Playing with economies

Some announcement from the White House, or from President Trump, and the stock market reacts. That's basically what happens, because when the U.S., with the world's biggest economy (although it may soon be surpassed, from the way things are going), wants to do something, there is an impact on the global economy.

So it should be no surprise that the stock market plunged with announcements on tariffs on steel and aluminum. And no surprise the stock market plunged again with announcements on tariffs on Chinese products.

But will these tariffs really make America great again?

Tariffs on steel and aluminum means it is more costly for manufacturers in the U.S. to import steel and aluminum. If the total cost (import price + tariff) is less than the cost of local steel/aluminum, U.S. manufacturers will then have an incentive to switch to locally-produced steel and aluminum, thereby potentially adding jobs to those two industries. But that is just a "maybe". Manufacturers may also choose to continue importing steel and aluminum, and pass on the higher costs to consumers. At the same time, even if they choose to switch to local steel/aluminum, if their prices are higher than imported steel/aluminum (before tariffs), that additional cost is likely to be passed onto consumers too.

At the end of the day, consumers will end up having to bear the burden of whatever increase in costs the manufacturers face. And if manufacturers do not choose to switch to local steel/aluminum (since they are not bearing the cost increase anyway), there may not be any real effect on bringing jobs back to the U.S.

So consumers lose, and the steel/aluminum industry may not win. Strike one.

As for tariffs on Chinese products... well, unless existing manufacturers in the U.S. have the spare capacity to ramp up production to meet current demand when Chinese products get taxed, people will continue to have to import Chinese products, only at higher prices (import price + tariff). Again, the tariffs do not guarantee retailers will switch to local products; they may continue to import Chinese products and pass on the extra cost to consumers. It is the same situation with steel/aluminum; consumers have to pay for whatever increase in costs, and there is no guarantee there will be a positive impact on bringing back jobs.

So consumers lose, and the manufacturing industry/labor market may not win. Strike two.

A large amount of the trade deficit between U.S. and China is actually poured back into the U.S. as China uses that money to buy U.S. bonds. A smaller deficit may mean China is less willing to spend on U.S. bonds. Which is not a problem if the U.S. budget is balanced and spending within its means, but when you keep having deficit budgets and have to issue bonds to fund spending, someone needs to buy those bonds. If China doesn't buy those bonds, interest rates will have to go up to entice others to buy. This raises interest rates in the U.S., which may not be a good thing for businesses (since it is an increase in the cost of borrowing) and a direct burden to households (who may see an increase in interest rates for home loans).

So borrowers in the U.S. lose. This happens, and it will be strike three.

I guess we shouldn't be playing with economies without fully understanding the impact on all stakeholders, both within and outside the country...