Tariffs — a tax or customs duty imposed by a country at its border on goods imported from another country — are wildly misunderstood and have come into the lexicon since their use by the Trump admin and during this presidential election campaign.
They are not wildly understood, sort of like calculus, differential equations, and how doorbells work. Let us reason together, dear reader.
Tariffs have been traditionally used (and taught in business schools) in the following situations:
1. Tariffs are used to protect strategic industries — industries with national security implications — such as high tech, steel, or aviation.
2. Tariffs are used to protect fledgling, startup businesses during their period of incubation and infancy, again, often technology related.
3. Tariffs are used to punish bad actors such as China for its theft of technology, its use of slave/prison/child labor to manufacture goods, and to offset low environmental standards.
Pretty straightforward stuff, no? But, there’s more.
In discussing the modern use of tariffs, there are additional purposes:
1. To create equality and reciprocity in trade relations. This is actually a very serious issue today.
If the European Union imposes a 25% tariff on the imporation of American wine, then the US would rightfully consider the imposition of a 25% tariff on the imporation of wine produced in the European Union countries.
2. To balance trade when there is a large imbalance between imports/exports between two nations such as the US and China — in 2022, the US imported $563B of goods from China and China imported $196B in goods from the US.
Much of this imbalance is caused by corrupt Chinese practices and rules.
This imbalance – called a trade deficit — could be impacted by imposing a tariff on the importation of Chinese goods into the US.
3. When a country attempts to force goods into another, such as the criminal “dumping” of Chinese steel, a tariff can be imposed to halt the practice.
Dumping — unfair competition — occurs when a good is sold for less than its actual cost of production.
BTW, much Chinese steel is just terrible and cannot be used for many structural applications. It also has to be tested repeatedly.
4. Tariffs can be threatened during the course of bi-lateral or multi-lateral trade negotiations as Donald Trump did successfully when negotiating the revision of NAFTA (North American Free Trade Agreement) called the USMCA (US, Mexico, Canada Agreement).
Tariffs or the threat thereof played a role in the US – Japan and the US – South Korea unilateral trade agreements.
5. Tariffs can be threatened to enact or influence other foreign policy initiatives such as when Donald Trump threatened Mexico with a massive tariff if they did not secure their side of the US – Mexico border.
The threat was successful though the border security disappeared during the Biden admin.
6. Tariffs can also be targeted and focused on a single subject such as the importation of Chinese EVs made at plants in Mexico.
This was an attempt by Chinese EV manufacturers to slip under the tent of the USMCA and thereby lessen the impact of tariffs.
Yes, of course, this stuff works — sometimes it works well, sometimes it works marginally, and sometimes you have to wait it out.
1. In the not so distant past, foreign auto companies were flooding the United States whilst very, very, very few American cars made it into their markets.
The trade was out of balance. These foreign companies imposed huge tariffs to protect their national car making industry — talking to you, Germany.
The US threatened massive retalitory tariffs and the German car companies — Mercedes, BMW, Volkswagen, Audi, but not Porsche — all began to make their cars in the United States thereby creating American jobs and paying American property and employment taxes. The employed Americans paid American taxes also.
This also happened with Volvo and the Japanese and Korean car makers.
This was very good for the US economy and it stabilized prices on these cars as it eliminated overseas transport.
2. In the Trump round of Chinese tariffs, their tariff funds were use to subsidize American farmers to the tune of $66,000,000,000 at a time the farmers were hard pressed — one of the reasons why groceries were cheaper under the Trump admin.
3. Foreign companies manufacturing in China and thus subject to US tariffs imposed on imported goods, have begun to re-shore (return to the United States) and to friend shore (relocate to more friendly countries rather than China).
China is our enemy and anything we can do to weaken its economy will ultimately redound to American self-interest.
The US should build its trade relationship with India, a natural and historic enemy of China, a democracy in the British tradition, and a potential huge ally for the US.
4. As noted, Mexico altered its border security arrangements based on the threat of tariffs.
5. Targeted companies have shelved their relocations plans — from the US to a foreign country such as Mexico — due to the threat of targeted tariffs. [I think these specific one off targeted tariffs are unconstitutional.]
6. The US has been able to use the threat of tariffs plus the use of incentives to lure strategic industries with national security implications — talking to you AI chip makers — into building big plants within the United States.
So, does this work? Yes.
The world is progressively more global and the flow of information — specifically pricing information — is instant and comprenensive.
The global supply chain of transport is complex, but easily accessible. You can arrange transport from India or China as easily as you can send an email.
This combination – free flowing information and ease of transport – lessens the impact of tariffs because you can source from a country with no tariff impact.
We often think of the impact of tariffs at the low end of the price curve, commodity goods, but there is a huge impact at the highest part of the price curve, luxury goods.
1. The fear at the commodity level is the impact on inflation. This can be negated by sourcing the same goods produced in another country as noted above.
If it is made in China, is it also made in India or Vietnam? The answer is almost always yes and at the same price point.
2. The reality at the luxury level is that the consumer is buying something that is already wildly expensive — think perfume or precious stones. The cost of the tariff is baked into an already expensive cake.
The proof of this inflation consideration is the simple reality that during the Trump admin when he imposed tariffs there was virtually no impact on what was already a historically low inflation.
During the Biden admin when Biden relaxed many of the Trump tariffs, inflation reared its ugly face to the highest level in four decades proving that the tariffs did not cause the inflation.
Tariffs have been out there since 1776, but there is more use of them since the Trump admin and the results are overwhelmingly good.
They are complex, but they can result in American jobs and manufacturing returning to the United States.
It takes a skillful administration to be able to use the cutting edge and the bludgeon that are tariffs.
But, hey, what the Hell do I really know anyway? I’m just a Made in America Big Red Car!
