With all the news about tariffs, we want to set the stage with some basic information about tariffs
A tariff is a fee imposed on imported goods or services by a government. A tariffs can be a flat amount on each good or a percentage added to the total cost of an imported good. They are similar to sales taxes and are collected by the government at the time of importation. Tariffs raise the price of imported goods.
Why would the government want to impose a tariff?
There are many reasons governments use tariffs. However, tariffs raise consumer prices and limit consumer choices. The most common is to protect domestic industries and domestic jobs from foreign competition.
- The most common reason is to protect domestic industries and domestic jobs from foreign competition. The stated goal is usually to protect jobs.
- A second reason is to raise tax revenue.
- A third reason is to shield key strategic industries like technology and arms manufacturing from adversaries.
- Governments may also lower tariffs to support allies and impose tariffs to pressure rivals.
- Tariffs can also be used to limit imports of dangerous goods or reduce consumption of harmful products like cigarettes or alcohol. Or simply to reduce consumption.
- And finally, there is corruption. Tariffs can be used to reward political supporters of government policies and punish opponents.
Reasons against Tariffs
Tariffs raise prices and limit consumer choices. The reduce the value consumer receive form purchases. They are prone to favoritism and corruption. They often don’t achieve their intended goal (good jobs). And they can create instability in the financial markets.
Who pays the tariff?
Tariffs costs are spread among different groups. Increasing the tariff on a product is the same as raising the price. Some of that price increase is passed on to the end consumer, but not all of the increase. Generally, tariffs are absorbed in the form of lower profits by all members of the supply chain. Each member, by the manufacturer, the importer, the wholesaler, the retailer and the consumer all pay higher prices and have smaller profits. The split depends on the bargaining power of each group. Basically, it boils down to: do I have alternatives?
Why are Tariffs bad economically?
Tariffs distort the true value of a good and the benefit consumers receive. They impede the free flow of goods at their true price. Tariffs artificially raise prices and limit consumer benefits.
For example, a flat-screen TV is a great value at $500. Nearly everyone owns one, and it adds real value to daily life. But few would pay $5,000 for the same TV. Tariffs raise prices and distort that value. People spend their money elsewhere, reducing demand and creating inefficiency.
Are Tariffs bad for Black People in the United States
Generally, yes, Tariffs are bad for black people in the United States. We spend a higher percentage of our income on imported products. We consume more low-cost goods that are made overseas. Blacks consume more good in certain goods sectors that are highly affected by tariffs: beauty products, electronics, toys, shoes and clothes, and automobiles and fruits and vegetables. Tariffs will raise prices in areas where African-Americans spend money while generating jobs in areas where we don’t work.
Why did the stock market go down when the tariffs were announced?
The stock market reflects the long term outlook for corporate earnings. Stock market values are based on future potential earnings and potential price appreciation. If the economy slows, then companies will earn smaller profits and their stock will be worth less.
Tariffs created uncertainty in financial markets. Investors expect higher prices and slower growth, which can trigger fears of a recession. The random nature of the tariffs also created uncertainty in the bond market refection a loss of confidence in US policy.
Stock Market and Media Coverage
The stock market and the media that covers the stock market, also reflects larger opinions about the US economy. Tariffs created uncertainty in the financial markets. The stock market and financial investors fear a slowdown in economic growth and a possible recession. The media love an exciting story, so the coverage has been extensive.
Why is free trade a good idea?
Countries are better off from trade because the value of imported goods is greater than the costs. No country, in a global economy, can produce everything it’s citizens want. The US does not produce mangos or diamonds. If it want mangos, it must import them, but consumers are better off with Mangos. Mango producing countries do not make aircraft. It therefore benefits both countries to produce and sell mangos and aircraft beyond what the domestic demand for each product is. Both benefit from sell the excess mango and planes to each other. Both counties are better off.
Comparative Advantage
Trade and Tariffs have been discussed extensively by economist for a long time. One of the early, Important theories on trade is called comparative advantage.
Over Consumption
The United States may overconsume cheap goods at the expense of creating good quality jobs.
Summary
Tariffs as imposed by President trump are misguided. Tariffs are a simplistic answer to a complicated problem: how to create good jobs. Tariffs might get you elected, but the real word is a lot different.
What is really needed is a US industrial policy that supports good jobs. If you want good jobs, then directly support good jobs: Infrastructure, unions, and decent wages. Not some backhand play to fund tax cuts.