Tariffs aren’t as simple as President Trump believes7/4/2018
The economics of foreign trade
The school year is finished, but whether we like it or not, Iowans have been sent to summer school this year.
The subject for our summer education: the economics of foreign trade and tariffs.
Professor Donald Trump assured us this would be really simple to master and wouldn’t take very long. But Iowa farmers and the owners and managers of many businesses are now realizing the professor might need to brush up on the subject material before he teaches more lessons.
The president’s tariffs have been imposed on goods produced by many of our overseas trading partners for sale to customers in the United States. Those nations have responded by imposing tariffs on many products their residents want to buy from the United States.
Suddenly this easy-peasy course in economics has turned into a complex exercise that is creating ulcers from border to border in Iowa and across the globe.
Even if you are not a farmer or don’t own a manufacturing company, you are feeling the effects of the tariffs — or soon will be.
If you are a consumer, those foreign goods on which the U.S. has imposed tariffs will cost you more, or U.S. goods made with certain foreign raw materials will cost more. And if you are a farmer or a manufacturer, your products will cost your foreign customers more.
A tariff is just a fancy word for a tax the United States government collects — and pockets — from U.S. buyers of certain goods brought into our country. Tariffs that other countries impose on U.S. goods mean those products cost overseas customers more.
Republicans in Congress who typically would be apoplectic over any tax increase have been pretty restrained in their reaction to the president’s tariffs. But the tit-for-tat dispute over international commerce could cause huge headaches for Iowa farmers and businesses that rely on them.
Pork producers in Iowa are worried about losing up to $560 million in sales to Mexico. Last week, China responded to U.S. tariffs by slapping a 25 percent duty on U.S. goods — a move experts believe will cost Iowa soybean farmers up to $620 million.
The effects of this potential $1 billion blow to Iowa farmers would go much farther. Farmers are less likely to buy John Deere tractors and combines or Kinze planters and grain carts, and a protracted trade fight and downturn in sales could lead to layoffs at those factories.
Iowa consumers who don’t owe their livelihood to agriculture may face other effects from the tariff dispute. Foreign goods that are subject to U.S. tariffs will be more expensive. Competing products that are made in the U.S. may rise in price, too, as collateral damage from the tariffs.
Here’s a simplified example to help you understand why:
Consider a widget made in Mexico or China that had been selling in the U.S. for $100 before the tariff dispute. A 20 percent Trump tariff means the widget now will cost you $120.
Similar widgets made in the United States may have been selling for $110. The Trump tariff means those U.S. widgets are now less expensive than the $120 foreign widgets.
U.S. widget companies could increase their sales by taking advantage of the price difference. But they might decide, instead, to capitalize on the tariffs and raise the price of their U.S. widgets to $120.
That means the biggest consequence of the widget tariff would fall directly on U.S. consumers who would pay more.
There are a couple of fundamental economic lessons involved here that often get overlooked: Companies have moved their factories out of the U.S. primarily because they can pay workers in Mexico or China significantly less than they would pay workers in the U.S. And whether the factory is in the U.S. or elsewhere, automation is reducing the need for factory workers.
Dimy Doresca, director of the University of Iowa Institute for International Business, said Iowa is going to suffer as this trade dispute drags on. “I don’t see any way to look at this where Iowa will come out as a winner,” he told The Des Moines Register.
Tim Bardole, a farmer from Rippey and a director of the Iowa Soybean Association, said, “There’s no shortage of things to think about when you lay awake at night.”
Professor Trump, your students have learned enough already to know they wish you had not signed them up for this expensive set of lessons. ♦
Randy Evans can be reached at DMRevans2810@gmail.com.