China and the United States are set to sign a first-phase agreement on trade Wednesday that will ease some of the tensions, and the economic burdens, the two nations have imposed on each other recently.
This is good news, and we hope it begins to end some of the uncertainty that has existed when it comes to conducting business between the two largest economies in the world.
But while people may argue endlessly about whether tariffs are proper weapons in a broader effort to stop perceived abuses by other nations, there can be no arguing that tariffs don’t harm people at home, nor that they don’t protect American jobs, despite the claims by politicians.
Those facts may be difficult to perceive at a time when the U.S. economy is booming, with low unemployment and with inflation hovering at around 2% per year. But if you apply a magnifying glass on the sectors directly affected, you can see it. Some experts say tariffs are the reason economic growth is at 2% today, rather than the 3% rate of two years ago.
The Wall Street Journal recently published a detailed analysis of those who were damaged by the trade war with China. U.S. farmers topped the list. Considering only 1% of the nation makes its living off the land, this may have escaped everyone else’s attention.
Exports from U.S. farms to China went from nearly $25 billion annually to less than $7 billion at their lowest point during the trade dispute. According to the Journal, farmers went into debt at a record level last year, even as delinquencies and bankruptcies increased. Meanwhile, hard-earned relations between U.S. agricultural interests and China might be difficult to mend long-term.
The tariff war reduced exports to China by almost $30 billion, without reducing the trade deficit much at all. Meanwhile, the loss of imports hurt several manufacturing businesses in China, driving several of the smaller ones into extinction.
While the trade war raised the cost of several products by an average of about 3%, little of this was passed onto consumers. That means importers and retailers absorbed the extra costs, which affected their bottom lines.
Finally, the tariff war affected economic growth in both countries, although the effects were less pronounced in the United States because of the overall strength of many sectors. Businesses thrive on certainty, and the constant threats of tariffs and retaliation from one side to the other made for an uncertain climate that stifled investment.
The first-phase agreement that was expected to be signed this week cuts some tariffs in half and commits China to increase purchases of goods and services. China has agreed to stop requiring U.S. companies to hand over corporate secrets in exchange for the right to do business, and U.S. banks, financial and insurance companies will be more free to expand.
The U.S., in turn, will no longer label China a “currency manipulator,” in exchange for measures designed to stop China from devaluing its money.
But disputes haven’t ended. Many imports still will be subject to tariffs, and many more issues are left to resolve.
The question still under debate is whether the same results could have been achieved without a trade war. Answers there aren’t clear, and you can be sure some future politicians will find it hard to resist the lie that tariffs are necessary to protect jobs at home.
Meanwhile, the casualties of this war may not recover for a while.