Posted on 03/02/2018 5:45:21 PM PST by jfd1776
Tariffs are a wonderful idea, aren’t they?
A tariff – technically, a tax on an imported good, usually as a percentage of the good's value – sounds almost too good to be true. A tariff raises money on imports, but encourages Americans to stop importing, and to buy local goods instead of foreign; it serves a foreign policy purpose by punishing our enemies, and it helps pay for seaports and border protection. Quite a multifaceted, targeted tool.
It’s like one of those magical diet pills that helps you get thinner in the waist, broader in the shoulders and chest, make your hair thicker, give you more energy, and add twenty years to your life. Of course, such magical diet pills always turn out to be fictional… and in many ways, so do the benefits of tariffs.
Now, that’s not to say that tariffs are objectively a bad thing. Government has to raise revenue somehow, to pay for the military, the roads, the national parks, and ten times more services than the Constitution even allows. If we have to raise money somehow, we may as well do it with tariffs. Objectively, they’re no more or less moral than sales taxes, social security taxes, income taxes and property taxes.
But the mere fact that they’re a legitimate tool doesn’t mean we should liberally expand them whenever we feel like it. Like all taxes, tariffs are dangerous things, especially when they change suddenly.
Imagine if you were getting ready to retire, having paid off your home and planned your retirement budget around staying in this mortgage-less home, only to discover suddenly that your property taxes quintupled overnight.
Or imagine saving for years to send your children to college, based on a steady salary and a predictable income tax and education tax credit program, and the very year your kids headed off to college, your income tax tripled and the tax credit programs were cancelled.
What would it do to your family? What effect would this have on your future, and the future of your children and grandchildren?
It’s the same thing for the business world.
The Filing Cabinet Manufacturer
Let’s say you’re in the office furniture business. You make attractive wooden rolling office furniture, such as filing cabinets, which are made of a multitude of materials. The body of the cabinet is made from real oak, as is the front panel of each drawer… then the body of each drawer is made from sheet steel, cut, welded and fitted into shape as a drawer. There are steel rods functioning as dividers, nuts and bolts holding everything together, wood stain and lacquer for the wood, powder coat for the steel, plastic gasket for the drawer closure, brass casters on the base, and brass handles on the front of each drawer.
Now, some of these raw materials are bought locally, in the United States…. Some are purchased from foreign vendors. The lumber, stain, and powder coat will likely be local; the sheet steel will likely be Canadian. The casters and drawer handles might be from China or Germany; the fasteners and gasket will probably all be South Korean or Taiwanese.
You’ve priced each purchased material carefully, so that you can keep your costs in check. You have high end competition, made of wood throughout, both interior and exterior; you have to be a lot cheaper than their products. And you have low end competition, which uses metal both inside and out, or perhaps artificial wood for the cabinet instead of the real thing, as you use. You can be pricier than the latter, but not too much so.
Price is everything in this economy, and probably always will be.
Now that you’ve bought these materials, your factory can get to work. Five days a week, or maybe six; one shift a day, or maybe two, you employ fifty or a hundred employees, stamping and welding and painting the steel parts… cutting and assembling and staining and varnishing the wood cabinets… assembling these parts together into a finished product, adding the casters and drawer pulls at the end.
That’s a lot of labor. You employ a lot of people – not only the workers on the line, but also the buyers who order the materials, the carriers who pick them up and deliver them to you, the engineers who design them, the product managers and salesmen and customer service reps who sell them, the accounting, marketing and upper management folks who handle the back office tasks, the warehouse and logistics personnel who store, ship, and receive it all.
And your purchases employ a lot of people, from the lumberyards and steel mills, chemical plants and injection molders who supply your materials, both in your country and abroad, to the people in your own factory who put them all together to create a new finished product.
You do this in America, and you pay taxes, and you employ people, and they pay taxes. It’s a good thing, all round.
Tax Cuts and Regulatory Reform
Over the course of 2017, the Trump administration focused on regulatory reform – lowering the costs of doing business in many industries, and reducing some costs across the board by taking the jack boot of the leviathan off the neck of industries critical to us all. Reductions in the red tape and fees of the energy sector have reduced energy rates; the cost of production of many specific products has gone down, and more will follow as the Trump administration’s upper staff finds more regulations to trim in the years to come.
Also in 2017, Congress passed – and the President signed – a huge tax cut. This tax cut focused on business more than the individual, on the theory that a stronger employer is more important than cutting the tax rate of an employee who could find himself unemployed any day!
