Trade War Or Stealth Tax Increase?

By: John Shepler

Enjoying your slice of the 2018 “Tax Cut and Jobs Act”? Throw all that extra cash in a pile and jump in it now. You won’t be drowning in surplus funds for long. The grim tax reaper is coming back and this time he’s dressed in the black cloak of tariffs.

We are getting used to wars where relatively few of us get hurt. We haven’t even had to deal with the inconvenience of major rationing for over 70 years. Trade war? Sounds exciting. Besides, we always win these things, right?

I suggest it won’t be so much fun when the tariff bombs start falling on your house. The first casualties have already occurred. Harley-Davidson, the iconic American motorcycle maker, is picking up and moving overseas to build bikes intended for the European Union. Why? We’re hitting Europe with variety of trade tariffs. They’re hitting Harley back for an extra $2,200 per bike. Made in America? Now only if it is also going to be sold in America.

The steel tariffs sounded like a boon to domestic employment when they went into effect. U.S. Steel was positively giddy about bringing on an extra 300 high pay blue collar workers to open a mothballed blast furnace in Granite City, Illinois. Meanwhile, nearby in Poplar Bluff, Missouri, 60 blue collar workers got pink slips at the Mid-Continent Nail plant. The company describes itself as “on the brink of extinction” after orders plunged 50% when they were forced to increase prices to deal with the 25% tariff on imported steel. They’re now looking at a move to Mexico.

These are just the opening salvos in what is shaping up to be a major global trade war centered on the United States. Global only in the sense that it involves US trading partners all over the world. Not global in the sense that countries of the world are lining up in new allies & axis alliances. Other nations are not at war with each other. It’s just us.

How bad is it going to get? Much worse than you might expect. Other simultaneous events, such as the immigrant border crisis, Supreme Court vacancy and Presidential summits with former foes, are crowding the tariff stories out of news cycle. Are you aware that companies have filed more than 20,000 steel import exemptions alone? Most of these are languishing in a bureaucratic morass with domestic steel companies doing their best to block the requests… for production they haven’t a prayer of delivering.

Why is it that we’re at war with our old friend Canada? We stick them with steel and aluminum tariffs. They go tit-for-tat with reciprocal tariffs. But not just on steel and aluminum. Canada’s retaliation also targets ketchup, lawn mowers, motor boats and yogurt, to name a few. The yogurt duty is to symbolically stick it to House Speaker Paul Ryan, since most yogurt exported to Canada comes from Wisconsin.

Who’s all getting hurt? Pig farmers in Iowa, Dairy farmers in Wisconsin. Blue collar manufacturing workers across the country, and you.

That’s right. Even if you don’t work in a business directly affected by any of the tariffs that are currently going into effect, you’re going to get hurt, too. It’s possible that the tit-for-tat escalation will expand the list of tariffed product and services to the point where it hits your job. Likely you’ll get lucky and the grim reaper of unemployment will pass you by. Don’t start smirking yet. The other grim reaper of higher prices is definitely coming for your wallet.

The most painful effect of trade wars is that they make things cost more. Even those brave companies that suck it up and eat the increased cost of steel and other inputs to their products won’t be able to keep it up for long. Executives in fear for their jobs won’t accept operating at a loss or even decreased profits for longer than it takes to develop a workaround. They’ll raise prices, layoff employees, and eventually relocate to foreign soil.

Meanwhile, what we pay at the checkout is going up in price. Every trip to the store is going to cost a little bit more. Buying a car is going to cost a lot more. The tariffs we’re imposing on China affect parts for televisions, lithium batteries, plastics, and a wide variety of manufacturing equipment that is used to make products right here in the good old USA.

Just what sense does this make to get into all-out economic war with China, Europe and even Canada at a time when things are going really well here? We already enjoy the lowest unemployment in decades, minimal inflation, dramatically reduced corporate taxes and, don’t forget, more money in your paycheck from lower tax rates this year.

Ah, there’s the rub. We all thought those tax cuts were free. The pie-in-the-sky sales pitch was that increased economic activity would generate more taxes to compensate for what was cut. It’s a beautiful idea… and one that’s complete nonsense.

