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What’s the Deal with Foreign Trade?

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In recent weeks the news has been blasted with the word and “tariff” and the phrase “free trade”. This so happens to be because of another controversial decision being made by President Donald Trump.
Peter Navarro, a professor at the University of California-Irvine, and Wilbur Ross, a private equity investor, put together a document “Scoring the Trump Economic Plan” during the 2016 presidential campaign. This document went over the now President’s plan on foreign trade. According to Navarro and Ross, some countries such as Denmark, China, Germany, and Mexico—who is a member of the North American Free Trade Agreement— have what is called a VAT—or a “value added tax”— for companies that trade with the United States. This means that when a company exports a good to the U.S., like Chinese steel or aluminum, it will receive a certain government subsidy, cash grants or a tax breaks, for doing so. On the other end, when a good is imported to their country, such as American made automobiles, they put a tax on the item to deter their citizens from purchasing the American product and to influence them to instead to buy a product made in that country or another. In Denmark this import VAT rate is an astronomical 25%, in China it is 16%, in Germany 17%, and in Mexico it is also 16%.
President Trump is suggesting that the U.S. put reciprocal taxes on these nations meaning that how they tax and monitor trade with the U.S., the U.S. will administer the same taxes and subsidies to American businesses that trade with those nations. Many suggest that this will cause a so-called “trade war” that will cause the constant reciprocal raising of taxes on trading between the U.S. and the nations affected.
The end goal of raising the taxes is to level the playing field for American businesses and get back to a bilateral trade agreement— the intent of Nafta. The Chinese government subsidizes the steel industry which makes it possible for Chinese steel prices to be so much lower that American steel companies cannot even come close to competing. If the U.S. raises taxes on imports of Chinese steel into the country, then American auto producers, construction companies, and other businesses that use steel would be able to purchase American steel for cheaper than the price of this taxed Chinese steel. Obviously this would be great for the American steel industry because now all of these other businesses and manufacturers are purchasing their steel, but the price of this American steel would not have in any way decreased since before the taxes were placed on the Chinese product, the Chinese steel simply became even less affordable than the American steel, meaning the businesses purchasing the steel would be taking a loss. They would have to increase their spending costs to buy this more expensive material which would mean that they’d have to get rid of employees to maintain their current profit levels.
This Chinese steel is just one example of a country that would be affected. Canada is the top steel exporter to the United States at 16.7% of imported steel although, should a new bilateral agreement be reached to take place of the existing NAFTA, Canada would be exempt from any import taxes. On the contrary, Brazil at 13.2% and South Korea at 9.7% would be affected because they hold a large stake in this market and taxing it would be a huge hit to their respective GDP’s. Mexico in fourth place would—like Canada—would potentially be exempt from these taxes, but would lose revenue form the lack of the ability to now lax U.S. imports causing a potential deficit in their trade.

This tax would also affect American auto companies in more ways than just an increase in the price of their materials, both automakers have plants in Mexico— one of the nation’s that’s imports would be taxed. Since the companies build the cars in Mexico, in order to ship them into the U.S. an import tax would be placed on every vehicle sold in the country. This would then cut into their profits forcing them to raise the prices of the cars, and if they raise their prices, then less people will purchase their products. The only way around this tax would be to move the plants back into the United States which would in theory bring in new the jobs that would replace those that were cut because of the rising steel prices.
These taxes, if all works out, are to ultimately decrease the current U.S. trade deficits and to boost the American economy.
Those against the U.S. reciprocally raising taxes on these countries insist that it would only cause a “trade war” and that it could never work to actually even the playing field when it comes to international trade.

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What’s the Deal with Foreign Trade?