This isn’t only good for you, as the furniture maker. These reductions of red tape and income taxes have not just cut your costs of doing business; they’ve done the same for your domestic US vendors.
This doesn’t mean that you’ll be able to switch to solely sourcing your raw materials in the USA tomorrow… but it does mean that more and more USA manufacturers will be able to be more aggressive with pricing when answering this year’s bids, and next year’s bids, and next year’s bids. As their costs go down, so will their prices, and you be able to “insource” (to switch from foreign vendors back to domestic, after years and years of gradual outsourcing), more and more every year.
This tax cut and these regulatory reforms will keep our furniture factory from closing down, or from having to move overseas. They help not only us, but our vendors too. We are on the right track.
The Punitive Steel and Aluminum Tariffs of 2018
The President is calling for additional tariffs on steel and aluminum, as new presidents so often do. The political power of the steel and aluminum lobbies is substantial; they whine that they are losing business to foreign competition, and plead with government to “help” them.
A President is likely to be open to their argument, because it’s undeniably important, not only for employment reasons, but also for national security purposes, to have robust steel and aluminum industries of our own, here at home. If there’s a way to keep our steel and aluminum industries, and to pull back some of the business that we’ve lost to other countries over the years, that would be a very good thing indeed.
And we were on the way to that end, weren’t we? The tax cuts and regulatory reforms already in place help all our industries… our vendors are getting healthier by the day.
But then the President announced new tariffs on imported goods. Imported products that were duty-free, or carried a low duty, will now increase in price by 10 to 25 percent… possibly at the drop of a hat.
Now, perhaps the duty rate was too low before; a case can certainly be made for adjusting the entire American tariff program, as we have a duty range from duty-free to twenty or thirty percent, depending on the product. There seems to be no rhyme or reason to the variances.
But ANY tax increase is disruptive, so government must be cautious when implementing such changes.
Think of our furniture company. Can we afford an increase of 25% in the cost of our second biggest component? (Now’s the time to thank our lucky stars we aren’t in the all-metal furniture business; then our entire product line would be going up 25% in cost!).
The government hopes, as all protectionists always do, that this 25% tariff on our imported steel will cause us to stop buying our steel from Canada, Mexico, or China, and we will instead switch at a moment’s notice to a domestic vendor. But will we?
Domestic vendors are cheaper and easier to work with, by far. Transportation is quicker and more dependable, quality tends to be high and customer support tends to be wonderful. If we could use domestic sources, we probably already would have.
So what choice does that leave us? We may find that we need to close down… or we may try to raise prices to account for the cost increase, and see if we survive… or we may do what companies have been doing for decades: pull up stakes and move production to a third world country ourselves.
We don’t want to do this. Nobody wants to move production away from the home they love, to do their manufacturing in a foreign country an ocean away. But at a certain point, it has to happen. The manufacture eventually decides he can’t take the beating from his government anymore, and he moves away.
This process is exactly what we had turned around in 2017. Our tax cuts and regulatory reform were stopping companies from running away, and instead, these reforms were causing companies to bring back production lines that they had exported to other “low cost countries” years ago!
The administration dreams that steel and aluminum tariffs are different, that they will create more business for the domestic steel and aluminum industry by forcing American companies to in-source those materials.
But they won’t.
They are still a tax, and the laws of economics will always apply. “Tax something and you get less of it.”
By raising the cost of manufacturing, with such universally-needed materials as steel and aluminum, the government is flirting with rendering all the advances of 2017 moot.
If our furniture factory could afford 25% more expensive steel, they would already have been buying US steel and aluminum. They can’t afford it. They will have to switch to plastic, or cut corners some other way (goodbye, company-provided healthcare to the employees; goodbye, company sponsored health club memberships; goodbye, planned factory expansion or new office).
And if the cost differential is too great, we'll have to flee, shutting the place down and moving to China or some other country more welcoming to a manufacturing plant. And then it's not only our employees who'll lose their jobs; it's also the domestic lumber mills and powder coat and stain and lacquer companies who used to be our vendors. They're losing their customer now, all those orders will disappear, and the jobs of those who had supported them too.
You just can’t tax a company into buying your product; all you can do is tax him into running away.
Steel and aluminum executives and union shop stewards are in ecstasy at these new taxes; they are sure this attack on their foreign competitors will solve their every problem.