Truth be told, the deficit is going up, not down. Government traditionally has two ways to keep the national debt under control: Raise Taxes. Cut Spending. Clearly, you can’t raise taxes when you just cut them. You probably can’t raise taxes at all in this contentious era of hot tempers and divided power. How about cutting spending? Fat chance. The major spending is for the military, protected by the right, and social safety net programs, like social security and medicare, protected by the left.

With two “third rails”, taxes and spending, poised to electrocute any legislator that dares touch them, the only thing left is some sort of behind the scenes stealth maneuver that won’t wake the sleeping constituents.

Inflation has been one saving grace the makes debt service easier every year by devaluing the currency. Your money buys less of everything, but you don’t really blame anyone in particular. Ironically, the problem with inflation now is that there is hardly any. The financial crisis of 2007 resulted in a “lost decade” of near zero inflation. That meant little or no interest on savings accounts nor annual cost of living pay hikes or significant Social Security adjustments. You aren’t losing buying power to inflation, but somehow it just doesn’t feel right not to be getting more income each year. Nobody is happy, including the government.

With inflation running at about 2% and Fed Chairman Powell indicating he might let his target get just a little higher, there’s not a lot of ability to inflate our way out of a growing national debt. So, is there any other way for the government to deal with that pesky deficit?

Conservative legislators, lobbyists and constituents are vehemently against any tax hike for any reason. Even increased enforcement gets people’s ire up. But, nobody has said anything about tariffs and fees. There was a move to dramatically increase fees for national park access, but the public screaming was so intense it got backed off to a modest increase. Some passport execution fees are are also up modestly this year. Other small fee increases may creep in, but nothing dramatic is likely tolerable.

That leaves tariffs. Globalization has been the strategy for decades, with the ultimate goal of eliminating tariffs and other trade barriers completely. The idea is that jobs lost to lower wages overseas will be made up by increased exports to markets like China that were once inaccessible. American consumers also benefit from lower cost imported goods. The only real fly in the ointment, and it’s a big one, has been the substitution of higher pay manufacturing jobs with lower pay service jobs. Blue collar families caught up in this transition have been livid in their condemnation of globalization. They’ve also been voting their frustration.

Soothing the pain of disgruntled workers offers convenient cover for jacking up protection for home grown industries. Hence, the revelry in the aluminum and steel manufacturing companies. They’ve suddenly gotten more business than they know what to do with. Dormant facilities are being brought back to life. Job applications are being handed out. Life is good if you are part of these businesses.

Elsewhere, it’s reworking the price lists and wincing as orders get cancelled. Pink slips for some factory workers. Fear of bankruptcy for some farmers. It’s too soon to tally the score, but the early indicators are that as a country we’re going to lose more jobs than we gain.

The price hikes haven’t worked their way through the system yet. When they do, it will be a little here, a little there, and pretty much something added to everything you buy. That spells inflation, but it also spells more revenue for the government. At 10% and 25% tariffs, we’re talking billions, tens of billions and even hundreds of billions of dollars flooding into the Treasury. Such a cash flow improvement will certainly corral the burgeoning deficit. It’s a windfall and nobody’s federal tax bill is going up. Again, it looks like free money.

In reality the “free” money is coming out of your pocket in the form of higher prices. You only have so much to spend each month. Like the government, you can deficit finance using credit card balances and home equity loans. Unlike the government you have fewer options to raise your income. Sooner or later, you are going to buy fewer products and services. When everybody starts doing that, it’s called a recession.

The officially reported tally of price inflation will exacerbate the problem by signaling the Fed to raise interest rates even faster to curb the supposed run away inflation. Your savings account, if you still have one, will benefit. Credit card balance interest, mortgage rates, student loans and car loans will be disadvantaged.

If you think this sounds like a downward spiral, you’re right. At some point it will get so ugly that you will pressure your elected officials to stimulate the economy again. Where will that stimulus come from? Why, the deficit, of course. In the end, we may rue the day that we started down this painful path to nowhere.

Of course, this burgeoning trade war may be nothing more than an opening gambit in a strategy to negotiate marginally better terms from our trading partners. If it all does blow over quickly we may be left panting from the wild ride, but no worse off financially. Maybe even better off. But… If those trading partners aren’t inclined to play ball and instead work around one country’s aggressive tariffs to make other arrangements among themselves, we’ve pretty much cooked our own goose. Bon Appétit!