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Trade Wars Explained: The Economics Behind the Current Debate

By Nate Gilbert | July 31, 2018 | AIM Academy, Meet the Teachers
Nate Gilbert teaches Introduction to Economics and Introduction to Government for Aim Academy. If you find topics like the recent debate over tariffs interesting than consider taking one of his classes this fall.

 

The recent tariffs and political tug of wars that have resulted in a “trade war” help demonstrate several principles of government and economics.  Tariffs, which are essentially a tax on imported products, do help some domestic industries.  However, many economists believe that the unintended consequences on society may outweigh any gains.  In politics, having a good public image can be rewarding, but policies that are popular may have fundamental weaknesses.

Trade wars usually start with one nation announcing tariffs on goods imported from another nation or nations.  Just like a couple of toddlers arguing over a toy, this often kicks off a battle of retribution.  Consequently, both nations end up with tariffs that tax select goods from the other country.  Some would argue that this merely levels the playing field.  After all, some nations use cheap labor or government subsidies to produce products inexpensively.  One criticism of China has been that it doesn’t care about US copyright laws.  Thus, the argument continues, the US needs to protect domestic industries affected by Chinese laws.  Another group would counter that the problem with all this bickering is that the tariffs don’t actually change many of the root problems.  They do, convenient for the government, fill up the tax coffers.  Additionally, these taxes drive up the price of consumer goods, which is why you may have seen the recent headline, “Trade War Causes Coke to Raise Prices.”

 

The unintended consequences of tariffs may be wide-reaching.  Although the US steel industry may benefit from protective tariffs, think of how many more US companies purchase steel.  They need to buy steel to make a variety of products that consumers use.  Now these companies may have to raise prices or cut expenses to make the same profit.  If they raise prices, some Americans end up paying at the cash register.  If they cut expenses or lose profits, that may mean job losses or little economic growth.  That is just the companies that use steel.  Now think of the companies that may be affected by the tariffs of retribution.  Farmers, manufactures, distributors, etc. could lose export sales.  This is illustrated in the recent headline, “Cherry Exports Squashed by Tariffs.”  If these industries suffer, some would say that we would be better off never starting the tug of war.

 

Many of our Founders saw political involvement as a duty and service to our country.  They would likely be shocked to see how much of modern politics is driven by showmanship and pandering.  However, tariffs have been around and debated since the early years of our nation.  So the question remains: are tariffs an effective tool to protect domestic goods or merely acts to gain favor with certain industries and the public?  Think about that when you see/hear the news about a new trade war.