A while back I paid $9.98 for a pair of memory foam sneakers from Walmart, which were made in China. Lately, I noticed that the price has risen to $14.98 at Walmart. I was curious about the price increase so I investigated how this may have come about and what to expect in the future.
What I learned is that when a Walmart shipping container from China arrives at the port in Long Beach, California, a United States federal inspector prevents the Walmart driver from driving away with the Walmart shipping container until a broker representing Walmart has Walmart pay the tariff for the particular items in that shipment.
Naturally Walmart can’t afford to pay a permanent Walmart employee to be stationed at every port of entry into the United States (seaport, airport and border crossing). But at each port of entry into the US there are brokers, where each broker represents a different set of companies that import products into the US. Walmart has arranged in advance to have a broker to represent it at the ports of entry that it might use.
When the Walmart sneakers from China are priced at the local Walmart store, the price has to cover the price paid for buying the sneakers in China, the travel cost over the Pacific Ocean, the tariff and the cost of driving those sneakers to the local Walmart store, along with overhead costs (such as paying the Walmart employees) and a little bit of a profit. Of course, Walmart’s fundamental marketing strategy is to sell an enormous amount of products by offering them at the lowest possible prices, which means keeping its profit margins on individual items very low. What that means in practice is that Walmart must either incorporate the tariff into the shelf price or drop the item altogether if the tariff makes the product too expensive.
Of course, as the tariff is part of the shelf price, the cost of the tariff is not broken out separately on the sales slip. It also means that the state and local taxes on the sales slip are being applied to the tariff along with the other costs included in the shelf price. In other words, in effect, the state and local sales taxes are being applied to the tariff. You are paying a tax on a tax!
As a source of revenue, unlike an income tax, a tariff is similar to a sales tax in that it is not based on your ability to pay. It is what economists call a regressive tax. Moreover, tariffs are not an unlimited source of revenue. A small tariff may bring in a bit more revenue, but if the tariff gets too large, customers say: “No way! I am not going to pay that much.” As tariffs get higher, fewer customers buy that product, and stores just switch to some other source or drop the product altogether. In that case, the revenue from the tariff can drop to zero. President Trump’s idea of benefiting the rich at the expense of the poor by replacing the income tax (based on ability to pay) with tariffs (paid regardless of ability to pay) is totally unrealistic.
It is certainly true that the United States has a trade deficit with China. The total value of all the items that we import from China far exceeds the total value of the items we sell to China. Is this bad? The idea that we must maintain balanced trade with each country makes no sense. We may export a lot to some countries and import little from them. We may import a lot from other countries (such as China) and export little to them. Having a balanced trade with each and every country is like saying we must work at Walmart to pay for everything we buy at Walmart. The whole point of trade is to use money to sell to some and buy from others. Having perfectly balanced trade with each country makes no sense.
Even the idea of maintaining an overall balance of trade with the value of exports matching the value of imports may not always be in a country’s best interest. For example, the U.S. dollar serves as the world’s reserve currency. Ordinarily, if a country issues too much of its own currency, the value of its currency will fall in international markets making its products cheaper for other countries to purchase but making the products of other countries more expensive for its citizens to purchase. This just generates inflation in the country that issued too much of its own currency.
However, the United States is in a unique position in that the U.S. dollar is used as the world’s reserve currency. As world trade expands, the demand for U.S. dollars expands. This means that the United States can get away with issuing more of its currency without generating inflation in the United States, as long as it limits its increase in U.S. dollars to the increase in the world’s demand for U.S. dollars as the world’s reserve currency. In other words, the United States can (to a limited extent) get something for nothing in world trade. Running a long-term international trade deficit on this basis may not technically be colonial exploitation, but it has some of the same implications. This may not have been intentional, but the United States certainly has benefited from being able to run a long-term trade deficit.
To understand US-China trade, we must step back and look at the bigger picture. When China transitioned from communism to its own version of state led capitalism, it was also undergoing a major transformation in agriculture. The transition from labor intensive agriculture to the extensive use of machinery in agriculture freed up a large number of rural people to move into Chinese cities in search of jobs.
This created a political problem for China. The last thing that China wanted was political unrest. But China did not have a large enough middle class to buy all the products that this large number of peasants coming in from the countryside were capable of producing. The solution was to temporarily “borrow” the American middle class to provide the demand for the products that these peasants could produce in newly created Chinese factories.
Consequently, China takes its natural resources and has its workers work hard to make products for us. We get high quality products from China (such as my memory foam sneakers) at very low prices. In return, instead of sending China a lot of our products, we send them pieces of paper with George Washington’s picture on them (US dollars). In other words, instead of sending a large number of our products to China, we keep most of our own products for ourselves.