They are wrong.
What profit is it really, if you manage to gain all the steel and aluminum purchases made by an empty factory, a shuttered warehouse, a plant set for demolition, because the previous occupants moved to China or went out of business?
He who wins all the orders from a bankrupt customer inherits the wind.
It’s only been two months since the tax cut was passed. Can’t we just give it a chance to work???
Copyright 2018 John F. Di Leo
John F Di Leo is a Chicagoland-based Customs broker and trade compliance trainer. His columns are found regularly in Illinois Review. Permission is hereby granted to forward freely, provided it is uncut and the IR URL and byline are included.
Right. And sometimes they worked, and sometimes they didn’t. But when they didn’t, it was mostly because the POTUS at the time didn’t have the spine to keep them in place long enough to have the desired effect.
Well put. Though I wrote to someone earlier today in response to some “trade war” rhetoric that if there is to be a trade war, it is not due to tariffs, but to failed trade policies of prior administrations.
The dishonest practices were borne of trade agreements authorized here at home.
Shaking things up to be in a better negotiating position is just what’s needed, but I still dream of the swamp being drained...
The part I quoted is blatantly dishonest.
Steel will probably cost about 10% more considering the choices US and foreign providers and vendors have.
Tariffs are indeed tricky; punitive tariffs are usually well-deserved and beneficial overall.
A conservative supports tariffs that are needed for our security.
Europe 2016: Guardian report:
An EU action plan to help Europe’s struggling steel industry to be announced on Wednesday is expected to include a proposal to levy punitive tariffs on subsidised Chinese imports, a move the UK government will oppose. Axel Eggert, director general of the European Steel Association (Eurofer), said the situation for Europe’s steel industry was now critical. The UK is one of the hardest-hit countries, he added, with the strong pound and relatively high energy prices raising the cost of British steel.
The industry in Europe blames the crisis on state-owned steel companies in China – and to a lesser extent Russia and Belarus – that benefit from loans and subsidies that allow them to produce below cost. As a result, EU producers have not benefited from Europe’s rising demand for steel as the car industry and construction sectors rebound out of recession.L
Okay. I’d have been more politic had I known you were the author. It’s not easy to put one’s thoughts out in public
“relatively high energy prices “.. ahem!
This is an example of a problem that would have been (in 2016) better solved by addressing the energy costs than by a protective tariff.
Fake news.
I generally disagree with using Tariffs on one industry for the sole purpose of boosting jobs at home. There’s a trickle down of those costs that impact many many more jobs at home.
Targeted Tariffs may be needed from time to time but should only be used to “Send a message” to the target that we are serious and are willing to take steps to force them to end their “dumping” policies. This is always dangerous because it invites retaliation on other industries.
From what I understand US Steel producers already supply 70% of the market and China ranks 11th in steel imports into the US. If these Tariffs are targeted to the concern that China is subsidizing their steel producers and dumping “Low cost” products than it seems to me that the overall economic impact of these Tariffs would be negligible.
American consumers don’t buy steel directly from China. American manufactures buy the steel and they make stuff that consumers buy. Higher costs for their materials will have a negative impact on their ability to remain competitive as it would result in higher prices. I don’t know how big this impact will be.
In any event, if an American manufacturer is buying “Low cost” steel from China because there is no American manufacturer that can deliver the product and those prices?
I say, So what.
Good for them.
Who cares?
If the Chinese Government is subsidizing their steel producers and taking a loss in the process.... I say we should buy more from these idiots. They are a pin prick in the overall market.
At the end of the day, The Chinese work for US.
It’s my understanding that VAT applies to the increase in value of a product as it moves through various stages or production. Something like taxing the increase in value gained by going from pig iron to automobile body. The result is that the retail price of the item contains the VAT it attracted and no further taxes are required.
Stuff we make here should be cheaper because all that tax is not loaded into the final price. Companies pay tax on their profits, which can vary wildly. I don’t see any double standard. VAT is insidious because it is a hidden tax, thus easier to be raised without public outcry.
Fiscally, tariffs are not that great an idea because they go into government coffers, reducing pressure on the govt to reduce spending. Economically, it is a transfer of money from the consumer’s through higher prices, which stifle demand. As an instrument of trade policy, it will be interesting to see the fallout.
