Stop Making Fun Of Trump For Not Knowing How Tariffs Work

Meeting with China’s President Xi in December

He knows. They’re a tax on American consumers, not China. It’s just a better story if he says it the opposite way, so he does:

But tariffs are not paid by exporters of goods (Chinese companies), but importers of goods (U.S. companies), which typically pass the cost on to consumers.

At some point, presumably U.S. consumers should start buying less, or putting off purchases of items that have suddenly gone up in price. University of Chicago economists along with a Federal Reserve Board member illustrated this recently in a paper they published about how tariffs have raised the price of washing machines an average of about $90, which may be leading consumers to delay their purchases. Dryers, which are not subject to tariffs, have gone up an equivalent amount, just because they’re often paired with washers, so companies that sell them figure they have an excuse, so they can get away with it.

Even if Trump’s right that Chinese companies have helped lessen the impact of his tariffs by reducing prices, that’s just money Chinese companies are leaving on the table. It’s not the “billions” Trump brags about flooding into the U.S. Treasury’s coffers. But while it’s important to correct Trump’s proclamations to the public on this, liberal pundits going on a gleeful Twitter spree about how dumb the President is, is also dumb. It’s not stupidity, it’s a con job, O.K.?

More, higher tariffs, should Trump put them into effect at the end of the week, should quickly show how serious China is about going mano-a-mano with Trump on this. If China’s is willing to cut margins further to reduce impact on U.S. consumers, it’s not necessarily a good sign for the President. But it could also put China in a position where its manufacturers will be under a lot more pressure to turn a profit in an already unsteady economy.

As we wrote last August:

A 10% increase on the price of a bath towel at Walmart for instance, might not be that noticeable. Or it might not even appear at all. Walmart could squeeze its Chinese manufacturer into a discount equal to that tariff, the alternative being losing a lucrative contract altogether. Or Walmart could eat the few cents on every dollar and leave the price where it is, assuming the increase will be temporary. A 25% increase however, becomes a lot more difficult to negotiate away or absorb.

Frankly, Trump’s objectives on trade with China are one area where we think he’s doing the right thing, particularly in protecting intellectual property, and including strong mechanisms for enforcement in any agreement. Hear Trump talk about it, and those seem like secondary objectives. But the self-described “tariff man” is always most focused on manufactured goods and commodities. Still, his lead trade negotiator, Robert Lighthizer, seems to know what’s up.

And Trump’s initial round of tariffs did help get the Chinese government to the table. But it also put the President in a position where his preferred and maybe only future option is to do more and bigger tariffs, and hope the U.S. stops importing so much from there as a result.

Even then, in order to work, China’s economy would have to suffer more casualties than U.S. farmers, manufacturers (who rely on custom parts made in China) and consumers (who rely on cheap goods). And China isn’t just going to sit still, it’ll retaliate. That’s why they call it a trade war. Which is really a form of a siege in that it then becomes about who’s got the stomach to suffer the longest.

U.S. consumers, though not fault of their own, aren’t exactly helping Trump’s effort. In fact, the booming American economy may be working against Trump here, because the buying power of American consumers is pretty great right now. So if they’ve got money they’re more likely to spend it, and not balk at slightly higher prices, or suddenly start pinching pennies when they see no reason to do it.

China’s Chief trade negotiator is scheduled to arrive in Washington Wednesday for what was hoped to be a final round of trade talks, but now both CNBC and Bloomberg are reporting China’s reconsidering coming at all. We think this is likely, based on the fact that the Chinese news sources we track are completely ignoring the story, at least at time of publication of this newsletter, indicating the government’s having very deep second thoughts. Maybe they’ve said something by now: click here to check.

So should the President’s Tweets be taken as more of a threat and expression of frustration than “guns blazing” at this point? Yeah, could be he’s fed up after his good faith gesture in December: declaring a cease fire and not expanding tariffs back then. Still, the prospect of slapping tariffs on virtually all goods imported from China in short order is unprecedented.

Before we go, two other factors we think might figure into this decision:

  1. Trump wants to show voters just how tough on China he can be. One of the first lines of attack Republicans have used on Joe Biden, now that the former vice-President has entered the race, is that he recently said China’s “not competition for us”. Implication, if elected he’ll back off and let China have its way with us. Reality: Biden was talking to union workers, and praising them for being able to outshine workers in China. But pretty far fetched to think this useful misinterpretation of Biden’s words factored into Trump’s threat/decision? Well, the reason we got the idea is it’s all over the Twitter feeds of Trump boosters.
  2. Trump’s had a grand vision in his head of signing his grand China trade deal with China’s President Xi at a grand signing ceremony at his grand Mar-a-Lago. This might’ve been on his mind when about a little over a month ago, he said he expected a trade deal could be ready to be signed in about four weeks. But Mar-a-Lago closes for the season before Memorial Day. Of course, Trump could reopen it, we suppose. But part of the impact of doing it there is parading Xi around to the great accolades of his fans/members. Of course, Trump has other properties where he could do the same thing. Still, we’d imagine he could be more than a little bit angry that things haven’t happened at a sufficient pace for him to achieve this oft-articulated vision.
Chinese government released photo of container ship in Port of Ningbo, China