Tariffs Are Not Terrific

Tariffs have many applications, but all tariffs are a tax on imported goods. They can be seen as necessary retaliation or as protective barriers for unfairly subsidized foreign goods. They are often imposed to gain a negotiation advantage, particularly where significant levels of trade are involved. But absent some income redistribution plan that pays the accumulated tariff income to the citizens of the country imposing them, they are always regressive. In other words, they impact those at the bottom of the income ladder vastly more than those at the top. Goods are simply priced out of the consumer chain entirely or such consumables simply cost more to buy.

People in the middle and lower ends of the economic spectrum, looking at a percentage of total family earnings, tend to spend a larger fraction of their income on buying consumer goods than do those at the top. High earners spend more on services, real estate, investments and savings – which are minimally impacted by tariffs – than do those lower on that income ladder. It gets worse as the government collects more money, disproportionately from lower earners, and uses that excess to stabilize tax rates, keeping them lower. That reality benefits those who pay the highest taxes.

What really complicates tariffs in a modern era is the global nature of manufacturing and resourcing. Certain basics, like lithium – a necessary component in most modern batteries and electronics – are more abundant in China, fairly rare in the United States. Components to complex manufactures are often global. High-tech equipment, even ordinary automobiles and household appliances, may be assembled here in the United States, but a substantial proportion of the individual components are often made elsewhere. Like China. Consumers might not understand that connection because of the indirectness of the supply chain, but they will almost certainly feel the pain from the resulting price increases.

Demand for the most expensive goods using such imported components obviously drops, as has happened to the U.S. automotive industry. And as that demand falls, layoffs push American workers out of their jobs. In the United States, the gains from tariff-generated jobs are offset by a nasty trickle-down theory that does apply: “Despite the fact that these [recently imposed U.S.] tariffs affect only a narrow sliver of the U.S. economy and are quite modest in size, response to the tariffs from defenders of the globalization status quo has been hyperbolic. Critics of the tariffs reference a 2018 study by Francois and Baughman of The [Trans-Pacific] Trade Partnership. The study claims that the tariffs would increase U.S. employment in iron and steel and in nonferrous metals (primarily aluminum production) by 33,464, but result in a net loss of 146,000 jobs, with ‘five jobs lost for every new one created.’ (Timmons 2018).” Robert Scott writing for the March 21, 2018 Economic Policy Institute (epi.com). 

As retaliatory tariffs and import restrictions from China slam American farmers in the teeth, Trump is pledging hard cash grants from the fed (lots of farmers are still waiting for their checks, by the way) to make up for the losses. But that money comes from the rest of us and hardly represents a sustainable long-term solution. Even as Donald Trump cries “America First” and champions a negotiating path to “winning,” China’s internal backbone has stiffened with a wave of counter-nationalism that sent a clear message to the PRC’s leadership: do not succumb to American bullying no matter the pain to us. That tariffs almost never accomplish what is promised in the modern, globally interconnected era, seems to fall on under-educated, history-averse Trump advisors’ deaf ears.

That Trump’s foreign policies represent one of America’s longest international losing streaks seems lost on his base. China and Russia have become much more powerful during the Trump era. The promised collapse of the Maduro regime in Venezuela, the theocracy in Iran (who were supposed to cave and beg to come to the negotiating table) and the denuclearization of North Korea have all failed. ISIS is still blowing up innocents. American influence among its traditional allies has never been lower. Oh, and those of us subject to Trump’s ill-conceived trade policies are about to feel a brand-new pain. Can we mitigate against some of that agony?

Some economists suggest that the economic value of collected tariff income should simply be redistributed directly to the people. If such redistribution takes the form of tax credits or, as noted, tax reductions, that only amplifies the income-inequality-boosting regressive nature of the tariffs. The highest taxpayers get the biggest benefit. To undo the regressive nature of the impact of tariffs, the newly collected income literally needs to be redistributed to citizens in reverse order of their position on the economic ladder, noting that those at the bottom may not even be paying any incomes taxes. Perhaps a reverse sales tax?

