Trade barriers, such as tariffs, could set the world economy on a downward spiral
More and more people are recognizing that Donald Trump may become the next U.S. president. He has already indicated what he plans to do in a second term, and it is not encouraging.
Trump hopes to make America great again by putting a 60 percent tariff on all imports from China (picture an empty Walmart) and a 10 percent tariff on everything else from everywhere else, including Canada. He imagines this will build up manufacturing in the U.S. with lots of good jobs, bringing back the 1950s when America was great. Instead, these tariffs would make the U.S. and its people weaker and poorer.
Tariffs and any other form of protectionism which reduces the competition that local producers face from foreign competitors increase prices. If it costs more to bring goods into the country, they become more expensive. With overseas rivals limited by tariffs, local producers can now raise domestic prices. Inflation runs rampant.
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Controlling inflation involves raising interest rates, which weakens spending, business activity and the overall economy. That does not make a nation greater. And as President Recep Tayyip Erdogan of Turkey has demonstrated, not raising the interest rate at such times makes prices rise even faster.
Inflation means that whatever money you have, whether from earnings or savings, now buys less than it did before. Your cost of living has gone up, and your standard of living has gone down. Sticker shock hits you when buying almost anything, from automobiles to out-of-season vegetables.
Not only do the things you want and need become more expensive, but your options also become more limited. The range of available products diminishes because the country no longer has easy access to all the products produced worldwide. And when U.S. manufacturers no longer need to maintain the same standards as their German, Korean, or other international counterparts for the appliances and equipment they offer, quality and reliability drop.
Invoking the 1950s, Trump and others imagine that the trade barriers will lead to major in-shoring of strong domestic manufacturing with large numbers of accompanying jobs. There are at least two reasons why this is unlikely to happen.
First, unlike in the 20th century, 21st-century manufacturing businesses have to be much more automated and much less labour-intensive if they are to be viable. They need a much smaller volume of workers than was required for the same output in the past.
Second, the skill level of the employees that are needed is high. Basic education in the U.S. has not kept up with the growing demand for a better-trained workforce, especially in the STEM areas; much of the U.S. labour force lacks the educational foundation that businesses now require. When a state-of-the-art chip manufacturer wanted to open a plant in the U.S., it found that the quality of staff it needed was just not available.
There is one other major factor that most political decision-makers fail to consider when they impose trade restrictions. While hoping that reduced imports will lead to more domestic production to fill the gap, they often overlook that the nations affected by these tariff barriers are unlikely to simply lie down and play dead.
A common reaction will be to impose retaliatory tariffs on the goods they import from the U.S. In the past, that may not have mattered much. As recently as the 1970s, only approximately 10 percent of the U.S. economy was engaged in international trade. Today, a quarter of American GDP is related to trade, and it went up to 30 percent pre-COVID.
Given that a substantial 25 to 30 percent of American economic activity is tied to trade, this sector plays a significant role in providing jobs and generating output. Consequently, if international markets are closed due to increased trade barriers, it will result in job losses and a decline in production. If other nations emulate the United States by raising trade barriers, the world could find itself on a similar path to economic hardship that contributed to the Great Depression of the 1930s.
Free trade and open markets have led to much of the prosperity that the U.S. and many other countries, including Canada, enjoy. The well-being of all of us is jeopardized by protectionist actions such as tariff trade barriers, which can potentially set the world economy on a downward spiral.
Let us hope that there are political leaders wise enough to prevent that.
Dr. Roslyn Kunin is a Troy Media columnist, public speaker and consulting economist.
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