In a country where we tax everything, tariffs have been singled out as uniquely disastrous, but why, when any argument applied to tariffs in particular can be applied to taxes in general? There will always be a potential upside – more revenue raised and/or a change in behavior – and a downside, namely an increase in costs such that the change in behavior has a negative outcome.
The establishment, and by that I mean the expert class, the mainstream media, almost all Democrats, and a sizable percentage of Republicans, has finally found a tax they don’t like: The tariff. In a country where we tax everything, down to the air we breathe in some cases or even what we do not do in the case of Obamacare, including but not limited to income, payroll, capital gains, corporate profits, estates, inheritance, sales, property, gasoline, occupancy, rental cars, and more, somehow a tax on imports simply a bridge too far, capable of collapsing the entire international economy at the stroke of President’s pen. The anti-tariff crowd, perhaps needless to say, never quite explains why this is so. What is about tariffs that are so much worse than any other tax they promote with glee? Instead, they make blanket statements about how the costs of tariffs on certain raw materials and goods will get passed on to consumers, or how they will distort the free market in some fashion, as if such a thing exists in a world with all of these existing taxes and where the majority of countries have some form of tariff already, but the same argument can be applied to any tax. Taxes are by definition costs that need to be paid by someone, either an individual or a company, and the money that is paid will need to be made up elsewhere or simply lost as it is in income taxes. Tariffs are no different, only the cost is paid by the country importing the raw material or goods. By that logic, any argument applied to tariffs in particular can be applied to taxes in general. There will always be a potential upside – more revenue raised and/or a change in behavior – and a downside, namely an increase in costs such that the change in behavior has a negative outcome. To be sure, tariffs are unique in how other countries might respond to them, creating a tit-for-tat that results in a trade war of some kind, but even then, countries already compete over corporate taxes, capital gains taxes, and others to attract investment, yet rarely does anyone assert either should be set to zero for the good of the global economy. Whatever the case, one would assume that almost every other potential disagreement between countries not currently at war, the hope for mutual benefit would ultimately prevail even in the event of some short term disturbance, especially when tariff rates can be set directly by the President and can be adjusted in almost real time. Otherwise, they are simply a tax, whose utility depends on their application. In that regard, it is reasonable for those who are generally averse to taxes such as myself to be concerned about the application of a new one, believing taxes in general are onerous and should be as low and simple as possible.
Beyond that, if someone would like to buttress any specific criticism of tariffs, it would be helpful if those in question appeared to know how they worked in the first place. Rather than making bold, blanket claims of rapidly rising prices across the board, they should acknowledge the reality that the increase in prices is in revenue to the government, not simply lost to the ether, and the global marketplace might well offer alternatives to keep prices down whatever the case. How do we know this? Because it is precisely what happened during President Donald Trump’s first term. On March 1, 2018, he announced tariffs on imported steel, 25%, and aluminum, 10%, asserting “Trade wars are good and easy to win.” These moves followed previously announced tariffs on solar panels and washing machines, ranging from 30% to 50%. Canada, China, India, the European Union, and others responded almost immediately with so-called retaliatory tariffs of their own. By January 2020, tariffs were applied to approximately 16.8% of all goods entering the US. As they have this time around, economists responded with barely concealed outrage, claiming that these tariffs would lead to more harm than gain, costing jobs for producers and money for consumers. This included everything from a “real income loss” of $7.2 billion, $1,277 per household, a .5% reduction in GDP, and the loss of some 250,000 jobs. Much has also been made of the fact that President Trump extended an additional subsidy to farmers of some $12 billion per year to offset a reduction in exports. Of course, everyone knows that President Trump’s first term economy wasn’t nearly so dark or dire, far from it. Despite these and similar claims, inflation was a meager 1.9% in 2018, 2.4% in 2019, and 1.4% in 2020. In 2018, the economy averaged 223,000 new jobs per month, at the height of tariff mania, bringing unemployment to a 49 year low with growth concentrated in both goods-producing, which would presumably be negatively affected by tariffs, and service industries. In 2019, monthly job gains ticked down to 178,000 per month, but growth continued in goods-producing industries and the labor force participation rate actually increased, bringing more people into the job market. Gross Domestic Product, meanwhile, grew at a healthy 2.9% in 2018, again at the height of tariff mania, and continued at 2.3% in 2019. Conversely, revenue to the US treasury grew between the two years, rising from $3.3 trillion in 2018 to $3.46 trillion in 2019. The tariffs from China alone generated some $65 billion in new revenue, more than offsetting any relief payments to farmers. While it is possible tariffs had some localized effect on prices in a specific market sector or for a specific product, or jobs in a specific sector, any such effect had to have been necessarily small given the prevailing economic conditions and would be notoriously hard to measure. Moreover, President Trump has always seen tariffs as one part of a much broader economic equation, where any increase or disruptions are offset by lower income and corporate taxes, reduced regulations, and reduced energy prices. He did not then and is not now recommending tariffs alone, nor is he claiming there will not be any price increases or other disruption. Instead, he is claiming that the combination of economic reforms will result in both a decrease in prices and sustained economic growth, meaning that even assuming tariffs increase prices in certain areas, they will be offset by decreases in the cost of energy, regulations, and perhaps income taxes while increasing revenue to the treasury to reduce the deficit and stabilize our finances.
