The Myth Busting Economist by Larry Malone

Debunking the Trump Biden Trade War

There’s plenty of war going on in the world right now, but perhaps you didn’t know that the United States has been engaged in a trade war with China for almost six years. Like everything we deal with in this column, there are a handful of myths ripe for the busting when it comes to trade wars. But before we do that, let’s start by busting a big myth that the current president shares nothing in common with the previous president.

Both Biden and Trump are trade protectionists, which means they are willing to put tariffs—taxes, essentially—on imported items. Tariffs make imported items more expensive, which is supposed to create more reasons to produce those things in the United States. Do tariffs produce such magic? To answer, it’s important to first understand how international trade works.

More than 25 percent of all economic activity in the U.S. involves businesses producing stuff that is either coming into or leaving the country. Last year, the top 10 exports out of the United States included: machinery, vehicles, mineral fuels, pharmaceuticals, precious metals and plastics. Meanwhile, the top 10 imports coming into the United States included exactly the same categories of items! How can that be?

The answer exposes one of the greatest economic myths of all—nations don’t trade with other nations. Instead, multinational corporations, American and foreign-based, produce items to sell to consumers who live in other nations in what is now a global marketplace.

The now-busted “Nations Don’t Trade with Nations Myth” is illustrated best in WalMart’s new slogan, “Save Money. Live Better.” U.S. citizens get the lowest prices and best values—and stretch their paychecks furthest—when they get their hands on an item sold by a business producing it at the lowest cost somewhere in the world.

It turns out that 16 percent of total international trade in the United States is the result of multinational businesses exchanging stuff between the U.S. and Mexico, 15 percent between the U.S. and Canada, and 11 percent between the U.S. and China. Many of these businesses produce in Mexico, Canada, and China but have their headquarters in the U.S. Because of the inflammatory rhetoric used by politicians, most folks focus on China when they think of international trade. Instead, Mexico and Canada make up almost one-third of international trade activity in the U.S. POOF, there goes another myth!

The key to understanding international trade and the use of tariffs is to recognize that nations have nothing to do with the exchanges that go on between businesses and consumers unless they interfere with trade.

Now back to our two most recent presidents, since both believe that interfering with trade can economically improve the lives of Americans. That’s because both Biden and Trump think that putting tariffs on stuff imported from China will make that stuff more expensive in the U.S., and inspire businesses to make that stuff here, instead.

The first error in their logic is that the only thing tariffs inspire is a trade war. Why would one nation sit by as producers within its borders suffer the fate of having taxes put on those things by another country? Jobs will be lost and businesses will close, and that means you will lose the votes of those who suffer those fates. So just like the start of any war, the country with businesses facing new tariffs will immediately retaliate and impose tariffs on stuff being imported from businesses in the other country. That means even if some businesses start up in the United States, others businesses will suffer or shut down when consumers in the other country stop purchasing their items when tariffs increase prices.

Now onto the particulars. The trade war with China was started by Trump in 2018, and after Trump lost the 2020 election, Biden did nothing to reverse the Trump tariffs. Biden has a long record as a trade protectionist, dating all the way back to the early 1980s when he was a senator.

In 2018, U.S. consumers purchased $2.6 trillion worth of stuff from businesses in China, while consumers in China purchased $1.7 trillion in stuff from businesses in the United States. The difference, $900 billion, is what is known as a trade deficit. But remember, Apple phones and a whole lot of other popular items are in that mix.

In his inimitable way, Trump said this was “bad, very bad,” and he imposed tariffs on $250 billion worth of items from businesses in China (some of which were made by U.S. multinational corporations operating in China) in August and September 2018. China immediately retaliated and put tariffs on $110 billion worth of items produced by American businesses.

A recent National Bureau of Economic Research study on the outcomes of the Trump China tariffs by David Autor, Anne Beck, David Corn and Gordon Hanson found that there were no gains in jobs from the tariffs. Residents in the most affected geographical areas were, however, more likely to vote for Trump in the 2020 election.

Perhaps Biden is expecting the same to play out come this November.

Larry Malone is professor emeritus of economics at Hartwick College.