with USA if it intervenes and contributes significantly so that this difficult situation can come to an end. Russia would help both countries and all the world by intervening and ending USA - China trade war.
John goes to vacation and leaves his cat with his brother Mike. After a couple of days, Mike calls his brother and tells him without hesitation that his cat is dead. John tells his brother that he should not have announced the bad news so abruptly. Mike should have said that the cat climbed onto the roof. He should have called after a while and say that the cat fell off the roof and he took it to the vet. On the third call, Mike should have announced that cat died. A few days later, Mike calls again and says "grandma climbed onto the roof".
This is an anecdote about announcing bad news slowly. This is what we have been doing in the articles regarding trade war. We wanted to be able to explain that the very bad scenario will be avoided. With all the background provided in previous articles regarding "USA's tariffs" and "Trade war", we can announce the worst scenario for USA and explain why it will be avoided.
In previous article, we stated that USA could have a drop in growth rate that could come close to 4,42%, if there is a fast trade war with all the countries in Appendix 22. These are not all the countries USA is trading with. Also data used were not the most recent. According to most recent data, exports are 2,062 trillion dollars, imports are 3,373 trillion dollars and deficit 1,311 trillion dollars.
If we calculate exports, imports and deficit as percentages of GDP, they are 6,80%, 11,12% and 4,32%. If tariffs are imposed the right way, USA could gain close to 4,32% of GDP. If they are imposed the wrong way, growth rate drop could come close to 6,80% which would be a severe recession. To calculate annual gain or drop, +4,32% and -6,80% should be divided by the number of years it will take.
In principle, imposing tariffs is correct. The tactic used may be risky. They assumed in USA that other countries would behave in a rational way and do nothing or negotiate. This is not certain. If there is a fast trade war with many countries, USA could go into a severe recession. They would lose almost all exports but domestic producers would not be able to take the market shares importers would lose.
The key issue here is how fast can domestic producers increase production or shift production factors to other products and services, in order to take the market shares importers will lose. If matters proceed too fast, they will be able to take only a small part and be harmed. If tariffs proceed slowly, they will take a very large part of these market shares and benefit.
The goal is to reduce deficits with countries. According to our opinion, tariffs should be imposed on products and services, not countries. Of course this not a well thought out opinion and we have not looked into USA's trade balance in detail. This is not our job. There are economists and others in USA that are paid well to do that. These people should consider our opinion.
Although the goal should be to eliminate all deficits, It would be very risky to impose tariffs on all countries. If many countries retaliate and there is a fast trade war, USA could get into a severe recession. Let's say that USA imposes tariffs on a few countries only. Most likely, other countries that have no tariffs will take a large part of the market shares countries with tariffs will loose.
If tariffs are imposed on products, all importers will loose market shares and local producers will take those. If it seems necessary, additional tariffs can be imposed on products from certain countries. Let's give an example to make it better understood. We go down the list of Appendix 22. China is on the top of the list. This dispute should settle the soonest possible with Russia's intervention.
Mexico and Ireland will have a special treatment (soft surplus reduction) because Trump's administration will need the votes of Mexican and Irish Americans in next elections. Vietnam is a poor country and USA should not ruin them. Germany is a rich country that treats all trading partners unfairly (5,90% surplus). The goal is to reduce deficit with Germany but it should be done by imposing tariffs on products imported from Germany. USA is the largest importer of German cars.
Since Germany is in EU, tariffs have to be on all EU countries. But if there are no tariffs on the rest of the countries (not in EU), they could take a large part of the market shares EU automakers will lose in USA. In order to reduce deficit with Germany, USA should put tariffs on all imported cars. There could be also extra tariffs on some countries or a differentiation in tariffs according to the country that exports them.
It should be done gradually, impose some tariffs, see how much imports and deficits will be reduced and than impose new tariffs, if necessary. This tactic does not hit directly the target which is reducing all deficits but works much better with markets and companies. The goal is indirectly achieved in a way more suitable to how markets behave and companies operate.
This approach also helps coordination with domestic producers. Trump's administration should consult with domestic producers and see how fast they can respond to take the market shares importers will lose. Tariffs should be imposed in such way that imports will be reduced at the same pace with domestic producers ability to take that market share. When Trump announced the ninety day pose, automakers were visiting White House.
In the case of the automobile market, Trump should first consult with them and find out how fast they can increase production. Then tariffs should be imposed on all automobiles in a way that imports will be reduced accordingly. Of course tariffs would not be just on automobiles but on other products as well. After Russia intervenes and trade war with China ends, USA can proceed with tariffs slowly and cautiously.