Let's talk about tariffs
It's not as cut and dry as our leadership would have you believe.
Tariffs have been a large talking point in the news lately, whether it was campaign promises in the 2024 presidential election, executive orders from president Donald Trump or responses to them from other countries.
From speaking with people about tariffs both in person and online, one thing has become evident to me.
Too many people don’t know how they work.
Most people that I talk to think when Donald Trump announces a 25% tariffs on Canadian goods, that means Canada has to pay a 25% tax to the U.S. government in order to have its goods imported.
That’s not the case.
Canada is a sovereign country. The United States can only tax its own citizens. No taxation without representation, remember?
A tariff means that in order for an importation company to purchase goods from another country that has a tariff, that company must pay the tariff. So if a cabinet from Canada typically costs $100 at wholesale prices, the 25% tariff means the U.S. company that’s importing the Canadian cabinet now must pay $125 because the 25% tariff means $25 is going straight to the government’s coffers.
If that importing company doesn’t want to go out of business, it then needs to recoup those costs from the tariff. It does that by increasing the price of the item when it then sells it to American consumers. So if you think about it, the 25% tariff technically becomes a massive 25% sales tax on any item that has a tariff against it.
The most important thing to remember is other countries do not ever pay the tariff. The only thing a tariff does, other than increase the cost of goods, is disincentivize consumers from buying those goods in the first place because they’re now too expensive.
Also, tariffs don’t just work one way. We have a global economy, so other countries that want free or cheap trade aren’t going to just stand pat and let the United States place heavy tariffs on their goods. Those countries retaliate by placing tariffs on American goods, which makes it less likely that goods from the United States will be purchased by foreign importing companies to be resold.
It’s called a trade war — and no one wins a trade war.
If you remember, the United States and China got into a trade war during Trump’s first term in office. Trump announced a significant amount of Chinese goods were going to be tariffed, so China responded by placing heavy tariffs on American goods.
It got to the point where U.S. soybeans, corn and wheat were now so expensive for Chinese importers that they stopped purchasing them entirely and China instead started buying soybeans from Brazil. China had previously accounted for over 60% of all U.S. soybean exports, approximately $14 billion. That dropped to 18% ($3.1 billion) in 2017 alone.
Trump has stated that he’ll be able to pay for a wide range of economic projects using all the proceeds from tariffs, but he conveniently is forgetting what happened last time. With the U.S. agriculture industry crippled due to the trade war, Trump had to bail out American farmers to the tune of $12 billion. That accounted for over 90% of all the tax income raised by his tariffs in the first place.
One benefit of tariffs is it encourages consumers and companies to “buy American” but that’s not always the best or cheapest strategy. Consumers and corporations would have bought American in the first place if it was cheaper, but it’s not. So even if they switch to an American version of a product instead of an imported product that has been tariffed to death, the costs still will increase because the new American products are more expensive in the first place (which is why they weren’t being purchased before).
History has not been kind to tariffs either. Hell, the United States tried this policy of placing tariffs on everything imported from other countries before. It was called the Smoot-Hawley Tariff Act of 1930, placing 20,000 tariffs on imported goods and the resulting trade war with Europe caused United States imports and exports to reduce by 67%. Many economists and historians agree that the tariffs worsened the effects of the Great Depression.
Some companies and countries have found work-arounds for tariffs, although they’re extremely illegal.
Many Chinese goods are instead first going to countries that the United States doesn’t have tariffs against, like Malaysia. The items then are shipped to the United States as if they originated in Malaysia. It’s called “trans-shipping” and it’s happened with Chinese-made items like steel, honey, furniture, clothing, shrimp, catfish and much more. U.S. customs are getting overwhelmed by all the fake items.
In one case, a Chinese aluminum manufacturer shipped metal to Mexico, where it was melted down into pallets and trucked into the United States, where it attempted to claim benefits from the North American Free Trade Agreement.
Needless to say, while tariffs have their uses, there’s no place for the type of extreme and punitive tariffs we’re seeing our current administration threaten to impose on allies like Canada, Mexico, Europe and more.
For a president who campaigned on reducing the cost of living and the amount of sticker shock consumers were seeing at the grocery store, this is going to have the exact opposite effect. A weekend spat over deportees with Columbia where 25% tariffs were threatened against the South American country caused coffee prices to hit new all-time highs on Monday.
Like I said before, trade wars have no winners. I just hope enough people realize it and get the message sent loud and clear to our leadership before it’s too late and we’re forced to bail out another crippled American industry.
