Peter Navarro – Trump’s rabid anti-China trade adviser – is now a staunch proponent of protectionism and tariffs. However, in his 1984 book, he warned that ,”as history has painfully taught, once protectionist wars begin, the likely result is a deadly and well-nigh unstoppable downward spiral by the entire world economy.” He went on to say that, “consumers will pay tens of billions of dollars more in higher prices for a much more limited selection of goods.” Thus we can see that economic theories are very political and fungible. Ignoring such hypocrisies, the fact is that tariffs are neither good nor bad by themselves, and the optimal solution will be based on the specifics of a particular situation.
Raw materials and essentials
Consider a hypothetical case of a 25% tariff on coffee beans imported into the U.S. Nobody will benefit from this, since we are almost entirely dependent on imports. Starbucks and other coffee stores will see their profits go down and will simply pass on some or all of the extra cost to the customers.
The same logic applies to all raw materials such as oil, iron, coal, cotton etc. The economy as a whole benefits when businesses have access to cheap raw materials from which profitable products can be made.
Tariffs on essential products such as food also hurt the economy. Look at all the vegetables, fruits and grains in the supermarket with foreign labels, and you can see why tariffs on them will be harmful.
Intermediate goods
Then there are intermediate goods such as steel and lumber, which are used to manufacture or build value-added products. Raise the price of steel, it will raise the prices of numerous finished goods from cans to appliances to cars. A stark example of this domino effect: thanks to the steel tariffs, one of the largest nail manufacturers in the US has already laid off people and it’s now on the verge of going out of business.
Similarly, Trump’s tariff on Canadian lumber has raised the price of an average American home by $9000. The number of jobs gained in lumber industry will be dwarfed by the jobs lost in the construction, real estate and housing-related sectors. (A new home also creates demands for appliances, furniture and numerous other goods).
When finished goods create jobs
Trump wanted to save the solar industry, so he levied a whopping 30% tariff on imported solar panels. While this may help a handful of U.S. companies sell solar panels at a higher price, the overall sales in the industry will go down.
Cheaper solar panels means more Americans saving money on their utilities, less pollution from fossil fuels, and more service jobs through installation. Thus there’s a balancing act here between manufacturing jobs versus service jobs plus other benefits to the society.
In this case, a better solution might be for the U.S. government to subsidize R&D to innovate solar panels that generate more electricity. This will allow U.S. companies to sell relatively expensive products while staying competitive, and consumers will also have more choices.
When it’s crony capitalism
Sometimes, corporations simply bribe politicians to raise tariffs on foreign competitors, without justification. For example, take a look at the revenues of washing machine giant Whirlpool:
Whirlpool is quite profitable, but it faces a stiff competition from South Korean companies such as LG and Samsung. Rather than working hard to make better and cheaper washing machines, Whirlpool simply spends millions of dollars on lobbying politicians:
A few million dollars spent on bribing politicians result in tariffs on Korean products, which has then allowed Whirlpool to raise prices by 20% in the last few months.
This is simply corrupt crony-capitalism, which harms consumers and innovation.
Shooting ourselves in the foot
Many imports from China are simply American goods made in China – iPhones, Nike shoes, GM cars etc. Thus tariffs on “Chinese” goods – as defined by the U.S. Commerce Department – means taxes on American corporations and consumers.
Also, seemingly all-American products such as Tesla cars have numerous parts from all over the world. Tariffs on those parts means higher costs for goods made in America.
Finally, many consumer goods – garments, toys etc. – involve low-end manufacturing and extremely cheap labor, and thus will probably never be made in America again. Tariffs on these goods will simply mean higher inflation for U.S. consumers.
Tariffs to trade wars
Sudden, punitive tariffs can lead to tit-for-tat trade wars where no country wants to look weak. The repercussions of such trade wars can be enormously damaging for world trade, global stock markets and national economies. Hundreds of millions of jobs around the world depend on imports and exports. No country is an island in the highly interlinked, globalized economy.
Solution
Tariffs have been around for centuries and will stay despite all the free trade agreements. There will always be some sectors that are politically or strategically too important for countries to sacrifice at the altar of free trade. The most effective tariffs are carefully planned out and narrowly targeted. We should have a non-partisan, neutral committee to analyze particular situations and make judicious recommendations that can include tariffs, quotas and subsidies. At the same time, we need to get commitments from the beneficiary corporations to increase domestic production, hire Americans, and not engage in price-gouging.
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