widening trade deficit between the USA and China

widening trade deficit between the USA and China

“Trade wars, Trump tariffs, and protectionism Explained.”

Article Summary

This article discusses a trade war developed as a result of tariffs that have been imposed on product imports under the trump administration. President Trump has slapped a 10% tariff on goods worth $200 billion and plans to levy a further 25% tariff on $325 billion worth of Chinese products. According to the president, the proceeds from these tariffs will be used to send humanitarian aid to countries that are poor and starving.

A tariff constitutes a tax on product imports from particular countries to make such goods more expensive and thus improve the consumption of local products. This is achieved by creating a deficit of those products in the local domestic market and thus increasing the demand for local items to fill the shortfall in supply that arises. This is a form of protectionism aimed at ensuring local companies can sell their products since they can set lower prices in comparison with imports. The article points out that the main reason Trump gives for this action is to bridge the widening trade deficit between the USA and China.

A trade deficit refers to the difference between how much a country imports to a country and how much it imports. The trade deficit with China widened by $43.6 billion to reach $419.2 billion in 2018. The article points out that many economists are against this move as it may end up having negative effects on the local industry. Essentially, this protectionist policy would raise the cost of imports and improve domestic demand. On the other hand, retaliation by the affected countries could raise raw materials that are needed by local companies forcing them to raise their prices, which will end up affecting consumers.

Many people advocate for a free market, which would allow them to buy products from anywhere with as low tariffs as possible. Whereas free trade leads to lower prices for commodities as many companies can purchase raw materials at lower prices, it also leads to capital flight as many companies may ship jobs to countries that have lower costs of operation (Bown, 2018). This may lead to the closure of local companies and the loss of employment for developed countries.

Part 2: Economic Concepts from the Article

The article has raised important economic concepts such as the role of supply and demand in world markets and how tariffs affect those markets. In an open market, the forces of demand and supply generally influence the level of commodity purchases. This means that in a free market if a product increases its price, customers will purchase cheaper products forcing the costs of those products to rise while the more expensive one would reduce its prices due to falling demand until equilibrium is reached. This is referred to as the invisible hand of the market (Carvalho, Azevedo & Massuquetti, 2019).

The tariffs instituted by Trump are meant to affect how the free market works and protect domestic markets since import prices will increase, forcing consumers to abandon them, thus raising demand for local products. From figure 1 below, the domestic price is higher than the world price, which makes rational consumers opt for imports as they are cheaper than domestic products. To protect the local industries from market competition, suppose the government imposes tariffs, thus increasing the world prices. This would increase the domestic supply from Q1 to Q2 while reducing domestic demand from Q5 to Q4. This would create a producer surplus due to the tariff and lead to deadweight, which is represented by the loss of productivity in the economy and loss of welfare by consumers.

Figure 1: The Economic Effects of Tariffs

Tariffs essentially benefit local suppliers who can sell more products moving from Q1 to Q2. The government benefits by raising tax revenue represented by the area between Q2 and Q4. The only losers are the consumers who have to purchase less in this case Q4 instead of Q5 due to the increased price. What we find is even though the idea behind tariffs may be noble, the effect will be harmful for the entire economy, additionally, if the Chinese retaliate, then the local manufacturers will have to look for alternative imports or be forced to increase prices further. For items that are not basic goods, such a move will make consumers move to alternative goods, which will lead to the closure of business and loss of jobs, which is the exact problem that the tariffs were supposed to address.

The article concludes by asking what is to be the expected culmination of the trade war that was started by the US slapping tariffs on Chinese products. This question can only be answered by historians, it is apparent that there can be no positive outcomes from a trade war between two economic powerhouses even though free trade may lead to economic problems and challenges to developed economies, they at least lead to a form of market efficiency as companies are forced to operate efficiently to be competitive. In a protectionist economy, companies may stop being innovative, or looking for ways to improve efficiency, as the tariffs will still make their products competitive domestically. That may be the reason that both the Republican Party and economists are against the tariffs.

References

Bown, C. P. (2018). More than soybeans: Trump’s Section 301tariffs and China’s response. Peterson Institute for International Economics (PIIE), April 4th.

Carvalho, M., Azevedo, A., & Massuquetti, A. (2019). Emerging Countries and the Effects of the Trade War between US and China. Economies, 7(2), 45.

Trade wars, Trump tariffs, and protectionism explained. (2019). Retrieved from https://www.bbc.com/news/world-43512098