Impact Assessment Of $60B China Trade Tariffs
Summary
A $60B tariff means a net deletion of dollars from the money circuit.
Cost push inflation is a most likely result as the general level of prices rise to absorb the new tariff cost.
The domestic economy might be stimulated to produce substitute products for the more expensive import.
The purpose of this article is to show how the proposed $60B trade tariffs on China will impact macro fiscal flows and investment markets.
To assess this regulatory change, a balance of sectoral flow analysis has been used (following British economist Professor Wynne Godley's work).
Options for Exporters
An exporter hit by a tariff has the following options:
1. Absorb the tariff cost and continue selling at the same price to maintain market share.
2. Raise the price of the good offered for sale in the US to match the cost of the tariff by passing it onto the US customer.
3. Raise the price of the good offered for sale in the US to partly offset the tariff cost, thereby absorbing some of the additional tariff cost from the profit margin.
4. Cease selling in America.
Regardless of the option chosen, except for the last, the monetary operation related to the transaction is the same.
Monetary Operations
In all three instances, the following monetary operations take place:
1. The customer pays for the imported good. His bank account is debited the amount of the purchase, and the seller's account is credited with the sale proceeds. The customer has the good and the seller has the money. Both are satisfied.
2. From the proceeds of the sale, the seller must now pay to the US government the tariff. Let us assume that enough goods have been sold and $60B is now remitted to the national government as a tariff to extinguish the liability that before the creation of the new tariff law did not exist. On the government's ledger spreadsheet the seller has an account entry with -$60B in it that he needs to return to zero.
3. In the same way as taxes and other fees that are paid to the national government, the money is deleted and appears on no measure of any money stock, not M1, M2 or M3. The only evidence of its prior existence is a receipt for payment. The US government is the issuer of the dollar and has dollars in the same way a referee at a football game has points, the points are tracked on a ledger and are added and deleted to keep a tally of transactions. Returning money to the currency issuer is like putting seawater back into the sea or sunlight back into the sun.
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