Trade wars may not be so easy to win after all. As President Trump’s impulse-drive trade war continues, Americans are bearing the brunt of the damage. Tariffs levied against Chinese goods are failing to prevent imports. Instead, the added cost is forwarded directly to American purchasers. Further retaliatory tariffs have effectively crushed several agricultural sectors. These products required healthy overseas demand to remain profitable. Trump’s administration amplified their subsidy program with an additional $16 billion, in an attempt to prevent further hemorrhaging. The Fed is assuming the situation will grow worse. In an attempt to help, they will likely cut rates.
The trade war sparked due to Donald Trump’s long-standing belief in a severe trade disparity. Despite his best efforts, the trade gap between China and the U.S. continued to increase under his watch. His approach seems less planned and more spur of the moment. Without a more measured approach, success will remain elusive for Trump. In contrast, China’s methodology is the perfect contrast. Beijing is all too aware that Trump’s time as president is limited. If they can survive his administration, they may be in the perfect negotiating position.
Increasing Subsidies Damage Viability
Subsidies are a necessary economic tool. They can be used to support new businesses as they work towards profitability. They can protect valuable infrastructure during times of hardship. However, they can also keep obsolete industries alive. Soybean farming is proving one of the worst casualties of the ongoing trade war. Without Chinese demand, soybean farms are floundering.
This economic disaster is entirely a result of current economic policy. As such, Trump’s new subsidies are likely pressuring the average American. Taxpayer money is now necessary to keep many farms alive – despite a thriving market and high demand. Chinese demand for soybeans did not drop, they simply started purchasing crop from other countries. Further, if they must worry about threats of trade war down the line, there is no reason to shift back to purchasing U.S. goods.
Trade War Destroying Entire Industries
Beyond the farming industry, other sectors of the U.S. economy are also suffering. U.S. manufacturing is often seen as the gold standard for American jobs. Yet, these jobs depend on raw materials – mostly imported from countries like China. Tariffs dramatically increase the price of raw materials. In the most severe cases, this price increase causes businesses to suddenly stop being viable.
Steel, aluminum and even lumber are critical to manufacturing businesses. If they cannot source these materials at a profitable price point, then companies will go under. Some may be able to limp through a shorter crisis. Unfortunately, Trump stated his willingness to prolong the war through 2020.
Article By: Adam Stone