Ordinarily, those US dollars would flow into the foreign exchange markets and drive down the value of the US dollar while boosting the value of the Chinese yuan. But this would make Chinese products more expensive for Americans to purchase and reduce the demand for products from China. To prevent wide-spread unemployment and political unrest, China has its businesses turn in those US dollars to the Chinese government in return for the Chinese yuan. Then China’s government uses those US dollars in its sovereign wealth fund to purchase US Treasury securities in the New York financial markets.
The big picture is that China sends us high quality products a low prices, but we keep most of our own products for ourselves. China is helping to finance our international trade deficit. Then China takes the US dollars we use to buy those Chinese products and loans them back to us to finance our internal federal deficit spending. Who is getting cheated? Hint: It is not us. Instead of criticizing China, we should be praising China for being so generous, or at least keeping our mouth shut and going along with a trade relationship that favors the USA.
Trade between nations, as between people generally, enables the division and separation of labor. Even if you are better at auto repair and roof replacement, you may not have the time to do everything yourself. The same is true between nations. Economist David Ricardo (1772-1823) developed the “law of comparative advantage” that tells us that even if we are better at everything, we still benefit from focusing on those things that we do best and let others handle the other stuff. The very best stock broker may also be the very best heart surgeon, but trying to do both jobs may be a bit too much.
What about employment is the United States? Don’t we want to create more jobs for US workers? This implies that there is somehow a fixed number of jobs in this world, and we need to fight over them. Economists call this the lump of labor fallacy. Proper fiscal and monetary policy can create as many jobs as we want as long as we don’t overstimulate the economy and cause inflation.
The real issue is the quality of the jobs. Every country must decide for itself how much taxpayer money to invest in the education of its people from elementary school through college. We not only benefit from our own education, but economist William J. Baumol (1922-2017) revealed that there is a considerable spillover effect that transfers substantial benefits from the education of some to the well-being of others. As retiring baby boomers get older (and sicker), they will come to appreciate the education of nurses and heart surgeons. Given the substantial spillover effects, American taxpayers would do well to consider extending educational support beyond high school to vocational education and college. This could greatly expand the number and quality of higher paying jobs in the United States. Germany already makes most college education tuition free as do the Scandinavian countries. Norway and Finland make college tuition free for all students including international students, while Sweden and Denmark make college tuition free only for EU/EEA students.
For political reasons both President Biden and President Trump have favored the US Steel Workers who are well organized. But using tariffs to protect jobs in the steel and aluminum industries just causes job losses in the industries that use steel and aluminum by blocking inexpensive steel and aluminum imports such that the prices of steel and aluminum rise sharply. For example, about fifty percent of an automobile is made from steel and aluminum. Rising steel and aluminum tariffs may mean more jobs for US Steel Workers in exchange for higher automobile prices and fewer jobs for workers in the automobile industry.
President Trump wants to restore labor-intensive production in manufacturing. But it is automation and not globalization that has destroyed those jobs. Instead of sending thousands of coal miners underground, a small number of workers now use giant earth moving equipment to remove mountain tops to get at coal seams directly. Some manufacturing plants are so automated that they use “lights out” manufacturing where robots work through the night in the dark without any workers on the assembly line.
China is way ahead of America in the production and sale of electric cars, which are cheaper to produce and can ultimately run on solar and wind power stored in ever-more-efficient batteries. President Trump wants us to return to the past, but the higher cost of steel and aluminum along with his blocking our transition to cheaper electric vehicles is going to make American vehicles ever more expensive while China provides ever less expensive vehicles to the rest of the world. Also, China’s middle class has grown from about 3 percent of its population in 2000 to over 50 percent of its population today so it no longer needs to “borrow” America’s middle class to create enough demand for its products to keep its people employed.
President Trump’s trade war with China also affects American agriculture. American farmers sell a large volume of soy beans and other farm products to China. But in response to President Trump’s tariffs, China has imposed high tariffs on farm products from America. However, China does not want political unrest in China with food prices rising because of the high tariffs on farm products from the United States. Consequently, China is lowering or dropping altogether tariffs on farm products being imported into China from other countries, such as Brazil and Argentina.
Since the end of World War II the United States has been seen as a reliable and dependable trading partner. President Trump’s use of tariffs a a bargaining chip has convinced China and other countries that they can no longer rely on the United States, so some are permanently switching their imports to other countries that they consider more reliable. As the Canadian prime minister said: “The United States is no longer a reliable trading partner.” The use of the tariff bargaining chip has turned into a long-term loss for American farmers and other workers as well as the cause of substantial increases in the prices of products that we were previously importing from China and other countries.
A good way to lower prices quickly and effectively is to eliminate virtually all tariffs. By following the win-win strategy and eliminating tariffs everywhere, the USA and China can both be winners.
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