President Trump thinks new tariffs on certain imports will protect American jobs and make US workers better off. But tariffs can also make some people worse off, and they may even degrade American living standards if Trump goes too far.
“These are things which raise basic prices for US consumers,” Scott Minerd, chairman of Guggenheim Investments, told Yahoo Finance at the Milken Institute Global Conference in Los Angeles. “And that basically impacts their standard of living.”
Trump himself is still wrestling with the severity of the tariffs he wants to impose. He recently postponed the imposition of tariffs on imports on steel and aluminum from friendly allies for one month, to June 1. And his administration is still working through a long list of Chinese imports that could be subject to new tariffs.
Many economists and investors warn that the types of tariffs Trump wants to impose could have unintended consequences that do more harm than good. Tariffs are supposed to protect domestic jobs, companies and industries, by making competing products imported by foreign firms more expensive. But tariffs allow domestic producers to raise prices, since the competing imports are now more expensive – which means firms and consumers purchasing the protected products pay more, leaving less disposable income for other things.
The United States had a trade deficit of $376 billion with China in 2017, and Trump wants to close that gap by at least $100 billion per year. But there are many reasons that trade deficit exists, and it benefits Americans in many ways. We buy cheap products made in China, while China holds the dollars we spend on those products in reserves, and uses some of that money to purchase US Treasury securities. That helps keeps interest rates low, making it easier for Americans to borrow for homes, cars and other things.
Modest adjustments in trade with countries like China probably wouldn’t harm the US economy. But the question now seems to be whether Trump will settle for nominal changes, or demand bigger ones. “While the growth in trade over the last 30 years has raised living standards around the world in an uneven fashion, meaning some countries have benefited more than others, all boats have risen on the tide,” Minerd says. “And to jeopardize that would be to jeopardize, essentially at the end, not just our living standard in America, but actually even our national defense and global hegemony.”
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman