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Trump Calls for Tariffs Over Taxes… Sparks Trade War Fears

Donald Trump gets ready to take office in just a few days. The time leading up to his inauguration has been a whirlwind of political and financial action focused around Trump’s promises to increase jobs and strengthen the U.S. economy. Why are economists so worried?

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Donald Trump gets ready to take office in just a few days. The time leading up to his inauguration has been a whirlwind of political and financial action focused around Trump’s promises to increase jobs and strengthen the U.S. economy. And while Republicans have started to rally around the new president, there seems to be a little rift within the party. Paul Ryan and the GOP have introduced a new plan called the border adjustment tax, which the GOP believes will boost U.S. manufacturing. But Trump has criticized the plan and is calling for something economists fear will start a trade war. Why are economists so worried? What’s the best course for the U.S.economy?

Why Tariffs Over Taxes?

After fears of his unpredictability quickly receded, the stock market has had a historic rally behind Donald Trump’s election victory. Trump has held to his promise of increasing jobs so far by threatening companies who move manufacturing plants from the U.S., rewarding those who stay, and even meeting with Jack Ma, CEO of Chinese online retailer Alibaba to discuss the creation of 1m U.S. jobs. Another effect of Trump’s win is the surging strength of the U.S. dollar, which just two weeks ago hit a 14 year high. On Tuesday, Anthony Scaramucci, a senior advisor to Trump, warned about the risks of a strong dollar at the World Economic Forum. But when the GOP presented a plan which could mitigate the strength of the dollar while improving jobs and the economy, Trump said it’s “too complicated”.

Why Tariffs Over Taxes? #1 | Trump Calls for Tariffs Over Taxes... Sparks Trade War Fears

The fact is, a strong dollar has its pros and cons. The stronger our currency, the more we can buy with it. That’s great for importing goods from other countries, but actually hurts U.S. exports since other countries then have to pay more for American goods, leading them to look for cheaper goods and materials from other countries. As the dollar continues to soar, the concern for manufacturers and companies is foreign competition, specifically China, undercutting American bids. As a result, jobs and the American economy suffer. On the other hand, a weak dollar makes imports too expensive for some consumers, but can boost the economy by increasing manufacturing jobs through cheap exports to other countries.

It’s a fine line to walk, and the GOP is busily looking for solutions. One such solution is the border adjustment tax, or BAT. The BAT isn’t actually a tax, or even a tariff. While a tariff affects imports, a BAT would affect both imports and exports. A BAT is basically a readjustment of how the country taxes imports and exports. Companies would no longer be able to deduct the cost of their imported goods, and the sales of their exports would no longer be subject to U.S. tax. This gives American companies the ability to sell their goods more cheaply abroad since they would no longer have to pay taxes on exports. Supporters of the BAT say this would increase U.S. manufacturing and exports, thus boosting the economy. Critics say that by driving up demand for U.S. goods abroad and by making imports more expensive, thus driving down demand for foreign goods, the dollar will continue to strengthen, eventually hurting the economy.

Trump’s solution is tariffs.

There are a few problems with that. A tariff would only affect imports, which would then raise the price of consumer goods for Americans, hurting spending and the economy. The bigger concern is that by implementing tariffs against other countries, they would then respond by placing tariffs on American exports, lowering demand for U.S. goods abroad. A trade war could cause a global recession as demand for foreign goods the world over would drop.

Watch the news report as Trump’s economic adviser Steve Moore discuss Trump’s tax plan on Fox Business:

In the end, what’s most likely to happen is there will be some sort of compromise between Trump and the GOP to amend the BAT to Trump’s liking. One thing is sure, however, and that’s that trade war is a lose-lose situation which must be avoided at all costs.

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5 Comments

5 Comments

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  • Avatar Filmaker says:

    This whole argument has one fatal flaw that renders it moot. There are no Dollars involved, only the government approved counterfeit currency issued by the Federal Reserve Bank. Real Dollars have been unavailable to anybody since 1974. Easier to monkey with.

    • Avatar RevIdahoSpud3 says:

      Good Point! It’s funny how you can get swept away with the arguments in the article and forget the realities. Even though the dollar is just a figment of everybody’s imagination and is not backed by anything, especially gold.
      If each dollar issued had an equivalent amount of Gold or some tangible of value the purists (I among them) would feel more secure. The dollar for now is backed (linked) to oil (petro dollar) and that has worked since the early 70’s. Will the petro dollar lose it’s credibility as the oil industry fights for survival? Likely, but beyond the petro dollar currently and into the future the fake dollar will continue to function despite being created out of thin air.
      Most of the world uses the dollar and notwithstanding the fact that it is valueless in a tangible way the amazing thing is that many nations use the dollar as their domestic currency while other countries peg their own currency values to the dollar. The phenomenon that world wide the dollar is looked at and accepted as having value based upon the stability of the United States as a political system is what drives its value. We could use moth wings as well and if everyone agreed that they have value then the same condition would exist.
      What is the likelihood that everyone world wide will wake up at the same time and realize the dollar has no value? Perhaps a good share of people (nations) realize that now. Without an alternative fiat the chaos that would ensue does not justify currently taking the risk.

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