Paying tax for the 1% in tariff war

Sunday voices: Thomas A. Regelski

The Bush administration’s 2007-08 “Great Recession” caused hardships for job seekers, instability in the business community, devastating losses for some home mortgagees, and stress on personal budgets. The corrections taken during the Obama administration began a slow but steady improvement in world economic health and, in particular, in the American stock market that continued to expand until recently.

Investments made then (or already in place despite losses in 2007-2008) would grow to today’s lofty levels. Then, in 2018, the Trump administration created instability in the market by introducing tariffs on friends and foes alike. The administration knowingly spread the lie that these tariffs are saving the American taxpayers huge sums of money when the truth is that they are in fact taxes paid for by buyers of imported goods (and the many American-made products having imported parts). A 30% tariff on an imported washing machine raises the price of that purchase to America consumers. It is, in effect, a 30% tax that makes up in part for the tax breaks given by the GOP to the 1%. That’s right: you are paying their taxes!.

Worse, last week President Trump tweeted, “The U.S. will start, on September 1st, putting a small additional Tariff (sic) of 10% on the remaining 300 Billion Dollars [sic] of goods and products coming from China into our Country (sic).” This surprise tariff announcement came just after the U.S. and China had restarted the first in-person trade talks since the G-20 summit, and it complicated those deliberations. China retaliated to Trump’s move with two harsh countermoves of its own.

First, it formally halted all U.S. agricultural purchases by Chinese government-owned entities. Among agricultural products banned were American wheat, soybeans, rapeseed, corn, and hogs. The American Farm Bureau Federation described this retaliation as a “body blow to thousands of farmers and ranchers who are already struggling to get by.” While earlier Chinese retaliation to Trump’s tariffs affected all Americans, this new strategy by China hits especially hard at middle-class consumers, being; purposefully aimed to hurt a large segment of President Trump’s voter base: farmers.

China’s second move was more troubling to the stock market, international business, and American and other consumers. It strategically allowed its currency, the yuan, to weaken against the dollar. The lowered value of the yuan dictates how many dollars a U.S. consumer has to pay to buy something made in China. With the lower valued yuan, President Trump’s tariffs are substantially less effective. Previously the yuan was 6.2 to the dollar-meaning, it took 6.2 yuan in exchange for a dollar’s worth of goods. But when the exchange rate is 7.4 yuan per dollar (as of Aug. 13), importers pay less for the same goods. Subject to Trump’s 10% tariff surcharge, the discounted yuan thus eats up the extra profit to the Chinese exporter, and the cost to the American importer remains about the same. The intentional weakening of the Chinese yuan nullifies Trump’s tariff. He has been outmaneuvered!

This give-and-take led to extremely unstable results; the S&P 500 seesawed up and down, and bond yields fell to new lows. Given the president’s undermining of his tariffs and the now floating rate for the Chinese yuan, market volatility is all the more likely to continue. Thus, the trade war started by Mr. Trump continues to roil markets. The trade war the president assured the nation in March 2018 as “good, and easy to win” hasn’t gone away or been won.

Continuing market volatility is thus likely for the future. And the present is questionable, as well. Last week, the Dow Jones and the S&P 500 both fell 3 percent. The yuan is at an all-time low compared to the dollar. The “yield curve” — the difference between three-month and 10-year Treasury rates — that has historically served as a prophetic gauge of the economy — has inverted to its widest level since 2007, the year the U.S. fell into the Great Recession. On Wall Street, which Trump claims to follow regularly, the Dow Jones has dropped nearly 1,500 points since last Tuesday. It’s now lower than it was when Trump initiated the trade war in early 2018.

Trade wars are not good for markets that prefer stability, and they are not easy to win! In the meanwhile, American voters are suffering the ill-effects of tit-for-tat tariffs, especially farmers and the middle class. Mr. Trump’s prediction, in this case, is no more accurate than the host of other mistaken statements of fact he is guilty of tweeting. This one, however, hurts the electorate and is not easily ignored in judging the believability of Trump’s White House.

A sign of good governance is an electorate that has overwhelming confidence in the government it elected. This is certainly not the case in the present and other instances

Trump’s “Market Facilitation” program was supposed to limit taxpayer-funded bailouts of farmers to $125,00. However, many members of a family in debt due to Trump’s tariffs can qualify as owners of the same farm and thus are eligible for bailout money, even if they do not farm, and live in Los Angeles! Thus, one Missouri farm family got $2.8 million worth of subsidy and more than 80 families topped half a million in payments. However, the great majority of farmers, e.g., 80% of eligible grain farmers, got nothing! Smaller farms that are most endangered by his trade war got less than $5,000. Not surprisingly, Trump’s “Market Facilitation” denies assistance to the many who are most in need by helping a few of the largest get even bigger. Again, taxpayer monies go mainly to the rich few.

Thomas A. Regelski is an emeritus distinguished professor at the State University of New York at Fredonia. Send comments to tom.regelski@helsinki.fi.