As we learned with the 1930 Smoot-Hawley Act, tariffs can backfire on the country that believes it’s a relatively painless way to affect change.
By applying 40% tariffs on 20,000 incoming goods to the U.S. to protect our farmers, it may be the singular event that caused America to move past a serious recession to the Great Depression.
Unintended consequences is what can happen when one plays with fire. Sometimes you end up burning down your own house.
The latest federal data show China’s response to raise tariffs on many American goods will have a significant impact on California’s economy. China is one of the largest recipients of California exports.
Last year, California exported about $16.3 billion in goods to mainland China, according to the U.S. Census Bureau. Another $9.9 billion in exports went to Hong Kong, a free port that is part of China.
U.S. law treats Hong Kong as a separate jurisdiction from China. Exports to greater China (China and Hong Kong) last year were equivalent to almost 1% of California’s gross domestic product, according to the Sacramento Bee.
California ranks fifth in global gross domestic product, outranking the United Kingdom last year, says USA Today. California sent more exports to greater China last year than to any other country except Mexico. It sent more exports to mainland China than any other countries, except Canada and Mexico.
The value of California exports to greater China has grown by about $8 billion, or more than 40% in the last decade after adjusting for inflation. The value of exports to mainland China has grown by about $5 billion, also more than 40%.
Five sectors comprise about 70% of California’s exports to both mainland and greater China. Computer and electronics products, machinery, transportation equipment, chemicals and scrap and waste, according to the Sacramento Bee.
Here are the truths that have nothing to do with politics. The overarching message from the U.S. business community must be: When the U.S. engages openly in free and fair trade, we all win. Competition makes the country better, encouraging industry around the world to deliver more value to more people.
Trade is not zero sum. It helps to grow the standards of living of people around the globe. We need the inexpensive products from outside the country to raise our standard of living. And, with only 5 percent of the world population, we need open access to markets for our own goods to grow our economy. We cannot have one without the other.
But overall, free trade is beneficial to the U.S. Because of free trade, Americans enjoy higher living standards and a wider variety of more affordable products like clothing and electronics. Imports from low-cost countries deliver products at lower prices to consumers.
Imports actually boost the purchasing power of the average American household by approximately $18,000, according to the Peterson Institute for International Economics. These products sell because American consumers choose to buy them, and they are more affordable because they are made in low-cost regions.
Mom is right about unintended consequences. Don’t play with sharp saws or start a fire.
John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.