One of the many unanticipated benefits of writing under “From the Murphy Center” has been the enhanced connection with our community. Often someone will tell me that they read a column and liked it. One time someone said, “Don’t give up the day job — whatever that is.” Even a few of the men who sit in front of Parker’s on St. Simons Island early in the morning solving the world’s problems have offered friendly critiques. Keep it up Golden Isles. Melissa, Don and I think it is great.
A few weeks ago I wrote a piece that argued that knowing business is not the same thing as knowing economics. I said it is important that policymakers have a clear understanding of tariffs, the balance of trade, the capital account and trade deficits. Even under the best of circumstances, international trade theory is hard to understand. It is helpful when reality gets in the way and gives us a case upon which to hang our hat.
In theory, when a tariff is created, the importer of the tariffed item pays a tax when it is brought into the country. One might anticipate that this tax, say 25 percent, is passed along to buyers. Buyers, seeing the increase in price due to the tariff, switch to domestically produced substitutes, now appearing relatively less expensive. Therefore, in theory, tariffs help domestic industries.
Now, tariffs in reality. I was in middle Georgia over the weekend and talked with a businessman who uses various types of steel in his production process. He only, and I repeat, only uses domestically produced steel. As he says, “I’m a vet and I only buy American.” He will never buy foreign steel.
Well, he recently placed an order with his domestic supplier. The tariff should not affect him, right? He was told that his price was now 25 percent higher when compared to his last order. The supplier said, “We need to get our 25 percent while we can.” President Trump’s proposed tariffs are to take effect in July. Already we can see how domestic firms will react to a tariff on foreign steel.
This is not a one-off case study. The economics literature on tariffs is filled with instances like this. I doubt if this is what the President’s policymakers had in mind.
When there is a balance of trade deficit with China for example — imports from China exceed exports to China — Chinese citizens end up holding lots of dollars. This is to say, our balance of trade deficit is matched by a capital account surplus.
What do they do with these dollars? We were in New York City with friends a few weeks ago and I commented, while sitting in traffic (a New York City sport) on how much construction is going on. Our friend, who has been in the financial services industry forever, said that Chinese investors are one of the largest, if not the largest, player in this construction. He also said that this is across the United States in every major city. Our balance of trade deficit can be seen in the very changing of our domestic skylines. This is what they are doing with their surplus of dollars — investing in the United States! Do we want this construction to go away with a smaller trade deficit?
As we celebrate our freedom this Fourth of July, let us also celebrate the ability to trade freely. Let freedom and not government determine economic outcomes. Happy Fourth to each of you. Let freedom ring!
Dr. Skip Mounts is Dean of the School of Business and Public Management at the College of Coastal Georgia and an affiliate of the Reg Murphy Center of Economic and Policy Studies.