Impact of Tariffs on Reducing Trade, Growth and Opportunity

By at 11 December, 2019, 8:56 am

by Raymond J. Keating-

The more you tax something, the less of it you get. This is Economic Policy 101 stuff, but nonetheless, it’s regularly ignored by politicians. The latest example is trade.

If you impose and threaten to impose higher taxes on international trade – that is, higher tariffs – then trade will stagnate or shrink. And that’s exactly what has happened under President Trump’s trade policies, with the U.S. raising barriers to trade and other nations responding accordingly.

The latest trade data from the U.S. Bureau of Economic Analysis shows continued stagnation and relative decline on the trade front. At $207.1 billion in October 2019, U.S. exports were down from $212 billion in May 2019, and from $210.1 billion a year earlier (October 2018). In fact, U.S. exports in October 2019 were in effect at the same level as December 2017 ($206.7 billion).

Source: Federal Reserve Bank of St. Louis, FRED

That’s no growth on exports for nearly two years with measurements in nominal dollars. If we factor inflation in, exports have declined.

As for imports, the $254.3 billion in October 2019 were down from $266.3 billion in May of this year, and from $266.8 billion in October 2018. If we go back to December 2017, imports have declined – from $257.1 billion to $254.3 billion, with the story growing worse when inflation is factored into the equation.

Two years of stagnation or relative decline on the trade front is:

● Bad news for the economy overall, given that total trade equals 32.1 percent of the U.S. economy, with growth in total trade equaling 44 percent of U.S. real economic growth since 1980. The Tax Foundation provides a valuable rundown on trade actions and their estimated economic costs. In addition, see SBE Council’s brief analysis on how trade policy has been a drag on economic growth.

● Bad news for the small businesses who account for the vast majority of exporting and importing firms in the U.S. Consider that 87 percent of U.S. exporters and 86 percent of importers have fewer than 50 employees.

● Bad news for U.S. manufacturing which relies substantially on trade. As reported by NAM, “Manufacturers in the United States export nearly half of U.S. manufacturing output. Of total U.S.-manufactured goods exports, nearly half were sold to nations with which the U.S. has free trade agreements. In 2018, manufacturers in the U.S. exported $679.5 billion in goods to FTA countries, or 48.6 percent of the total.” And as SBE Council recently pointed out, “When you look at the recent history of output data, it’s clear that manufacturing was hit extremely hard during the late-2007-to-mid-2009 major recession, and suffered a manufacturing-specific recession from late 2014 to mid-2016. Unfortunately, the 2019 data point to the return of a manufacturing recession.”

● Bad news for U.S. workers who earn more in export-intensive industries. According to the U.S. International Trade Commission, workers earn a 19.0 percent premium in export-intensive manufacturing industries and 17.6 percent in export-intensive services industries.

Increased taxes on trade are doing their job, that is, reducing trade, economic growth and opportunity.

Trades occurring between businesses, between individuals, and between individuals and businesses in the marketplace, including across international borders, are, by definition, mutually beneficial. If not, those trades would not occur. Government’s job is not to protect one industry at the expense of consumers and other businesses, and it is not to try to manipulate certain sets of trade statistics based on mistaken political assumptions. Instead, government should be reducing barriers to trade, and allowing opportunity to flourish for entrepreneurs, businesses, workers and consumers.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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