From reading my blogs, you must have figured out that I am an engineer or have a technical background and you are right. In this blog, I want to show how engineering tools apply to tariffs and trade.
First off, you need to have a basic understanding of "free body diagrams". Engineers analyze complex situations by drawing a circle around a body or component and then accounting for all forces acting on the body. Here is a simple example. Think of yourself standing on the side walk on a clear calm day. If I were to drew a circle around you, I would notice that you were not moving and in total equilibrium. There are forces on you, but they are all balanced so that you are standing perfectly still. The Earth's gravity is pulling you down with exactly the amount of force that your legs are pressing against the sidewalk. If a wind was blowing, you would be leaning just enough to compensate for the force of the wind. Are you starting see how it works?
Now tariffs and trade. If China were to apply a duty on wheat from the USA, it would hurt our farmers, by lowing the price they get for their wheat. There are only a few wheat farmers, so they would be screaming to Washington DC like mad. With the lower price for wheat, it would mean that the cost of bread would go down and millions of people here in the USA would save a few cents. Using the free body diagram concept, the savings by people who eat bread would be almost equal to the loss in profits by the farmers. Is this sinking in?
Our politicians always respond to the loudest voice and in the above case it is going to be the farmers, not the million of people who eat bread. Now, where is China going to get wheat if it is not from the USA? How about Argentina? If China starts to buy their wheat from Argentina which may cost them a little more, what is the impact? Argentina only has so much wheat so the customers who used to buy wheat from Argentina are now going to have to buy wheat from the USA. The problem with the talking heads on TV and most of the people who are watching can not focus long enough to see the full free body diagram picture.
The problem that we have with most of the trading world is that most have some kind of duty aganist the USA. The end result is that they have farmers who are not very good at growing wheat, but their government protects them at an additional cost for bread to their own citizens. Since it only increases the cost of loaf of bread by few cents, most don't even notice what is going on.
There are many cases where not all the people in a country can be competitive in the world wide play ground and that is where the problems come in. If a country has a bunch of farmers who can "not" do anything else but grow wheat the alternatives are limited. The country either has to let the farmer go on welfare or protect their market for wheat in their own country. Citizens of that country pay a little more for a loaf of bread as an alternative to paying the farmer who would be out of work on welfare.
Every country needs to have an economic policy that can sustain them for the long term. We had a short term policy after WWII to help broken countries at our expense. That was clearly not a policy that any country could sustain long term and that is why we need to change it into a long term policy with "balanced" trade. It this too simple?
China does not have very much natural resources compared to its number of people. That is a fact, but they do have a lot of hard working people who do not earn very much. China is in a transition period where their poorer workers are earning more. As long as they are poorer than countries like the USA, they will have a price advantage against us on "value added products. What is happening is a rebalancing with China narrowing the gap between them and the USA. How fast that rebalancing takes place is the big problem. We all want to remain much richer than China and the way we do that is to "slow" the rate that China closes the gap. How do we do that? With tariffs if necessary so that our non competitive workers have a job and are not on welfare.
What we all need to do is to start looking at a bigger and longer term picture and not jump at every bump in the road like the wheat example that I have used about.
PS--If you want to get a better understanding of this problem, you should check into our "sugar" protection policy. Sugar costs almost twice that of the world market so that our government can protect sugar beet farmers. Note also that ethanol is made from sugar!
PS--If you want to get a better understanding of this problem, you should check into our "sugar" protection policy. Sugar costs almost twice that of the world market so that our government can protect sugar beet farmers. Note also that ethanol is made from sugar!
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