The False Promise of Tariff-Driven Prosperity

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?

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.

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.

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 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.

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.

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?

It’s only been two months since the tax cut was passed. Can’t we just give it a chance to work???

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.

Riddle me this John F Di Leo. The rest of the World imposes a value added tax on goods sold in their country. So stuff we made here is already taxed by us as income and sales and then again by them with their VAT. Our companies have to compete against this double standard. How? Cut worker wages?

I absolutely love what Trump did. He has reignited our much needed Steel and metals industry which we desperately needed if there is a war. You do understand that don’t you? Free trade can go to hell if it is not FAIR TO US !! Trump is so great on this and all these bastards that make money off of killing our jobs can get lost!! Go TRUMP!!

“If our furniture factory could afford 25% more expensive steel, they would already have been buying US steel and aluminum. “

The increase is only on imports!

This kind of lying is just pathetic.

Look, I don’t mind if you don’t understand economics... that’s between you and God...

But don’t accuse me of lying.

“More globalist panic as their agenda is dismantled.”

They are going nuts! It seems as if to satisfy them we have to bend over and take it for every foreign business entity that wants to screw us and pays off the Chamber of Commerce, our politicians and the myriad of other special interest groups.

I've been watching/listening to the business news all day, and NOT ONCE has any of these hand-wringing globalists interrupted their kvetching long enough to offer an alternative solution to our yuge trade deficits and the dishonest practices of our trade "partners". So until someone comes up with a cogent solution, they can all go $*@# themselves.

I’m not a globalist shill, and I have nothing against tariffs.

Reread the first section.

I just refuse to be a keynesian and allow government to pick winners and losers.

I don’t accept the premise that it’s okay for a so-called conservative to prop up one industry (steel) by smashing every other industry.

Why on earth should we love the steel worker and hate the file cabinet maker? Why can’t we love both?

A REAL conservative - and in particular, a real capitalist - would support policies that help both of them.

Sure, and from the founding of this nation until 1913 (IIRC) when the Federal government began to rely on something in addition to tariffs the US population shrank and the people had to survive by eating grass and tree bark.

Relying on mainly tariffs forced the Federal government to stay reasonably well aligned size wise with the intentions of the Constitution.

That's the real problem the big government/big business cabal see in tariffs, the possibility that the people will realize the US could end Constitutional distortions like the 16th Amendment returning to the founders intentions and end the gravy train they ride.

JMHo

The founders also wanted to protect domestic industry, hence this in article 1 section 8 of the US Constitution:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises

By the way, I generally agree with free trade, but when only once side has the ‘free’ and the other side doesn’t I don’t consider that to be free trade.

I think all of us freepers, or nearly all of us, experienced a great analogy of “tariffs” at the Junior High Level or perhaps even elementary school.

It was on a “playing field”. Heard that term before have you?

Recall that in Track, the guy running the inside lane starts at the starting line. But, the guy running the outside lane gets to start waaaayyyyyyyy out front of the inside lane, for obvious reasons.

This is what “tariffs” when used constructively, by a sincere person (like Trump) can do. They “level” the playing field.

The “key” here is honesty and integrity in applying them. Trump has some of that. Democrats have absolutely ZERO. Just like they abused the IRS, the DOJ, the FBI and so on, they can’t be trusted on tariffs either. On that, the writer has a point.

Nothing new. Libertarians attacked Reagan as well for being a protectionist:

https://object.cato.org/pubs/pas/pa107.pdf

It’s not “an accusation “.
The tax really is only on imports as was said.

You personally do not understand “economics” you are versed only in high finance and to that sub discipline your knowledge is tightly confined.

And it shows.

Comprehensive economics includes the entire engine of production and includes both a civilian economy and a fuctioning wartime economy - a discipline so entirely beyond your grasp that it might as well be taught only in medieval Finnish for all the understanding you have garnered on it.

Steel and aluminum are materials which
a) are needed in wartime and
b) are produced in plants which take years to design, get permitted and built.
There are others and these should be next.
In the bargain, steel producers must equal the quality of foreign steel. In the late ‘80s and early ‘90s, US Steel was notorious for shipping off-center, orange peel and chemically substandard seamless pipe, and plate only fit for block pallets.

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