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Tariffs are not meant to be punitive and, as a rule, should not be used to coerce other nations to do something they are opposed to. Tariffs can have unexpected, unintended, and undesirable consequences.
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Generally, stronger nations will simply respond to tariffs placed on their goods by placing tariffs on American goods.
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Tariffs are supposed to be used to encourage U.S. businesses and products by protecting them from foreign competition. In the early days of this country, tariffs were used to make room for American entrepreneurs to establish industries that would be vital to the economic health of the nation. They worked just as intended then but they don’t work so well now that the U.S. is the economic powerhouse it has become.
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Why is that?
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The cost of tariffs is paid to the U.S. government by the American importer of foreign products—not the foreign manufacturer or a foreign government—and that cost is then passed on to the consumer by jacking up the retail price of goods.
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Sometimes the retailer might even jack the price up higher than the actual tariff because the consumer has been given to understand that, because of the new tariff, the price is going up anyway, and without enough information and a decent calculator, the consumer may not be able to easily determine how much that increase should actually be. Even if she can, the consumer still only has a limited range of choices: buy the foreign product for a new, higher price or pay slightly less for the same American-made product. That’s OK if you don ‘t need that product to get by, but if your life depends somewhat on being able to afford imported food (for example, vegetables from Mexico) you have no choice. Either way, the consumer has to pay more today for exactly the same thing that otherwise cost less yesterday. And, to add insult to injury, that extra cost is effectively a tax increase on the consumer.
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Tariffs, as noted above, are supposed to make foreign goods more expensive so as to encourage consumers to favor domestic manufacturers. But many imported products do not have domestic competitors and imposition of tariffs on those products won’t create a rush to invest in startup businesses that will compete for what are likely to be extremely narrow profit margins at best.
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In fact, one of the most likely consequences of tariffs is that the countries which those tariffs affect will institute tariffs of their own on American goods and/or take other retaliatory measures.
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That’s what happened with U.S. soybeans, which used to be sold to China in great quantity. After the U.S. imposition of tariffs on Chinese products, China now buys most of its soybeans elsewhere—Brazil, for instance—and American soybean farmers have been devastated.
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So now our government is committing billions of dollars to bailing out the depressed soybean farmers.
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Those billions of dollars come from the federal taxes we all pay to Washington; so a tax on Americans to support American farmers who, before tariffs on non-farm goods, had previously made a nice living from farming without government assistance.
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And the same taxpayers who are bailing out the farmers are also paying more to a government that imposed those tariffs for the imported goods they pretty much still have to buy because there are few or no American competitors or because they actually need those now more expensive commodities.
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How much more expensive foreign goods become is dependent on domestic manufacturers maintaining the selling prices of domestic goods at levels before the imposition of tariffs on imported goods.
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But after imposition of tariffs on foreign goods, prices of domestic goods also tend to rise while still maintaining some competitive advantage.
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Conclusion: Poorly thought out tariffs upend a stable economic balance, impose greater taxes on the incomes of ordinary taxpayers, and force American businesses (and farmers) into dire straits.
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Foreign widgets can be bought by importers for $1.00 apiece and are sold to consumers for $2.00 apiece. The $1.00 difference covers the cost of doing business including employees, advertising and distribution, leaving some balance for profit for the domestic widget marketer.
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Widgets don’t get made domestically because the cost of domestic manufacturing is too high to be competitive.
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Let’s say it would cost $1.50 each to manufacture widgets domestically. At $2.00 each at retail there would be no room for profit and probably wouldn’t even cover the cost of getting them to market. Therefore, nobody wants to make widgets in this country.
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Imposing a 25% tariff on widgets might make domestic widgets more attractive to manufacture. Now widgets will cost importers $1.25 each—$1.00 for the foreign manufacturer + $0.25 the importer has to give the U.S. government to pay the tariff.
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So now the importer has to raise its retail price to $2.25 to cover the same $1.00 it used to get for advertising, distribution, cost of doing business, and profit.
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In the end, the consumer is the one who bears the burden of the tariff, not the foreign manufacturer or the domestic importer. The tariff becomes nothing more than the cost of doing business, essentially no different from distribution costs or advertising costs or paying employees.
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But, you might say, now domestic manufacture will be competitive and people will buy domestic widgets and create jobs for Americans.
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But, I’ll remind you that foreign widgets, after a 25% tariff, are still so cheap that no one could see a profit manufacturing them domestically. There are no domestic widgets to be found and no one is going to invest in making them domestically because there will be no profit, or so little that it would be foolish to spend money trying.
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So let’s raise the tariff to the point where it might be profitable for domestic enterprise, say, 50%.
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At 50%, as the foregoing examples provide, imported widgets will cost $2.50 at retail.
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Domestic widgets, according to #3 above—if that “industry” can be started—will cost $1.50 a piece to manufacture domestically and another $1.00 to cover the cost of business and leave a worthwhile amount for profit. In other words, U.S. widgets and foreign widgets would now be price competitive and patriotic consumers would be expected to buy American and create more jobs for Americans. Problem solved, no?
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Not so fast. We may have just created a domestic widget industry with tariffs on foreign widgets, but at what cost?
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Widgets that once cost $2.00 at Walmart are now 25% more expensive retailing at $2.50.
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But don’t we now have a genuinely profitable American widget industry?
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Not really. This new industry is now heavily subsidized by American consumers, who are paying 25% more for widgets than they used to.
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That’s OK, you say, because we are creating jobs for Americans.
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But is it OK to tax Americans—that’s what tariffs are: taxes on domestic consumers—to create jobs for other Americans while our general tax policies give the employers of those other Americans ridiculously low corporate tax obligations that allow them even more profit after taxes?
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Finally, travelers abroad start to wonder why widgets are so inexpensive in Canada or Europe and no American widgets are sold in those countries because, remember, American widgets can’t be manufactured competitively without a tariff. Canada and Europe aren’t putting tariffs on widgets because they know that tariffs are, in the final analysis, taxes on their own consumers.
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But, you say, tariffs punish the widget manufacturing country by hurting its economy. However, in practice, foreign widget manufacturers aren’t really affected by the tariffs because they don’t pay them, Americans do. The foreign widget makers don’t expect an American widget industry to spring up overnight because they recognize how difficult that would be. On many foreign goods, tariffs would have to be exorbitant (100% or more) to really make domestic manufacture a worthwhile investment.
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So what really happens? Foreign countries respond to tariffs on their goods by putting tariffs on American goods and selling into other markets to make up for any sales losses American tariffs actually do effect.
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Worse, they ignore U.S. markets for imports to their country in response to tariffs on their goods. That’s sort of what happened to U.S. soybean farmers, who watched foreign soybean buyers seek new suppliers in Brazil and elsewhere, leaving domestic soybean farmers with huge losses that have put many of them on the brink of ruin or worse.
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To “help out” with those farmers’ huge losses, our government is giving those farmers billions of tax dollars to keep them out of bankruptcy. And, where do those billions come from? From the taxes consumers pay—for example, those taxes tariffs on widgets.
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Conclusion: Tariffs don’t work. Most of the time, unless they are carefully thought out, all they do is make a messy situation messier.