The national economy is robust and strong – with reports of four percent growth last quarter and low unemployment – but a global trade war could bring a halt to this economic prosperity. Recently implemented trade barriers risk eroding economic gains and lowering our quality of life by taxing imports used by American businesses and consumers.
As tariffs are increasingly levied by and against the United States, trade has become distorted. In a global trade war, everyone loses.
When trade is free of coercion, it benefits both the buyer and seller. Trade allows societies to add value and create wealth.
For example, when you shop at your favorite retailer and decide to make a purchase, you freely judge a product or service to be worth more than the money you exchange to buy it (and the labor you gave to earn that money). Likewise, producers of goods and services only make their products available for purchase when they believe the money received will be more valuable to them than the product or the labor that provided it. Assuming a transaction occurs without fraud, deception, or coercion, trade is mutually beneficial.
This mechanism also applies to international trade.
Unfortunately, there can be barriers that limit our ability to make mutually beneficial transactions. Some of these barriers occur naturally, such as search costs and transportation costs. Search cost is the time and effort buyers and sellers need to find each other in order to engage in trade. Transportation cost is incurred by both sellers and buyers to move goods to the marketplace and into the buyer’s home.
Not all trade barriers are a natural feature of the market. Some barriers, such as taxes – or in the international context, tariffs – distort costs and influence the decisions of market participants (both buyers and sellers).
A tariff, just like any other tax, disincentivizes transactions that would otherwise be mutually beneficial. This creates what economists refer to as “deadweight loss”, or, explained simply, gains lost by both consumers and producers due to distortions in the market caused by state actors.
Denying Americans access to competitively priced international goods and production inputs could hurt domestic producers by artificially raising prices.
For example, recently implemented tariffs on foreign plastic polymers and aluminum imports may raise production costs for many of North Dakota’s important industries. These inputs impact the cost of extracting and transporting oil out of the Bakken oil fields. They also raise the cost of production for equipment manufacturers, many of whom supply North Dakota’s other industries and compete internationally.
Trade barriers hurt producers and consumers on both sides of the tax. In a trade war, initial tariffs and increases lead to retaliatory tariffs. Right now, retaliatory tariffs imposed on American agricultural products are constraining the market of prospective buyers. For North Dakota farmers, this limits their ability to sell crops.
Whether a tariff is initiated or retaliatory, whether you are a producer or consumer, whether you live in the United States or abroad, you should beware the threat of tariffs.