President Trump has declared an International Emergency Economic Powers Act (IEEPA) concerning Mexico, Canada, and China, relating to fentanyl.
It includes national security tariffs on automobiles, steel, and aluminum applied to all nations, as well as to all countries connected to the economic national emergency.
As of April 4, according to the Tax foundation, China, Canada and the European Union have imposed retaliatory tariffs in a sum of $330 billion on USA exports.
The tariffs are an encompassing 10% on imports to the US and 25% on foreign vehicles. The universal tariffs will raise $1.5 trillion in revenue over the next decade, reducing the USA GDP by 0.4%.
Trump’s recent tariffs are situated within the realm of political economics, a concept articulated by Adam Smith in his seminal work “The Wealth of Nations.”
Smith delineates political economy as a science that pertains to statesmen and legislators, with the primary objectives being to ensure an ample revenue for the populace’s sustenance and self-sufficiency, as well as to furnish the state with adequate funds for public services.
The overarching aim is to enhance the prosperity of both the state and its sovereign. Smith advocates for two systems within the political economy to foster national wealth: commerce or trade, and agriculture.
Trump’s tax proposals are based on Adam Smith’s notions of political economy, as previously mentioned, aiming to generate adequate funds for public services provision.
The ramifications of implementing tariffs initially are evident. Let’s consider a scenario where Ghana had no duty on foreign goods that Ghanaians were accustomed to purchasing without any additional charges. It was suggested that Ghana could potentially bring its rice industry to existence by levying a duty of GHȼ70 on imported rice.
There will be nothing wrong with such a view by looking at the face value of it. The cost of rice imported to Ghanaians market would be too high that Ghanaians would be forced to venture into rice production. Because the demand for rice has been created by higher tariffs.
Nevertheless, governmental intervention is necessary to subsidize the rice industry.This means that Ghanaians will to have pay GHȼ70 which would be collected from them through higher prices by the rice industry.
Individuals not previously employed will be engaged in the rice industry. This assertion is demonstrably correct. Nevertheless, the country’s overall employment level will not rise. The Ghanaian consumer would face a GHȼ70 cost for the same quantity of rice, thereby reducing disposable income.
The consumer would have to reduce his expenditure by GHȼ70 from somewhere else. The emergence of a new industry necessitates the contraction of numerous others. The employment of 30,000 workers in the rice industry necessitates a corresponding reduction of 30,000 workers in other sectors. Hence, there is a tradeoff between jobs in the rice industry and other industries.
But the new industry would not be visible. The number of employees, the capital invested, and the market value of their products, cannot be estimated. People can easily notice the rice factory workers not going to work.
The results would be visible and direct. The results of other industries would not palpable and seen with the eyes and the Ghana statistical service can’t estimate those industries, how many women and men have lost jobs due to consumers have to pay more for rice imported to the country.
This loss spread across all productive sectors industries will be minute for each industry and it will be difficult to determine how each consumer would use his GHȼ70 for if he been allowed to save it and not paying for higher prices.
Perhaps he could have used it to buy shirts or invest in a mutual fund, thereby accumulating capital for a different business. The overarching majority of people, therefore, would probably suffer from the illusion that the new industry had cost us nothing.
The same scenario applies if Ghanaian consumers are required to pay lower tariffs of GHȼ65 on imported goods. In doing so, they effectively save 5 Ghanaian cedis, which can then be spent in other industries to boost job creation.
Also, it would increase our exports to other countries, this is because the more we buy from foreign countries, the more they buy from us. Therefore, comprehensive implementation of the 24-hour economy as an industrial policy would prove advantageous.
Additionally, it is anticipated to bolster our export industry by diminishing our reliance on foreign goods. This shift is significant as heightened imports lead to increased exports, thereby balancing the dollar flow within the Ghanaian market.
Consequently, Ghanaians will have the liberty to make purchases where they find the most competitive prices. Ultimately, this transition will result in a net increase in employment opportunities for us and our trading partners, leading to mutual benefits for customers in both countries.
Effects of the tariffs
It is important to notice that the new tariffs on the rice industry would not raise the Ghanaian wages or American wages.
