WASHINGTON, January 11, 2016 — Republican presidential candidate Donald Trump says that if he is elected, he will place a 45 percent tariff (import tax) on all goods made in China and sold in the U.S. He says that the Chinese government is manipulating its currency to keep the exchange rate low. This, he says, allows China to become wealthy at the expense of Americans.
The reality is that a 45 percent tariff would be a disaster for most Americans.
Trump says the reason that the Chinese government keeps the value of its currency low is to make Chinese goods less expensive for Americans. That means consumers are inclined to purchase Chinese goods rather than domestically produced goods.
This results in a decline in American manufacturing, high unemployment among U.S. factory workers, and a booming Chinese economy which produces billions of dollars worth of goods sold annually in the U.S. The bottom line, he says, is that China is becoming wealthy at the expense of the American worker.
Is he right?
He is partially right. Since Chinese workers are paid only a few dollars per day in wages, U.S. companies find that it is much cheaper to send raw materials to China, produce the goods there and then ship them back to the U.S. for sale to American consumers. The companies can sell the goods at a very low price and still maintain or even increase profits.
The low price benefits consumers. The higher profit benefits the company and the stockholders. It is the American worker who suffers a loss since factories will be closed and workers will permanently lose their jobs. Trump wants to help those workers. The problem is that his tariff will not significantly help Americans who have lost manufacturing jobs, and it will cause large losses for consumers.
Consider the smartphones currently in most Americans’ pockets. Most of us paid about $600 for the phone. If every component were made in the U.S. and the phones were assembled here, they would cost about $1,800. At that price only a small percentage of consumers could afford to buy a phone, and those who could would have $1,200 less to spend on other goods and services. At the $600 price, most Americans have a smartphone.
A 45 percent tariff is not enough to bring production back to the U.S. The cost differential is much greater. The tariff would have to be closer to 200 percent in order to shift manufacturing back to the U.S., and if it were that high, consumers would see a dramatic increase in their cost of living and a decrease in the standard of living.
In other words, the tariff helps a very few, perhaps as little as 5 percent of the population, while hurting virtually everyone else. It doesn’t make sense to appear to help a very few and cause severe problems for the vast majority.
Trump should concentrate on creating new jobs for tomorrow’s economy rather than trying to bring back yesterday’s jobs. It is a normal progression that as economies develop, they shift away from manufacturing and toward providing services. Already services account for about 70 percent of total GNP.
Should we be concerned with China’s build-up of wealth? China grows because they can produce some goods at much lower prices than other countries. Eventually as the Chinese economy grows, there will be pressure to raise wages and raise the living standard of their people. As that happens, their goods may become more expensive relative to some other developing countries which will shift production away from China and toward those other countries. This is how the global economy works.
We all are better off with free trade. Both the U.S. and China benefit, as will any other country that can develop a comparative advantage and engage in free trade. We should encourage more trade, not less. Trump needs to understand this, just in case he is successful with his run for president.
Fortunately only Congress can impose new taxes, so even if Trump wins, the chance of placing tariffs on Chinese goods is very low. And that is a good thing.