The more complex our trade wars become, the more important it is for farmers to understand the basics of trade actions. Central to these are tariffs—and misconceptions abound. Here are some basics.
Tariffs are taxes. Grover Norquist, America’s leading tax-hater and president of Americans for Tax Reform, tweeted it bluntly: “Tariffs are taxes. Taxes suck.” It is also crucial to know tariffs are not paid by countries, but by people and businesses. They are like sales taxes on imported goods, and they are paid by the buyer—not the seller. That’s why saying “slap a tariff on Chinese steel” is misleading. The tariffing government hopes the added cost will steer domestic buyers to domestic sellers instead.
In practice it hasn’t worked that way. In our steel dispute with China, domestic steelmakers shrewdly raised prices to maximize profits rather than buy market share by undercutting Chinese sellers. In the words of the metal manufacturing (steel users) trade group, the U.S. is now “an island of high steel prices.”
Tariffs used to work more effectively centuries ago before global trade became complex value chains of technology and expertise. They were also one of the few practical ways to collect taxes before the advent of income, sales and other levies. Endless new ways to divert global goods undermine their efficacy. Plus, tariffs are regressive and can disrupt entire economies causing slower or no growth, which costs jobs and revenues.
Tariffs don’t work. Tariffs are usually imposed in an attempt to protect specific industries from foreign competition. While the central issue is often lower labor costs in labor-intensive manufacturing, such as textiles, tariffs are also imposed in an attempt to correct perceived unfairness—from slave labor to exporter government subsidies. There is little evidence jobs are ever saved. Steel tariffs have been imposed on China twice since 2002 and the result has been unnoticeable as U.S. steelworker numbers continue a slow decline, even when U.S. steel output expanded. In most cases, economists can show productivity boosts from technology have been a much bigger factor in job loss than trade pressure.
Tariffs are less effective against commodities. Substitution and outright evasion of tariffs by transshipping or relabeling are common and difficult to police. Markets for tariffed commodities absorb much of the extra cost and/or shift production to other suppliers. Tariffs lower consumer choice and raise costs, which, in an economy 70% powered by consumers, adds risky economic friction.
Tariffs divide us. When protectionist measures such as tariffs are enacted for specific products or services, those industries achieve a government-supplied advantage that cannot be achieved in the free market. Other workers soon clamor for the same unearned status and economic benefits. To attempt to preserve less than 200,000 steelworker jobs puts more than 7 million steel manufacturing jobs at risk. When retaliatory tariffs are placed on export-dependent industries such as soybeans, affected producers demand similar government support. Government compensation is not only costly, it’s politically explosive.
Even if ruthless unilateral actions such as tariffs wring some concessions from our neighbors, we’ll be living next to Canada and Mexico for a long time. Any farmer who has inherited a fence line squabble from their parents or grandparents knows how hard it is to rebuild a good working relationship with the neighbor.
Scott Lincicome, an international trade attorney with the Cato Institute, sums up tariffs succinctly and elegantly: “Tariffs not only impose immense economic costs but also fail to achieve their primary policy aims and foster political dysfunction along the way.”
And yes, you can get that on a T-shirt.