The Trump Administration continues to pursue a trade war with China, a war that it is losing. The usual results appear: trade relationships are exacerbated, production suffers and labor resources are allocated inefficiently. Instead of trading productively, relative productive disadvantages are created.
Trump continues to do this in the face of evidence that these policies are producing problems for the American economy. For example, business taxed investment and Gross Domestic Product have been adversely affected by the continual use of tariffs to accomplish these goals. One of the effects of these policies has been to weaken the yuan, the Chinese currency. As it weakens, which means it takes reduced amounts of foreign currency to buy it, Chinese policies have produced increasing tariffs of U.S. goods and reduced the tariffs on goods imported from other countries, thereby making it more difficult for U.S. goods to enter China.
This is not a new result, as protectionist measures, such as tariffs, are being employed to burden and alter free trade policies between countries. No better example of these burdens can be found than in the California wine business, which has seen dramatic increases in surcharges on wine, reports Margot Roosevelt in a recent article in the Los Angeles Times. Those taxes have resulted in a dramatic 93 percent surcharge on each bottle of California wine, making it much harder to sell abroad. Meanwhile, Australia and Chile export their wines to China taxed at a much lower rate as a direct result of their separate free trade agreements.
Using protectionist devices to alter trade so as to make trade with other nations result in benefits for trading nations has been used for centuries. Protectionism has been shown to modify gain from free trade by many economists. The most well known, David Ricardo, put forth the idea of nations producing where they have a comparative advantage, in 1817. Nations producing where they have a comparative advantage and then trading for goods where they lack cost advantages is the foundation of mutual gains for nations Ricardo showed and economists today agree.
As tariffs and other restrictions on free trade are used, the possibility of gains from free trade is modified. Any improvement will not take place in an atmosphere of hostility and suspicion. Ample evidence for that conclusion appears in the relationship that now exists between China and the United States.
Without a doubt, increases in tariffs and other barriers used by both China and the U.S. will act to reduce the gains from trade with each other, worsen the political relationship each country has with the other and complicate the steps both China and the U.S. must take to improve political and economic relationships.
David Kaplan of Santa Barbara, Calif., is a retired economics professor.