Explaining Trump tariffs

“Tariffs are a tax on consumers”

It isn’t as simple. When you introduce tariffs, the chinese exporters will only be able to transfer part of this cost to the US customer as price increases, because they face competition for these customers’ dollars, which may directly come from similar goods produced domestically in the US, or indirectly as customers shift their spending to other things. So part of the tariff will be absorbed by Chinese capital, in the form of depleted margins – hence they won’t be fully transferred as a tax on consumers.

Another thing to consider is that US trade with China is not symmetric – US purchases are skewed towards Chinese consumer goods, whereas China purchases are skewed towards US based or dollar denominated capital assets, particularly real estate. This effectively means that the US is consuming its own capital as payments for consumer products, and China is accruing capital. That situation is beneficial for real estate and capital owners in the US, but detrimental to most people, as they compete with Chinese buyers now for their homes and stocks and so on, as well as with Chinese workers for wages. This happens primarily because capital is more efficiently deployed in China than it is in the US. That is partly due to their labor being cheaper, but also regulatory and tax burden. A tariff on China makes their relative efficiency in that market less prominent.

Tariffs will impact this trade relationship in that US customers will buy less consumer products from China, and Chinese capitalists will buy less US real estate, US dollar denominated debt or equity, etc. The net effect on employment will likely be positive in the US and negative in China, as the trade prior to tariffs was more labor intensive in China. So wages in the US go up, and wages in China go down. US capital that was being bought by China suffers a loss, which is the reason why a lot of elites hate Trump tariffs. Another impact is that since government revenues increase with the tariff, the deficit decreases, and therefore less debt is monetized, causing lower inflation.

These are a few of the reasons why using tariffs against asymmetric and potentially adversarial trade partners was not the economic disaster predicted in the first Trump term. Another reason is that it creates leverage for negotiation with China and other countries that may abuse trade imbalances or international law or arbitrage environmental regulation etc. The real world is often more complicated than the first order effect that we learn in economics 101. It is true that in an ideal world the US would deregulate and reduce the government burden on domestically deployed capital to become more competitive against these other partners, but tariffs is something that can be used too, and is more expedient for the president to do.