• Sam Simaan

Trade Wars

Economies are not simple things. A national economy is the sum total of all the economic activity – buying, selling, creating, repairing, manufacturing, investing, paying taxes, etc. – of everyone and everything in a nation. There are millions, and maybe even billions, of variables that can impact an economy.

Of the enormous number of variables, a large proportion are related to human behavior. Economics is ultimately how we measure human behavior in the marketplace. Most of it is not what we might consider “hard science.”

But some of it is. There is a reason why it’s called the “Law of Supply and Demand” rather than the theory. It is provable. Unfortunately for Americans, part of the provable canon of economic science is how harmful tariffs are.

Without getting too wordy, the goal of a tariff is to force prices up for imported goods, allowing domestic suppliers to be more competitive. The problem is that they can be ineffective at achieving that goal, and then if they do achieve the goal, there are secondary effects that end up harming more than any benefits gained.

We can take the current tariff situation as an example. Most of the tariffs in place are meant to impact American trade with China. However, many companies that have historically imported from China are now shifting their operations to other countries, such as Vietnam. So, the companies that import goods are avoiding having the taxes charged, thereby keeping the prices consumers would pay closer to the original level. Actually, this is probably the best outcome for American consumers, because prices remain close where they were. However, China is still reciprocating with tariffs on a lot of American exports, including agricultural products. So, in this case, an ineffective tariff isn’t hurting American consumers very much but the response by Chin certainly hurts many of our businesses quite a bit. In other words, it’s a net negative.

Let’s suppose the tariffs had worked as they were intended. Many different companies are involved in the design, manufacture, shipping and selling of a given product. The question is, who pays the tariff? Remember, a tariff is a tax on an imported item. Facing a new tax that would otherwise eat into profit, anyone in the supply chain who can afford to raise prices will do so eventually. The link in the chain with no power to change prices, however, is the last one, the consumer. Effectively, the taxes that are paid by an importing company are almost always passed on to the consumer.

What about the impact on jobs if the tariffs work properly? Well, it is true that forcing competitors to raise prices will help domestic companies and protect jobs in that industry, but any products further down the supply chain will be faced with increased production costs, which will subsequently raise prices for their products and may lead to lower sales. The result here, if you factor in all industries affected, is often a loss of jobs, and usually nothing better than a net zero impact.

Tariffs are really a tax paid by the American people, not corporations that import goods. At best, the corporations find ways around having to impose tariffs. At worst, the consumer bears the full brunt. The many variables we mentioned earlier might be able to mitigate some of the drag created by the tariffs. The economy may grow while tariffs are in place. It is a certainty, though, that while we may not see it directly, tariffs will slow down that growth, if not completely reverse it.

35 views0 comments

Recent Posts

See All

Concern about access to capital [could] lead investors to move out of growth companies that need a steady flow of investment.