These measures ensure that Ghanaian rice industry employees receive average domestic wages, eliminating the need to compete with wages from the country the rice is imported.
There won’t be an increase in Ghanaian wages in general as a result of the duty, for, as we have seen, there would be no net effect increase in the number of jobs, no net increase in the demand for jobs, no increase in productivity gains. Indeed, labor productivity gains will decrease because of the tariffs.
This brings to being the real effects of tariffs walls. It is not merely that all visible gains are offset by less obvious but no real losses. In fact, it results in net losses to a country. Irrespective of years of personal stake and propaganda, tariffs reduce any country’s level of wages.
As we have seen, the amount added which consumers pay for a tariff protected good leaves them with less money to buy other goods. There is no net gain to industry as a whole. Due to artificial trade barriers erected to foreign goods, Ghanaian, labor, capita and land are forced to move from what they do more efficiently to do what they do less efficiently. Therefore, as a result of tariffs walls, the average productivity gains of labor, capital and land are reduced.
If we look at it from the consumer point of view, it is observed that the consumer has less money to buy goods.
Therefore, the general purchasing power of his income has been reduced. Whether the effect of the tariffs is to lower wages or to raise money prices depends on the monetary policy that is implemented.
However, it is clear that while tariffs may raise wages in protected industries, the overall effect on real wages across all sectors will be negative. In other words, they diminish real wages relative to what they would have been otherwise.
Trump’s tariffs effects
For Donald Trump’s tariffs, they will benefit the USA because, the USA is a producer at the expense of Canada, Mexico Ghana and the others. China has a trade surplus with the USA. Chinese low quality and high-quality exports to the USA are forcing people out of jobs.
Walmart, the biggest retail store in USA has a huge warehouse in Shenzhen, China, where it exports goods to USA, therefore, tariffs walls on the net bases won’t hurt China much.
This is true because of the duties placed on imports. Contrarily, American consumers will bear the brunt as they will be forced to pay duties in the form of prices. However, it is not true tariffs benefit all producers as such.
Inversely, it benefits only the protected industry especially those with a comparatively large potential export market, at the expense of all American producers, such as automobile, Agricultural.
To illustrate, if a tariff wall is so high that it becomes prohibitive, and no imports can come from other countries. The American consumers are forced to pay for costly imported goods, Americans will have to pay less or spend less on other industries.
Because foreign industries will find their markets in the USA cut off, they will not get dollar exchanges and therefor will not buy American goods at all. As a result, American goods will suffer in great proportion to the American goods sold previously in abroad. A higher tariff wall, not prohibitive, will bring the same results.
Ultimately, the effect of tariffs is to change the structure of production in an economy. It changes the number of jobs, the kind of jobs, the comparative of one industry to another. It diminishes the sectors in which a nation excels, while amplifying the inefficiencies in larger industries. The overall consequence is a reduction in overall efficiency.
Inclusion, it is reasonable to infer that a reduction in tariffs would be beneficial without causing harm. Indeed, its reduction will improve a nation’s trade balance. However, someone will inevitably suffer adverse consequences. Certain industries that have previously enjoyed substantial protection will be negatively impacted.
This is why it is inadvisable to establish such highly safeguarded interests in the first place. Therefore, it is justified when certain industries, like those in manufacturing, express concerns that the elimination of tariffs could potentially lead to their closure and subsequent unemployment of their workforce.
This is particularly evident when considering the specialized skills possessed by these workers, which require significant time and effort to acquire. Hence, it is crucial to carefully assess the short-term and long-term effects of tariffs on all segments of the population.
Author
I am David Alemzero, Ph.D. I earned my Doctorate in Management Science Engineering in 2022, after completing a Master of Science in Economics. Based in China, I work as an independent researcher, focusing on the energy transition and low-carbon economy. My academic work has been published in reputable journals such as Scientific Reports, Resources Policy, Renewable Energy, Sustainability, Energy Reports, and Environmental Science & Pollution Research, among others. Additionally, I have written two chapters in a book.
Email: [email protected]
