Tariffs

The topic of tariffs has been front and center in the news as of late.  Really, it seems like anytime the president mentions it for negotiation purposes with other countries the media has a collective meltdown and says our economy will be severely impacted and not for the better.  A big part of that emotion comes from people who second-guess everything the president says and does because they don’t like anything he says and does.  They also refuse to give him credit for his successes and falsely state he had nothing to do with them.  When it comes to the economy and low unemployment rate they conveniently overlook the deregulation policies the current administration has implemented and give full credit to the former administration.  That is the same administration who never had annualized GDP growth of more than 3%, record levels of people receiving government assistance and claimed you needed a “magic wand” to bring back manufacturing to the US.  For every predictable liberal response that blames the recession inherited from the Bush administration, I remind them that recessions are nothing new as they are inherently cyclical and Obama had the slowest recovery of any other administration prior to him being in charge for two full terms.

Before I go off on a tangent and onto a completely different topic let me refocus on the matter at hand… tariffs.  As with all subject’s that seem complicated I like to define them to make sure everyone understands what they are.  This demystifies often-complicated subjects and gives us all a clearer idea of what we’re talking about.  Defined simply, a tariff is a tax or duty to be paid on a particular class of imports or exports.  You can do a search on the Internet as I did when researching this subject and watch videos from reputable publications and organizations that go into this topic more thoroughly.  The majority of the content I found was consistent with the functions of tariffs along with how and why they are implemented and the impact they have on us at home and abroad.  The problem with this topic and what you read is that the perceived impact of tariffs is subjective.  That leads to people’s opinions swaying your thought on whether tariffs are good or bad and whether the president is a “stable genius” as he claims or unfit for office as his opponents claim.

 To be perfectly clear, every country in the world imposes tariffs.  The amount and goods that are taxed depends completely on the economic policy and needs of that countries economy.  Protectionism plays a huge role in whether a tariff is implemented.  What that means is that the government wants to protect the jobs at home from unfair competition abroad.  Following that line of thought, a big factor on what determines a level playing field for price comparison of goods at the market is whether or not the importing country subsidizes or financially supports the maker of those goods.  You can see how this can become really intricate and complex when you think about everything that is imported and exported.  It can also lead to a tit for tat between trading partners.

I’ll give you a real-world example of a recent shopping trip I had to show the impact of tariffs.  I have been doing some yard work on my backyard and went to Home Depot to pick up a digging shovel.  After looking at the various sizes and amenities I narrowed it down to two that were equal in every way.  One was made in America and sold for $15.  The other was made in China and sold for $20.  Now, prior to Trump’s implementation of higher tariffs on steel and aluminum being imported from China, you would never have seen the US product of equal or better quality selling for less than the Chinese product. The reason is that the Chinese labor market often pays its employees a lower wage than the same job being performed in the US.  Another factor is one that I mentioned earlier.  The Chinese government often subsidizes domestic corporations that are not profitable to keep them afloat so they can sell their goods to the world. Those two factors along with bilateral trade agreements and China being allowed to enter the World Trade Organization during the Clinton administration is the reason we have seen China transform into the manufacturing powerhouse that it is today.

Sticking with my shovel purchase example for a second, my choice of purchase was the US product that was comparable to the Chinese product.  Why?  It’s simple! $15 is less than $20 every day of the week.  When all things are the same and I have the chance to buy American to support the US economy I will always do it.  If I felt that the Chinese shovel might have been a better shovel by design, craftsmanship or quality I might have been inclined to spend the extra money.  Time and usage will let me know if I made the right choice.

Now take that example and apply it to everything you see.  Tariffs play a huge role in where corporations do their manufacturing. Trump’s recent tax reduction of personal and corporate income has had an immediate effect on the repatriation of corporate profits from overseas along with new and additional investments in manufacturing in the states.  If you are a business that imports to the US and saw that the US corporate income tax rate was reduced from 35% to 21% and you are paying more than 21% elsewhere it would give you a good reason to look at shifting your manufacturing operations stateside.  Besides the immediate tax advantage, you would avoid paying any tariffs on your goods sold in the US, as there are no tariffs for goods sold domestically. State income taxes are a completely separate matter.

One might be thinking how does this impact our trading partners.  Great question with a simple, vague answer; it depends.  Every country has different agreements.  Politics plays a huge role along with what the country’s dominant export products are.  Say you are a small island nation that has a huge banana business.  You will charge a huge tariff on banana imports because you want to protect the banana farmers.  Let’s say that same country needs to import oil.  You will charge a lower tariff on that commodity.  Now let’s muddy the water and say the same company that imports your oil also has a huge banana export business and wants to sell in your market.  That’s where it gets tricky and individual trade agreements are crafted that charge different tariff amounts for different countries.  It all boils down to politics and money.

Trump recently announced he was going to impose a 5% tariff on all Mexican goods imported to the US that increases by 5% each month up to 25% if they do not do more to stop the flow of migrants coming across the southern border.  Whether that works or not and we see Mexico say I’ll see your 5% and raise you 10% each month on your goods until we hit 50% in retaliation is unlikely but, is possible in theory.  Immigration is a completely separate issue but Trump is using whatever tools he has at his level of authority to try and address a political hot button issue that seems to be unsolvable during this election season.  You would think that our politicians would put politics aside to address the crisis at the border.  Seeing as how their profession is inherently political that would be wishful thinking.  One can always hope!

So that is tariffs in a nutshell.  It all boils down to money and creating and keeping jobs at home.  We all live in an increasingly connected global community. I can buy goods online from a country halfway around the world and get it to my house in less than a week. Sure, I could go to the store and pick it up the same day.  If waiting a little bit means saving some money, I may do it depending on how bad I need it.  How much I pay for it along with shipping costs depends greatly on what if any tariffs are imposed on it.  And that brings us full circle in the economic cycle and the role of tariffs. If you didn’t understand it before and understand it a little more now but are still unsure of how it all works just remember that politics and money along with protecting and creating jobs at home are why countries impose tariffs.  As P. Diddy and Biggie once sang, “it’s all about the Benjamin’s baby!”

A simple description of tariffs and why countries use them.
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