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.
I agree with you on “targeted” tariffs.
I also agree with you on your last sentence.
The “key” is fair application and a generous amount of honesty in their application. Namely, is China screwing our industry X or are we really, really caving to lobbyists for that industry?
I don’t agree with your understanding of the VAT at all.
That's odd, considering you are restating what I said.
The VAT is like a sales tax. The consumer pays the full tax.
Of course. The tax is added to the product cost during production and emerges as part of the retail price. I said as much.
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.
This is also as I described 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.
How does that work? If, say, the VAT on German car comes to a thousand dollars, do they apply that to an imported car?
The United workers and companies pay income taxes on goods they make before they are sold domestically or overseas.
Unions pay income taxes on their wages, not on the goods they produce. And American companies do not pay taxes on the goods before they are sold. They pay taxes on the net profit of the company at the end of their fiscal period.
When we buy a product from a VAT country it is sold to us without the VAT added on to the cost.
If the VAT is integrated into the price, I don't see how it can be backed out for foreign sale.
When we sell our goods to a VAT country, they add on their VAT. In effect they are levying tariffs on us.
If VAT is levied on imports, it looks like a tariff to me, too. If they are.
I'm sure there are a myriad of reasons for that. Tariffs affect our economy by being, in effect, a consumption tax in addition to all the other taxes we pay. And no nation ever taxed itself into prosperity.If tariffs are so debilitating to the economy, explain how China has roared to the front of the line in world manufacturing?
You say: “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.”
But it wasn’t. I posted this to show the hipocracy of the EU. When their industry is hit hard, a tariff is fine; when American industry is hit hard, a tariff is opposed.
Seems like the guy’s meme is, “Just because it can be good for America and Americans, doesn’t mean we should do it.....”
Not really.. the vat tax that is collected along the process is a bookkeeping game where the intermediary shifts the tax to the next in line and finally is paid as a sales tax by the consumer. Yes, the foreign governments apply the vat to foreign and domestic goods. In the United States we pay our taxes on goods as income before they are sold. Our exported goods are taxed by us and the vat markets. In effect we are competing unfairly by being taxed twice. The only way to compete is to reduce our wages or profits.
“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.”
That’s nonsense. VAT countries do have income taxes. And they then apply VAT to all goods and services sold. There is no double taxation on US goods, on the contrary, US goods are in general cheaper than those from the EU (because of lower income taxes in the US), but import duties and transportation costs make them uncompetitive.
Seems like “conservatives” and liberals are in lock step to crush the USA’s middle class. Trump ripped off the facade.
Free Trade didn’t prevent Germany from invading the USSR in 1941. The USSR was Germany’s no.1 trading partner in 1941.
That’s all free traitors do is lie and use bully tactics.
We have free trade, which is Constitutionally protected, inside the USA. Why isn’t that enough? BTW, I will put my economic prowess up against yours any day.
Free Trader globalist are confined to the USA. The rest of the world trades under protectionism and laughs at the USA.
Hey doofus there is no connection between Keynesian economics, and protectionism. The two things are not related in the slightest way. I am not even sure you understand what Keynesian economics really is. You are dumb, really mis informed.
Up until 1913 that was the only way for the Feds to generate income so it is safe to say they worked.
Ok, you are a traitor. Just admit that and we can kick you out of the Republican Party.
Idiots think the supply of steel is static. What a bunch of imbeciles. The supply of steel is dynamic. After the tariff the US prices will make more steel, lots more steel. This will push prices back down to new pre tariff levels.
Umm, the whole point of a tariff is to increase the price of an import so that the higher-priced US good will be purchased instead. The buyer still is forced to pay the higher (US) price... and pass the increase on to the consumer.
Really?
So, if I don't admit that then you can't kick me out?
This is awesome.
Is admission to traitorous positions a prerequisite to expulsion or do we have to check with you first?
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