Trouble with Weaponized Tariffs

Tariffs are a tax levied upon imported goods by the country receiving the goods. This is an addition to the price of the item which the consumer pays. For example, if you buy a car which was produced in Germany, you may pay an additional couple hundred to a thousand dollars which was added to the price to cover the tariff levied by your government. It is a pretty simple arrangement which is used by many nations. It can be a very good tool to raise revenue, create trade agreements, and promote businesses for governments when used effectively.

Since it is a tax, it is revenue for the government which imposed the tariff. Prior to the American Civil War, tariffs accounted for 80 to 90% of all government revenues. At the same time, tariffs can be used to protect and promote businesses within the nation. In the early days of the United States many industries were just beginning and in many cases the start up costs were tremendous. Just imagine the costs of setting up a furnace and arranging the logistics for material and that is even before you start earning a profit. Meanwhile these industries were well established in Europe and even in Mexico. In fact, until 1826 the coins the United States were minted in Mexico. These foreign companies were able through years of development and competition, to produce products which were cheaper than American made items. To help these infant industries compete tariffs were used to increase the price of foreign products while at the same time creating a stream of revenue for the government. This was important because Americans just rebelled with taxes as the main thorn. Tariffs were a tax but hidden in the price of products and not readily visible and recognized by the American public—foreign products were just more expensive.

However, this creates a delicate balance. In order for the government to have this stream of revenue, the tariffs had to be at a level which still encouraged the purchase of foreign products. Yet, at the same time, they couldn’t be too low that domestic industries struggle. It was very important to have both this revenue stream and to protect and promote native industries. If foreign product sales were to drop to low levels because of increased tariffs, then the government might have to enact taxes which could also inhibit the growth of businesses and the resulting job opportunities as well as upset the voters. Now it should be noted that in the early days of our republic, the government also used the sale of land, resources, as well as the issuing of licenses or permits to harvest these resources and various rents of resources.

Another aspect of tariffs is that they can be used to negotiate trade deals. Various nations, because of location and resources, are able to produce various items more easily than other nations and of course they desire markets for their main industries as well as up and coming businesses. Remember, politicians are elected because they keep their constituency happy and this is mainly through encouraging and promoting jobs which allow their constituents to claim a piece of the pie. They use tariffs to negotiate, such as lowering the tariffs on the main production of another country if that country lowers the tariffs on our chief exports. Both can maintain standard tariffs on items which are produced more universally and can cause fierce competition for domestic industries. Cooperating nations can create a trade system which ensures jobs through constant and predictable production and consumption. Then there are cases of playing hardball with tariffs to force others to agree to better trade deals. This is what President Trump is attempting to do.

One of the things most people don’t realize is that the United States does consume quite a lot of products from around the world. It is one of the largest importers of goods and services. It has the highest consumption of consumer goods. Over the years, especially since World War II, many nations’ economies have been shaped with this in mind. A good example is the Japanese automobile producers. Japan does not have the space to maintain the level of auto sales required for the industry to be viable. Europe is a viable market, but Japan would be competition with a lot of aggressive producers as well as an incredible public transportation system and towns designed for bicycling or walking. The United States provides a lot of space and desire for automobiles. Another example is just take a look at a grocery store and see how the products they have to offer have grown considerably since 1945.

Trump realizes this and he is using how nations around the world have become dependent on catering to the U.S. consumer along with the power of tariffs to gain the upper hand for the United States. He is attempting to bring companies to the United States to produce here and avoid the tariffs. This is an attempt to open factories here and create jobs. And, though this strategy works and does bring in transplants as well as investments to the United States, there is one nagging question, what happens when the tariffs recede to historical levels?

In a highly competitive world, there will be pressures on other nations to create an atmosphere to attract the business to their borders. They will do what they need to in order to woo employers and investments into their countries. At the same time, how will the recently acquired businesses and investments react as the business climate changes in the United States and opportunities arise in other parts of the world? United States will have to do what it can to maintain the companies and to encourage the continual investment within the nation. If the companies leave or instead of reinvesting returns on investments back into the nation, the United States could run into rough seas. So, it leaves us with the probability of constantly having to maintain tough tariffs to force favorable trade deals.

Which in itself creates another problem. There is nothing in this world which says that other countries must trade with us. One of the rules of economics is a very simple one and that is a movement from pain. A form of pain is costs. Costs include items beyond the cash exchanged for goods purchased. For example: if you must do business with an abusive partner who constantly pushes you around and demands to dictate the terms of the deal, there would be a lot of pressure on you from within to find a better entity with whom to do business. You may go along with the abusive agreements until the opportunity arises.

At the current moment, many countries would have to develop new trading partners and this will take investments, time, and diplomacy. During the immediate future, until changes can be made it does make sense to negotiate with President Trump’s demands. However, in the long run, as several world leaders had mentioned, they could create a situation in which Trump and his demands are irrelevant and we could be looking at a difficult future.