Thus, the net impact of his combined economic plan will be positive. Even when we consider tariffs in particular and their potentially adverse localized effects, the impact isn’t nearly as direct as they claim, where some uninformed media pundits have acted as if the cost is applied to the end price of a product and a 25% tariff on steel will drive up the price of cars by the same amount. Tariffs, generally speaking, come in two forms with two different impacts. They can be applied to the import of raw goods, like steel, or they can be applied to a finished product like champagne. In the event they are applied to raw materials, producers who rely on the imported product might well pay a higher price, but the consumer is unlikely to feel the full effects by the time they purchase the product. For producers, there could be efficiencies in the supply chain that reduce the impact, or an aggressive distributor could take a lower profit margin to capture more market share. Manufacturers can also source raw materials not affected by the tariff in question, purchasing from another source without a tariff in the first place; this might be disruptive in the short term, but in an automated, computer controlled supply chain, most manufacturers source materials and parts from a wide range of suppliers at the same time. For consumers, the impact will be significantly less even if we assume the full cost of the tariff is added to the cost of the raw material because raw materials are only one component of a product’s final sale price. When you purchase a car for example, you are not paying purely for the steel required to build it. You are instead paying for the steel, the additional raw materials, leather, plastic, rubber, etc., all of which still total only around half the cost, the manufacturing, the distribution, the research and development, and the capital investments required to build the infrastructure in the first place. In fact, a typical car contains around 1,000 pounds of steel, accounting for a cost of between $6,000 and $7,000 per vehicle. Given the average price of a new car is $48,401, steel accounts for no more than 14% of the total. If we were to increase that cost by the full 25% tariff, the additional cost of the car would be around $1,750, for a new average price of $50,151, or an increase of 3.6%. While this isn’t nothing and any price increase is far from ideal, the average person owns a new car for 8.4 years, meaning the additional cost to the consumer over time is $200 per year, or about $17 per month, not exactly catastrophic and not even close the inflation we have experienced over the last four years. Extending this to President Trump’s comprehensive approach that includes reducing energy prices, a person spends around $3,000 per year on gas or $250 per month, meaning if we can reduce gas prices by less than 7%, the entire cost increase of the 25% tariff would be offset.
The second type of tariff is on the finished product. In this case, it is likely that the cost of the product will increase in line with the tariff, but the consumer is not required to purchase that particular product. For example, President Trump recently threatened a 200% tariff on champagne imported from France, a threat the mainstream media regarded as a potential economic calamity. Back in the real world, however, a consumer who wants French champagne (I am aware that technically all champagne is French, I am merely being specific for purposes of this post) that badly can choose to purchase it at the higher price, or they can choose a substitute sparkling wine not subject to the tariff, preferably one made in the United States. This, necessarily, would likely lead to an increase in sales of domestic products at no increase in costs to the consumer unless they chose otherwise. If you have ever been to a foreign country and wondered why the local beer was cheap, but Budweiser cost a small fortune, this is why. In other words, tariffs can influence behavior to increase domestic sales and hence production, keeping money in our economy that would otherwise have been sent to France or another country. This is, in fact, precisely what President Trump is counting on across the board, believing that we can domestically produce both raw materials and finished products. As he put it in an article posted to the White House website earlier this month, “President Donald J. Trump is standing up for American workers, strengthening American industries, and making clear to the world that America will no longer be ripped off — a push that has already delivered historic results.” This includes “leveling the playing field for American workers” with tariffs on steel and aluminum,” something that “will flood the U.S. with jobs as trading partners move their industries to U.S. soil to avoid tariffs” according to Robert Simon, CEO of JSW Steel USA. Also quoted were, American Iron and Steel Institute, “American steel producers know well the negative impact of foreign unfair trade practices, including subsidies, currency manipulation and other unfair and discriminatory policies and practices, on domestic industries and their workers,” and the Renewable Fuels Association, “For almost a decade now, we have spent precious time and resources fighting back against an unfair and unjustified tariff regime imposed by Brazil’s government on U.S. ethanol imports … We thank President Trump for taking this action and hope this reciprocal tariff will help encourage a return to free and fair ethanol trade relationship with Brazil.” The White House proceeded to cite large manufacturers who have either already moved production to the US or are expected to do so including, Nissan, Honda, and Stallantis, as well as large investments totally nearly $2 trillion that have already been secured at least partially due to tariffs, TSMC, Apple, Softbank, and others.
Granted, at least some of this is political spin and the President has a vested interest in telling the best possible version of the story. At the same time, it’s not as if his version of events is at odds with reality. Vice President JD Vance provided a more philosophical summation in support of tariffs even if they raise prices earlier this week, claiming that globalization itself has been brought on by two false conceits. “The first is assuming that we can separate the making of things from the design of things. It turns out that the geographies that do the manufacturing get awfully good at the designing of things. It turns out that, as they got better at the low end of the value chain, they also started catching up on the higher end. We were squeezed from both ends.” He continued, “The second is that cheap labor is fundamentally a crutch, and it’s a crutch that inhibits innovation. I might even say that it’s a drug that too many American firms got addicted to. If you can make a product more cheaply, it’s far too easy to do that rather than to innovate. Whether we were offshoring factories to cheap labor economies or importing cheap labor through our immigration system, cheap labor became the drug of Western economies. I’d ask my friends, both on the tech optimist side and on the populist side, not to see the failure of the logic of globalization as a failure of innovation. Indeed, I’d say that globalization’s hunger for cheap labor is a problem precisely because it’s been bad for innovation.” They believe tariffs can change this in part, and if I had to bet on them over the experts, I’d choose them every time. At least they appear to have some clue how any of this works, rather than finally discovering a tax they don’t like.
Confessions of a Conservative Atheist 