Sunday Times 2
Trade, tariffs, Trump—and trouble
View(s):For most of this month I have been musing about this question of Trump’s tariffs and what they might bring on for the world.
For a start I had to look up the meaning of this word, tariff, since it is not a word that we commonly use in our Sri Lankan dialect of English.
This is what I learned.
A tariff is essentially a tax that is charged by a government on goods that are bought and imported into that country from other countries. They are usually calculated as a small percentage of the value of the imported product. For example, if a business imports something from overseas and it costs them the equivalent of a hundred rupees to purchase from their overseas supplier, the government might charge a tariff (an import tax) of, say, 10% so that the cost price to the business that brings it into Sri Lanka would be Rs 110.
In order that the business can make a profit, they would calculate a profit of, for example, 10% on that price and would then sell the item to customers for Rs 121.
Since customers feel that this is a reasonable and affordable price at which to buy this item, they would pay Rs 121 for it. This would then provide a reasonable margin of profit for the business and a reasonable tax income for the government.
Unfortunately, by slapping a much higher import tax or tariff on goods coming into the US from other countries, companies importing—for example, clothes from Sri Lanka— would have to pay not 10 dollars per hundred on the value of imported goods but 44 dollars on every hundred dollars of clothes that they import in order to pay this higher tariff to the US government. Naturally, they would pass on most or all of this tax to their customers, who, instead of paying $200 for a dress imported from Sri Lanka, would now have to be paying almost $300 for the same dress. As a result, Americans who have been used to buying a cheap (but good quality) dress imported from Sri Lanka will think twice about buying a new dress. This will theoretically lead to less demand for goods from Sri Lanka and consequently loss of jobs as well as closure of factories in countries like ours.
Trump‘s logic (if any of his decisions can be attributed to logical thinking) is that businesses in America will be unable to sell cheap imported goods from countries like ours and so will buy ‘Made in America’ stuff—which will lead to more factories being built in the US and more jobs created for US workers.
Unfortunately, the problem is that for the past many decades, America has simply been living beyond its means. Americans have been consuming more than they produce and enjoying a higher standard of living and leisure than their productivity entitled them to enjoy.
In addition to having been deeply in debt (America’s national debt currently stands at around 36 trillion dollars), America has been buying more goods from countries like China than it sells to these countries. For example, in 2024 about $440 billion went out of the US to import goods manufactured in China, while the US earned only $145 billion from its own exports to China.
This business of trade deficits and imbalances of payments is nothing new in this world.
As the Scottish historian William Dalrymple (author of The Golden Road) so engagingly explained in the talk he gave in Colombo earlier this month, ancient Rome spent so much of its gold to import luxury goods from India that the resultant trade deficit was a massive contributing factor to the devaluation of Roman currency, inflation and economic disruption that led to the decline and fall of the Roman Empire.
Later on, the British spent so much importing luxury goods from China that they faced a massive trade deficit. They found that the only thing they could sell to the otherwise self-sufficient Chinese empire was opium. When the Chinese emperor attempted to stop the British from selling opium (which was destroying Chinese society), the British went to war, unleashing the first Opium War (1839-1842). Unlike Trump, the wily Brits did not increase tariffs on the luxury goods being imported by their merchants into the British Isles because they knew that such a move would be politically unpopular with the British population. They simply went to war against the Chinese emperor so that they could continue to sell these harmful and dangerously addictive drugs to the Chinese people!!
Today, the US has benefitted from China’s hard-working factories, which produce large quantities of items ranging from clothes and shoes to electronic appliances and mobile phones. It was recently shown that over 95% of toasters sold in the US today have been made in China—as are more than 70% of mobile phones!
Will the American population, which has got used to cheap imported goods and mounting national debt, tolerate Trump’s policies? Will they now start eating untoasted bread for breakfast or pay more than double what they have been paying to buy new toasters until American businesses build toaster factories in the US and pay Americans to work on the assembly lines that manufacture toasters?
We are in for interesting times.