Tariffs, once they result in inevitable retaliation and a new trade war, can cause havoc to the economy.
Newly elected President Trump has been quick to unleash his most beloved economic policy, tariffs. Among other things, Trump claims they will lead to a renewal of the U.S. economy. On March 4, Trump followed through on his threat to impose 25% tariffs on Mexico and Canada and double existing tariffs on China to 20%. However, two days later he delayed the tariffs on Mexico and Canada and exempted automobiles for one month. The next day, following the U.S. stock market plummeting, Trump exempted many products from Mexico and Canada from the tariffs that fall under a previous trade agreement. Further tariffs are planned next month, though it’s possible that Wall Street will again force Trump to back down.
The immediate effect of the tariffs (if they end up going into full effect) would be an increase in prices across a wide range of products. For example, after the auto industry tariff delay expires, the price of the average car will rise by $3,000, since 22% of all vehicles sold in the U.S. are imported from Canada or Mexico. It is estimated the price of gas could rise 40 cents a gallon within days.
Tariffs, once they result in inevitable retaliation and a new trade war, can cause havoc to the economy. Canadian Prime Minister Trudeau has already promised that Canada’s tariffs on the U.S. will remain in place even if Trump backs down. As trade walls go up, trade declines and the economy tanks. Trump’s obsession with tariffs is a bomb that can tip the world economy into recession. This happened in 1929 when massive US tariffs led to a trade war, turning a world recession into a global depression.
“Simulations have been done on the full tariffs against China, Canada and Mexico and, if you believe them, we’ll be in recession in nine to 12 months,” Carl Tannenbaum, chief economist at Northern Trust. Greg Daco, chief economist at financial and accounting advisory firm EY, agreed. “You can’t underplay the potential drag on economic damage. This is a recession for North America,” he said. Ultimately, Trump’s tariffs reflect the weakness—not the strength—of U.S. capitalism and its inability to spur growth, orchestrate new investment, and increase profits.
How Tariffs Hurt Workers
A tariff is a tax imposed by the government on the import of goods. The company that brings the goods into the country is responsible for paying the tariff, and these companies pass their costs to their customers and drive prices up for working people.
Different nations have shifted their trade policy between tariffs and free trade. Each has adopted a trade policy they hope will gain a competitive advantage over their rivals. At present, facing a 70-year long decline in its position as the most powerful nation in the world, the U.S. is looking to be more competitive on a global market. In particular it is looking to contain China. Trump and Biden turned to tariffs to prop up the U.S. economy. But will they work?
Trump says tariffs will result in a renaissance of U.S. manufacturing. But the world is much more complicated than Trump’s promises. There is no automatic relationship between increased tariffs and a strengthened economy. To see this, we need to dig a little deeper into how the capitalist system works.
Real wealth is created through increased production of goods or useful services. Under capitalism, the big corporations will only expand production if they are able to make a larger profit. Individual capitalists make decisions not based on where they produce goods, or if it will benefit a certain country, or even society as a whole, but solely looking at their prospects for future profits.
Under the neoliberal globalization policies of the last 30 years, capitalists have directed new investment to wherever production was cheapest in the global markets. The winners were the global corporations most able to produce products in cheaper labor markets overseas. In the U.S., this led to economic stagnation, fewer well-paid jobs and increased inequality. This was part of the global downward spiral of wages. This led to the great recession 2008, and the subsequent global revolt.
Trump has promised tariffs as a solution. But tariffs don’t help workers, they’re just another way for the bosses to make profits. Increasing the prices of goods from overseas doesn’t necessarily stimulate U.S. companies to innovate. It’s often more profitable and safer for U.S.-based companies to match the price increase and make super profits. New spending is often then directed into speculation (like betting on the stock market) instead.
Problems of Capitalism
The only way to actually grow the U.S. economy is if corporations build new plants, industries or offer better services. The problem is they need to find a market, and global markets are already saturated. So they need to make products that are cheaper than their competitors.
There are two ways to do this, and neither benefits workers. They can: 1) Directly cut wages, speed up on the job or cut benefits, or 2) Introduce new technology. Either way, the idea is to spend less money on the amount of labor in each product.
Cutting labor costs directly, using the same technology, hits workers directly. Workers will have lower living standards. But it also reduces the ability of workers overall to spend money, since they have less of it. This leads to a lower-wage society where workers can’t afford to buy things the capitalists are selling.
Investment in new machinery is more complicated, and risky for the capitalist. New technology means spending more money on machines, which can then reduce the amount of labor needed to produce goods and services. But since labor is the only cost that can create new wealth, with each item holding less labor, the capitalist has to sell many more products to make a profit. But markets are already saturated. So they may spend all this money, and then fail to outcompete their rivals.
Considering the risks and upfront cost, corporations often turn to the government for handouts. But in the end, many will fail, or abandon their project and just pocket the handouts. Biden’s plan to build semiconductor factories in the U.S. promised $120 billion to Intel but construction has been pushed back repeatedly because of the lack of a market. Despite taking billions in state investment, Intel has yet to produce a single chip in the U.S.
This difficulty of finding easy profitable investments is a central crisis of capitalism on a global scale. This leads most investors to look for a quick buck on financial markets which promise a good rate of return with less known risk. This leads to bubbles, and crashes as has been seen repeatedly during the last 150 years.
What is the Solution?
So if free trade and tariffs don’t provide an answer for working class people, what is the solution? The crisis of the economy flows from the flawed system of capitalism. Capitalism is a system that depends on expanding production of goods and finding markets beyond their borders. This unplanned aspect of capitalism leads to conflict, trade wars, and real wars.
The economy needs to be organized and planned on a global level to provide for our needs, the needs of the working class, not the profits of big business. That means a national and global socialist plan of production. To do that means expropriating the major capitalists, in other words taking their enormous wealth and redirecting it toward the needs of society and the planet.
Neither tariffs nor free trade policies are in the interests of the working class. We need to reject the warped logic of the capitalist system. Working-class people need public ownership of the major corporations and banks that dominate the economy, and for decision-making to be in the hands of the majority – the working class.
