There has been a lot of chatter about the administration's use of tariffs in the past few weeks. But what exactly are Tariffs? Why can they be beneficial and how can they be detrimental? Basically, Tariffs are a tax on any products that come from an outside country. Additionally, tariffs can be used as a way to protect the production inside the home country or to disincentivize imports from a foreign country.
Who Pays for Tariffs?
The ultimate question is: Who pays for tariffs? In the end,
the consumer bears the cost, as they are the ones purchasing the product.
However, foreign exporters may also be impacted. If they wish to maintain
access to the U.S. market, they may need to lower their prices to remain
competitive against domestic producers. Otherwise, they risk being outpriced by
local sellers. In this way, foreign producers also absorb part of the tariff's
burden.
The Good: Leveling the Playing Field
Where Tariffs can be good is that it levels the playing
field on the pricing of certain products. For example, if farmers in the
US have more expensive wages to pay, more regulations to follow for food
production or any other expense that the foreign countries don't have to pay,
then a tariff raises the prices of the lower priced imports and gives the
farmer an equal chance to compete and sell in the market.
Another area is that some people believe tariffs are a way
to protect national security. One recent example is that during the Covid
Pandemic there was a cut in production of certain items like microchip
processors and medication. Due to global trade, these were mostly
imported products (over 80% of antibiotics or the APIs for medicines came from
China in 2019). The US consumer had been so accustomed to the lower
priced products, the domestic producers could not compete and eventually quit
supplying it domestically. When the foreign country no longer provided
the product, due to lockdowns, the US had no way of producing it or keeping up
with the demand. This was causing huge shortages and panic and the
shortages also led to higher prices and inflation. If the US keeps
production in country, there is less of a risk of being shorted on product in
the event of a war or any other global issue. There needs to be a balance
between having no domestic production and literal dependency on a foreign
country.
The Bad: Market Distortion and Economic Harm
However, with all good things, there are the unfortunate side effects. In a true free market capitalism, the global free trade should be mutually beneficial for all parties involved. The importing country is getting lower priced and sometimes better quality product, while the exporting country has a larger base of consumers in order to sell more products. In fact, if there were multiple countries making meds or processors pre-pandemic, this would not have been an issue. Major corporations moved production facilities to other countries to avoid a pandemic type shortage in the future. Smaller developing countries that are trying to grow in global trade need a free market situation so they can compete on the global stage. The developed countries that receive the products are more than happy to obtain items at lower prices. Tariffs hurt the smaller countries by making it hard for them to get their products into the hands of consumers and stalls their development.
The Ugly: Trade Wars and Retaliation
The consumer is also harmed. Not only do they
ultimately end up paying the tariff, but they may also be subject to lower-quality
domestic production. The protectionist strategy of "protecting the
domestic producer" typically prevents domestic producers from creating higher
quality or lower priced goods, as there is no incentive without competition.
In the 60s and 70s, the US automakers were protected from
the better fuel-efficiency products coming from other countries (not
necessarily due to tariffs, it was more of a diplomatic protectionist
strategy). Most people look back on that era and see the negative effects
of a protectionist strategy. The US automakers did not adapt to the more
efficient vehicles of the Japanese and European automakers. They did not
have any incentive because during that time frame there was limited
availability for the foreign imports. By the 80s, the limitations were removed,
and the Japanese and European cars flooded the US market, and the US automakers
were forced to make changes. Protectionism does not benefit the consumer;
it only benefits the producers.
The ugly part of the simmering tariff war is when there is a
retaliatory effort to stop the tariff war by ironically raising tariffs.
This is more like pouring gasoline on a fire rather than trying to subside the
issue at hand. There is no doubt that the US has been on the short end of
the stick when it comes to allowing other countries to pour products into the
country while the foreign countries protect their own producers. However,
trying to stifle the unfairness by adding a tariff isn't the answer.
The Bottom Line
Tariffs will not fix the US global trade deficit. By
improving quality, removing regulations, incentivizing innovation and making US
products more desirable abroad, the trade deficit should fix itself.
Trying to punish other countries for providing things that the US consumers
want to buy doesn't solve any problems. It is evident that there are some
countries that have been taking advantage of the generosity of the US and even
some that unilaterally have tariffs on US exports. If they are not
looking out for the US interest or seeking fair trade, then a tariff is good
leverage. But a trade partner with no issues, other than cheaper
products, is not reason enough to slap tariffs. If the goal is to
temporarily use it for leverage, the president has that right. If the
goal is to protect the domestic producers or claim it is for national security,
then it never works long term. Just look at the protectionist strategy in
North Korea. Their goal to protect their local production and to have no
dependency on any other country has led to mass starvation and
devastation. They should be the cautionary tale of against protectionism,
not the game plan for the US.
