Whiting column: Tariffs are complex
Recent implementation and threat of tariffs on imports has brought the subject to the forefront. Several emails have requested an explanation of their functioning, rationale and desired economic effect.
Tariffs aren’t new. The first were imposed in the late 1700s and were a common component of foreign trade policy the next century. Basically, tariffs increase the price of a specific imported product or commodity. This is done with a flat tariff ($5,000 per car from a specific country) or a percentage (5 percent of wholesale price).
They can be in conjunction with quotas ($500 on each TV in excess of 50,000 per year). In most cases, tariffs are selectively placed on specific products from a specific country.
They can be a significant source of revenue, but most often used to level the playing field. For example, if a washing machine’s cost of production in the USA necessitates a price of $1,000 and a foreign country imports them at a retail price of $800, a tariff of $250 could be imposed to eliminate the pricing advantage, encouraging people to buy the domestic product generating profit, tax revenue and increased employment.
The foreign country price difference is typically because of their lower cost of production, most often due to lower wages. It can also be from having to meet fewer environmental or other regulations, lower taxes, and/or governmental subsidy. When a country incurs the additional cost of transportation and still beats our price, the labor differential must be significant. Free trade would be the ideal so consumers could buy the best product, but differences in cost of production have made such an economic detriment.
Steel and aluminum are an example. The price of European Union steel was recently $514 compared to the $942 U.S. price. U.S. steel mill wages average $24 per hour, the European average $5.69. The European price of aluminum was $1,700 per ton, the American price $2,400.
Consequently, Trump is implementing tariffs on steel and aluminum to increase our market competitiveness. The only alternative would be to lower steelworker wages or see steel sales continue to decrease with the consequent loss of jobs.
To be fair, some advocate steel industry bankruptcy, because we don’t want hard industry increasing pollution. The economic issue would be lack of supply to meet our needs, loss of jobs in a group of people whose training is steel, increased manufacturing in countries without our environmental regulations, and giving power over our economy to another country.
China facilitates a lower price point by choosing to subsidize specific industries. Consequently, making a profit isn’t a necessity for existence.
Another motivation for tariffs is to decrease imports which reduces our trade deficit and money leaving our country. This matters because of the economic multiplier effect in which every dollar spent is re-spent 3-5 times generating additional profits, tax revenue and employment. Every dollar that leaves can’t be multiplied.
The risk in tariffs is a country imposing retributive tariffs on our product(s). Whether this has a negative effect depends on the tariff amount, the country’s ability to purchase the product elsewhere or the elasticity of demand based on price. Since we are the world’s largest consumer, in the long term, the economic power is in our hands.
Last year, China exported $483 billion to us and we $116 billion to them. Our business is 23 percent of their total economy. Their business is 5.5 percent of ours. Without our business they would have 23 percent fewer jobs. Not an attractive thought even to China.
In addition, they import resources and necessities; we import consumer amenities. Their main imports are oil, fuel, ore, copper, plastics, chemicals, corn, wheat and technology. Ours are consumer electronics, toys and clothing. We have the leverage.
Interestingly, China utilizes our technology in their products. They are not on the forefront of technology development, but are a leader in implementing the technology. They import technology resulting from our investment in R&D. A recent point of contention is China’s requiring our manufacturers to provide them with the technology as a condition to selling the product or commodity. They also have refused to honor our trademarks, copyrights and patents, which Trump is seeking to protect through the power of tariff.
China has threatened tariffs and/or prohibiting import of select items. Soybeans is an example. However, China produces only 11 percent of the soybeans they require, and we are the world’s largest producer. They don’t have an alternative source. Similarly, China, Russia and most European countries do not produce all the food their citizens require. Russia, even with its large geographical size, produces only 35 percent of the wheat it requires. They buy the rest from us and Argentina. Our food production generates economic power.
Our trade treaties, whether NAFTA or others, primarily opened our markets for other countries. NAFTA created 682,000 jobs in Mexico, which one could argue were and would be in the USA. To be sure, the world’s economics are more interdependent than even a generation ago, but we are the least dependent.
Any tariffs imposed on our products would create short term hardship for those involved in those products or commodities. The crucial issue is do we want to protect certain industries and their wage level. The choice is tariffs or decreasing our cost of production through lower wages and less regulation.
We have the personal responsibility to buy products made in the USA. If we wish our manufacturing industries to continue, our government has the responsibility to protect them, our jobs and economy.
Bryan Whiting feels most of our issues are best solved by personal responsibility and an understanding of non-partisan economics rather than by government intervention. He recently retired after 40 years of teaching marketing, entrepreneurship and economics. Comments and column suggestions to: firstname.lastname@example.org
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