Anticipating the newly escalated Trump tariffs on China, many retailers overbought their normal orders of Chinese goods and socked them away in overcrowded warehouses. Some Chinese manufacturers will bite the bullet and absorb a significant portion of the expect tariffs. But those are temporary band aids. Here’s our expected reality, as James Peltz writing for the May 19^th Los Angeles Times explains: “Major retailers are sounding the alarm: The U.S.-China trade battle could be coming to a mall near you in the form of higher prices in time for the back-to-school and holiday shopping seasons.

“President Trump is threatening to levy 25% tariffs on about $300 billion worth of Chinese imported goods that include clothing, shoes, household items, mobile phones, bedspreads, toys, sporting goods and school supplies such as calendars, pens and pencils… If he follows through, the tariffs probably would take effect in late June or July, and American consumers would see higher prices on many of those Chinese imports in the following weeks, according to retailers, analysts and trade associations.

“‘We’re going to do everything we can to keep prices low’ but ‘increased tariffs will lead to increased prices, we believe, for our customers,’ Brett Biggs, chief financial officer of Walmart Inc., the nation’s largest retailer, told reporters last week… If the tariffs occur, ‘it’s going to affect a lot of the apparel and accessory categories,’ Macy’s Chief Executive Jeffrey Gennette said on a call with analysts. ‘It is hard to do the math to find a path that gets you to a place where you don’t have a customer impact.’… Wall Street is waiting to see if Target Corp., J.C. Penney Co. and Kohl’s Corp. also warn of higher prices when they report their quarterly results this week.

“The retailers are scrambling to dilute the tariffs’ effect by renegotiating supplier contracts, if possible, and stocking up on products before the tariffs take effect. They’re also trying to find alternate manufacturers in other countries… But those changes can’t happen overnight and, ‘if this additional batch of tariffs becomes effective, consumer wallets will be hit hard,’ Camilla Yanushevsky, a retail analyst with CFRA Research, said in a note to clients…

“For instance, China makes nearly 85% of the $27 billion worth of toys sold in the United States each year, according to the Toy Assn. , an industry trade group… ‘If prices go up it’s going to dampen sales, there’s no question about it,’ Toy Assn. President Steve Pasierb said. ‘And we’re an industry still recovering from the loss of Toys R Us,’ which liquidated last year, he said… The Trump administration already has slapped 25% import tariffs on $250 billion of Chinese products, which includes steel, manufacturing parts and home-building supplies along with certain consumer items such as major appliances and luggage.

“In the case of luggage, the industry’s trade group said those tariffs have resulted in a 5% to 10% increase in retail prices so far this year… The median price of a washing machine before the January tariff announcement was $749, according to researchers from the Federal Research Board, University of Chicago and the National Bureau of Economic Research. The tariffs added $86 to that, the researchers said.

“The latest tariff proposal encompasses a much wider array of consumer goods, forcing retailers to decide how to handle the added cost if they can’t find replacement suppliers outside of China. They can absorb the higher tariffs in hopes of keeping prices stable and not losing sales, but that eats into profits. Conversely, they could raise consumer prices to protect profits and risk a falloff in demand for their goods. For many retailers, it’s likely to be a combination of both, experts said.”

Could there be a deal soon? Of course, but it highly unlikely to deliver anything close to what Trump considers a win. Then again, even as Trump is likely to be forced to cave, I suspect he will tout the result as “the best trade deal in history.” For a field of self-defeating hordes of Democratic candidates, they can only hope that Trump’s economic folly hits and hits hard before the 2020 election… but what a shame for America!!! And it is not how the Dems should win.

              I’m Peter Dekom, and as Trump claims victory for each and every defeat, blaming Democrats for resisting his vision of America, I wonder how much of this damage is even possible to reverse, in the near future… or ever.