The Chinese Govt OWNS their steel and aluminum mills. Every time you buy a Chinese made item you are paying for another missile, aircraft, or ship aimed at America
Oh look an opinion from Illinois. Yes, Illinois the state where poor folks work to prop up their democrat overlords through egregious taxation and funnel the money to illegals and gang bangers.
The Chinese Govt OWNS their steel and aluminum mills. Every time you buy a Chinese made item you are paying for another missile, aircraft, or ship aimed at America
OK, so what?
They are producing products, steel in this case, at a LOSS.
Do a little math.
How can their sales of a product, at a loss, produce money to pay for those military expenses?
No matter how you slice it, they are going into debt whether they sell steel products or they don’t.
If you recall, we defeated the Soviets buy bankrupting them in an arms race.
Your assumptions are incorrect.
Pelham and Mr Smith get it. Thank you.
For the rest... let me put it this way:
You have a thousand people in a mall’s food court who need to eat. Every day, a hundred eat in the food court, and the other 900 go outside and drive to the restaurants and fast food places in the area.
This bugs the food court vendors, so they convince the town to put a 25% additional tax on the outside restaurants and fast food places. Effective this morning.
So the next morning all 1000 try to go to lunch at the food court, and 800 are turned away because the food court can’t handle all the business. they don’t have space, they don’t have staff, they don’t have ingredients. they’re out of food by 11:45am.
So those 800 now have to go to the restaurants and fast food places outside the mall, like usual. So that’s no change for them... except that now they’re being charged at 25% surcharge.
Now, over the long term, given enough time, maybe the mall could expand the food court and buy enough ingredients and hire enough staff to accommodate a thousand people...
...but that construction job will take a year or two. And in the meantime, these completely innocent 800 people have to pay 25% more to eat lunch. Through no fault of their own.
This is my objection to the 25% steel tariff that Trump announced. He doesn’t understand the economy at all. He doesn’t realize that the American steelmaking industry can’t accommodate a massive influx of new orders overnight... so his 25% tax is a massive and unfair penalty to this completely innocent group of customers.
This is the problem with a sudden imposition of a 25% tariff.
JFD
This advocates America Last globalism.
The tariff is simply a shot across the bow — a signal that Trump is serious and that the glory days of Non-Fair Trade practices by our competitors are being ended. And, by the way, Trump who has decades of successful international business practice DOES understand economics.
Unless this is very very very selective all it’s going to mean is that whatever that product is if made out of something being subjected to that tax.
It’s going to cost you more.
Plus the country affected will retaliate but putting taxes on stuff we send them and it will cost them more. Usually it hurts our Agri business. Creating inflation and slows down economic development.
It strikes me what Trump is looking at are those thousands of small manufacturers who’ve gone out of business because of the expansion of cheap Chinese imports (of which many were design knock offs) into this country. Remember the Obama quote on manufacturing.
But that was a slow gradual process when it began. Then accelerated by policy. So it should be when as we’re trying to bring small industry back.
Certain key manufacturing and re-manufacturing processes essential to defense should be targeted first and done on a very very limited basis. Because a wholesale approach would wreck our economy.
I don’t agree with your understanding of the VAT at all. The VAT is like a sales tax. The consumer pays the full tax. The producers pay their incremental portion along the production line but recoup their added contribution as it passes on down the line. Hence the consumer eventually pays it. The value added tax countries don’t have income taxes. They have the VAT. VAT countries levy the VAT on domestic and foreign goods equally.
The United workers and companies pay income taxes on goods they make before they are sold domestically or overseas.
When we buy a product from a VAT country it is sold to us without the VAT added on to the cost. When we sell our goods to a VAT country, they add on their VAT. In effect they are levying tariffs on us. If tariffs are so debilitating to the economy, explain how China has roared to the front of the line in world manufacturing?
Interesting analogy (makes the ‘national defense’ case though).
Match it up to this info https://www.trade.gov/steel/countries/pdfs/2016/annual/imports-us.pdf
and it might make a good column.
Seamless pipe.
Spent 30+ years in the mechanical contracting biz and was told in the 1980s by our pipe and fitting supplier that ASTM A53 ERW (pipe with a seam made by electric resistance welding) was more trustworthy in performance than true seamless pipe (ASTM A106). The mandrels used to pierce and form the bore for seamless pipe/tube were so worn they produced wide variations in wall thickness.
I think this has changed drastically for the better because of the furious business in the domestic oil patch spurring our mills to upgrade equipment.
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