by Dave Gardner
Is war imminent, with the American business community at ground zero?
President Donald Trump, fulfilling a prime campaign promise, has begun trade disputes on a series of international fronts, with tariffs as his prime weapon. According to Business Insider, a tariff is a tax on goods, also known as a duty, entering the United States.
These fees are collected by the American Customs and Border Protection at the good’s port of entry. Importers face the extra fee immediately, raising prices for these goods destined for sale in the United States and thereby interfering with the free market.
According to international economist Iordanis Petsas, Ph.D., chairperson and associate professor of economics at the University of Scranton, tariffs are sold to the public as protectors of specific domestic industries. A factual examination of history can reveal that this tariff mechanism produces benefits as well as costs, and may occasionally not be a bad idea if the benefits exceed the losses.
Dr. Petsas pointed out that, as tariff revenues flow directly to the government, higher prices for the taxed goods must result. Therefore, the American consumer sustains the losses and inevitably can buy fewer goods.
Domestic producers of the taxed goods must then withdrawal resources from other sectors of the economy to cover the shortages, creating some sort of production losses within the total economy. Total benefits may later exceed the costs, or perhaps not.
“History makes me skeptical of tariffs because of the associated problems created,” said Dr. Petsas. “The countries exporting the goods may then impose tariffs on exporters from the United States, creating more disruption and losses.”
According to Dr. Petsas, the last time Washington levied tariffs against a major category of imported items was during 2002, when foreign steel was taxed. The overall economic damage done by the tariffs was so great the process ceased within a year, particularly because the job losses inflicted on other domestic industries were greater than the benefits derived.
“We experienced a lot of troubles during that time, particularly with steel that was not used directly by the consumer, such as within the food industry for cans and within building construction,” said Dr. Petsas.
Another example from history of tariff-related troubles involves the global banana wars of the 1990s. According to Dr. Petsas, the European Union restricted banana imports from Central America, but the producers of the bananas then retaliated by restricting clothing from Europe.
Producers within both industries suffered, economic losses mounted, and complaints were subsequently filed with the World Trade Organization. Nobody won the war, but the historical example now serves as a famous guideline for modern economists evaluating current proposals for tariffs.
The inverse of tariffs, according to Dr. Petsas, is a global system where free trade between nations creates efficiency and product competitiveness. Tariffs, however, inevitably create rising prices and decreased consumer buying, particularly with situations such as Asian consumer goods where retail prices immediately rise.
“When job losses occur from tariffs it readily becomes apparent to people that there is a downside to the process,” said Dr. Petsas. “This is among the reasons that tariffs as a solution have historically failed.”
Many different types of tariff mechanisms exist, according to Thomas Sweetz, M.S., instructor of business with Misericordia University. These include import quotas, blanket taxes and formal licensing with imports.
The American trade deficit with China, now in the vicinity of at least $150 billion, is fueling calls for restrictions of this nation’s goods on American shelves. According to Dr. Sweetz, China has achieved the ultra-low prices for many of their goods by a process called dumping, where the item is sold in the United States at below cost to box out domestic competitors.
The NAFTA trade deal has created benefits for every nation involved. It has evolved to benefit some countries more than others, but NAFTA is representative of virtually all trade mechanisms in that it has encouraged global competitiveness, better products, and lower sale prices.
“The consumer often misses all of this because they become preoccupied with global political aspects of a tariff,” said Dr. Sweetz. “They can’t see that truth. If a trade war breaks out the prices on goods in the big-box retail stores prices will rise, and temporary financial bailouts for American producers like the soybean farmers will be increasingly necessary.”
Dr. Sweetz also discusses multiple chain impacts when discussing tariffs. Inevitably, tariffs suppress national GDP and growth, influence the exchange rates for national currencies, and raise consumer prices.
He calls this all part of a domino effect that cannot be seen by the average consumer, even if the tariff creates a painful inflationary spiral within various sectors of an economy, such as steel for construction, railroads and automobiles.
“It’s also true that market disruptions can evolve an economy, but generally the cons outweigh the pros with tariffs,” said Dr. Sweetz. “Above all, uncertainty is created by tariffs, and uncertainty is very bad for economic growth.”