Grumbling 4: A Primer on Tariffs

There is a group of Rightwood folks who meet regularly outside the bakery for doughnuts and coffee on mornings when it is not snowing. They are a mixed group, some Republicans, some Democrats, some Wackos, some MAGA’s and some “Progressives.” They are all good friends even though conversations can become pretty heated. I am usually excluded from the group because of my annoying Econ pontifications but it’s OK because my coffee at home is the fancy type and much better than anything you can get at the bakery. And doughnuts to go are just fine, thank you very much! Besides, I prefer to have coffee and doughnuts with my wife rather than with that rowdy group of geezers.

On this particular spring morning, with the tulips and daffodils dancing to the caress of a soft breeze and singing to the rays of the early born, rosy fingered dawn, the group was animated as they “discussed” tariffs. I was passing by and started to slow down. I couldn’t help but hear and I knew I had to intervene. I could easily read the looks on their faces which said, very clearly, “Don’t look. If we don’t look he might just keep on going. But they had no luck on that early spring morning. I turned toward them and began the lecture. 

“All right, listen knuckleheads, just as 2 + 2 = 4, not 3 and not 5, there are certain facts about tariffs that are just that…facts. What I’m about to tell you is not a political statement; it is simply a collection of facts.” 

A collective groan arose from the group. 

1. A tariff is a tax on goods imported from other countries paid by domestic importers. If a tax is imposed on Canadian lumber, the U.S. importer pays the tax, not the Canadian exporter. This is one of those facts, not opinions, that I mentioned!

2. U.S. importers will attempt to recoup the tax that they paid by raising the price for consumers. If the tariff is 10% on a $500 product, the importer will want to raise the price to consumers by $50 so that consumers who used to pay $500 for the product now pay $550. 

3. Whether importers will raise the price by the full $50 or not depends on the consumers’ “price elasticity of demand” … consumers’ response to a price increase in terms of quantities purchased. If consumers look at the 10% price increase and respond by reducing their purchases by 50%, the importers may have to reconsider their price increase. (Price goes up, customers buy less…the Law of Demand.) It all depends on how much the sellers can increase their prices to minimize the impact on their bottom line…profits. To say that importers will pass the tariff on to consumers is disingenuous; a more correct statement is that importers will ATTEMPT to pass the tariff on to consumers. It is a reasonable statement to say that tariffs put upward pressure on prices to consumers. 

4. If the purpose of the tariff is to protect American jobs, it is unclear whether a tariff does that or not. We could discuss automobiles but that is a rocky road; there is no such thing as an American car or a Japanese car or a Mexican car since the parts and the assemblies cross many borders many times before they reach an American showroom. Let’s look, instead, at steel and aluminum. Here’s the rub. Steel and aluminum are INPUTS into many different products. The proposed tariffs on steel and aluminum are expected to have widespread effects across multiple industries. To measure the impact on jobs from a tariff on aluminum and steel, you would have to research the impact on jobs in the automotive, construction, aerospace, packaging (e.g., cans for food and beverages), machinery and manufacturing, appliances, electronics, and household items that use steel or aluminum. If tariffs raise the cost of production in these industries, prices are likely to increase, consumers are likely to buy fewer of the products, and some workers in these industries are likely to lose their jobs. To evaluate the impact on U.S. employment, the steel and aluminum workers’ jobs created or protected by tariffs must be weighed against the jobs lost in steel and aluminum using industries. 

5. Retaliation. Foreign policymakers are not likely to “sit back and take it” as tariffs are levied against their producers’ products. If Canadian policymakers impose tariffs on U.S. made wines and whiskeys, prices of U.S. wines and whiskeys in Canada are likely to increase, causing a decrease in purchases of U.S. alcoholic products, and a loss of American jobs in those U.S. businesses. Probably less impactful, but still significant, is the possibility that people in the countries whose products are being “tariffed” will simply boycott American products. 

6. Tariffs increase government revenues. Revenues raised by the tariff tax are paid to the U.S. Treasury.

7. A tariff can be a negotiating tool which is meant to result in more favorable trade agreements for U.S. producers. 

8. So that’s my story and I’m sticking to it. 

   
   

By this time, most of the group had managed to finish their coffee and doughnuts and sneak off. But George, one of the more sensible ones, said to me, “Thanks, that made plenty of sense. Why have I not heard that before?” I smiled and, in my usual grumpy manner, said, “Because you have been listening to politicians, not economists.”