How Trade Tariffs Hurt The Economy

Since I’m not smart enough to explain how trade tariffs work (or even spell tarrifs), I’ll just shameless quote Christopher Hancock from The Penny Sleuth.

We believe trading partners are better off specializing in the good in which they are the low-opportunity cost producer. We believe restrictions on trade decrease the wealth of our country.

We believe tariffs benefit the select few at the expense of the entire economy and its citizens.

Think of it this way…simple example…China produces widgets for Wal-Mart at $20 a widget. American producers can’t do the job for less than $25. So American widget makers may lose their jobs. They plead to Washington, and Washington comes to the rescue. Congress slaps a $10 tariff (tax) on all Chinese imports. Wal-Mart now turns to the American widget producer.

But the retail giant must now pay $25 for each widget they stock. Consequently, they raise the shelf-price for widgets by 25%. Unfortunately, many American consumers simply can’t afford the price increase. Wal-Mart sales drop. The company is forced to cut costs. They lay off 10% of their work force.

The point: The number of jobs protected by import restrictions will be offset by jobs lost in other industries. And to top that, widgets are now more expensive for everyone in the American economy.

It gets better: In response, China decides to slap tariffs on American exports. Now American semiconductor makers can’t sell their products to Chinese computer makers. Sales drop. More jobs are lost.

And here’s where it gets worse: China cleverly cedes to America’s demands. The yuan appreciates 40%. Now every good we consume sporting the “made in China” labels gets noticeably more expensive. And just try buying something that’s not made in China.

Furthermore, China no longer has to keep the yuan from appreciating relative to the dollar. Meaning, China’s dollar demand drops. The fundamental need to buy U.S. Treasuries no longer exists. The dollar falls even further. Investors around the globe now requrire a higher rate of return to hold U.S. dollars. Interest rates rise. The economy slows…and so on…and so on.

There really isn’t anything left for me to say (except buy foreign-currency denominated investments)!

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