Something to Think About: On Chinese Trade Wars and Inflation

Ignoring the inflationary pressures that come from an immigration policy bent on constricting the supply of domestic labor in an already tight labor market, and the consequences of ballooning public sector spending on higher interest rates, and consider for a moment what trade means to the US economy.   Depending upon the year, imports range from about 13-17% of total US gross domestic product.  We import a lot of stuff from Asia and especially China, because it’s cheaper to make there.

We do this for a reason.  Trade is not a zero sum game, but a win-win for both parties, thanks to the economic concept of specialization.  You can make something, say iphones, better than me. And I, in turn, can make something better and cheaper than you, say soybeans. And we exchange one good for another to live richer lives.

Since July of 2008, imports from Asia have grown 30% and imports from China have grown 56%. Over that same period, US consumer prices have risen a mere 13.2%, which is pretty subdued. One of the contributing factors to keeping US inflation so low has been deflation in Asian import prices.  Since July of 2008, imports from Asia have risen 30%, while prices for these imports have FALLEN 36%. Let’s repeat that.  The value of all imports from Asia is up 30% while the prices of those imports is down 36%.  In other words, as US consumers of imports over the last ten years, we have gotten more and more services and goods and paid less and less for them.  A trade war with China, which represents about 47% of Asian imports, would completely reverse this trend, eroding US purchasing power, especially for goods, and put upward pressure on inflation and therefore interest rates.  So while tariffs on Chinese imports may just be a posturing gesture in the art of a deal, should those tariffs become reality, the economic and financial consequences could be fantastically ugly.

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