Tariffs suck for the country implementing the tariff. But before I tell you why they suck, let me tell you the way they are supposed to help.
Here’s the way tariffs are supposed to work according to people that like tariffs (spoiler alert, this thing I’m about to describe is a fantasy and I’ll explain why).
Let’s say people in the US can make widgets for $10 and sell them for $12 and have a viable business. But mean old foreign country can make widgets for $5 and sell them for $7 and have a viable business. The foreign country sells the people of the US widgets for $7, which is great if you live in the US and want to buy a widget but sucks if you live in the US and want to make a widget.
Tariffs are supposed to protect local businesses by making foreign goods less competitive. If every time someone imports a foreign widget they have to pay a $10 tariff, well now that $7 foreign widget costs $17 and the local US widget producers can compete again. Great if you are a US widget maker and shitty if you are a US widget buyer.
Now you might notice the people in the US buying widgets, even in the best fantasy scenario, end up getting dicked over. The theory goes that widget making jobs are good though and if we do that enough then everyone will have to pay more for goods but we will have lots of jobs making stuff that pay ok.
Now here’s the part that really, really sucks. Let’s say you are a US widget maker and now you know that your foreign competition can’t make a widget for less than $17. You could sell your widgets for $12 and have a viable business or you could sell them for $16.99 and have a super profitable business. I’ll just gesture broadly at the sea of corporate greed we find ourselves floating in and let you decide which is more likely.
Tariffs induce even local manufacturers to raise prices because it hurts competition. It’s basically a massive transfer of wealth from local consumers to local producers by cutting out the foreign producers and the competitive pressure they exert on the market. This is why basically every economist said “do this and kill the economy”
So why do people want tariffs? Well the promise for your average voter is that the tariffs are going to bring back good solid blue collar jobs. You can go work in a factory and pump out widgets and get a nice middle class paycheck. It’s a nice sales pitch and a lot of people would really want that to be true. I suspect though that the manufacturers will automate most of this work and pocket the profits, again, gestures broadly at the late stage capitalism hellscape all around us.
A caveat. In your scenario, there is apparently only one widget maker in each country and they have a monopoly?
If widgets could be made in the US for $7 and sustainably priced at $9 to be a viable business, then they wouldn’t be selling them for $16.99, because ten other US businesses would start up selling widgets for less.
Tariffs don’t work for everything, but how many jobs in the US are in making something? What would you have of them? Because in the US you need like $25 an hour to make a living and we have health and safety implementations and labor laws. China pays their employees $2 an hour. They can undercut anything we could make in the US.
A small widget manufacturer attempting that would get bought out by a larger widget manufacturer because anti-trust laws are unenforced. A mid-size or large widget manufacturer would make more money by not doing that and instead forming a widget cartel with the other larger manufacturers because anti-cartel laws are unenforced.
10/10 ELI5. Bravo.
there’s one layer missing, which is that the US widget makers make their widgets from ingredients and components that don’t exist in the US, if you put a tarrif on everything, you can’t male a $12 US widget any more because widget juice now costs twice as much
Also : what does the government plan to do with all this new tax money?
Build another wall?
EDIT: Silly me. It’s for tax cuts to the rich. Of course.
They’ll do fuck all with my money because I’ll be spending as little as fucking possible for the foreseeable future. Learning to sew to fix holes in old clothes instead of buying new ones, taking public transit a lot more (deeply discounted on account of my autism!), getting back into cooking, donating time in my community for the feel good chemicals instead of buying whatzits, and still giving the middle finger to winter
peerfamily pressure gift giving holidays.Since they’re about to let go all of these gov employees, they will need a lot of money to hire consulting companies for pretty much everything. That’s what started happening in France and Canada already.
These private companies consultants are so much more efficient and cheaper than low paid gov employees who’ve been running the ship for decades. You totally believe it, right?
Oh and don’t look behind the curtain, it’s definitely not Musk or someone similar who owns the consultant companies they happen to use federal funds on, nor do they just so happened to be big donors to Our Lord and Savior Trump™
No no no, that would be corruption to the core and we all know the incoming administration is comprised of all the Paragons of Virtue™ our society has to offer.
Excellent point and kudos to you for knowing that widgets are juiced based.
you can’t male a $12 US widget any more because widget juice now costs twice as much
At my job, I turn $20 of raw material into 25 pieces I sell for $16 each. Double my material costs, and to break even, I have to make another $20 from the sale of those 25 pieces. I have to charge $16.80 instead of $16.
it depends on what you make. Margins on food, farming, automobiles, oil and gas, medical devices tend to be pretty small, comparatively speaking. Which are all fairly critical industries.
A tariff can be helpful if, for example, the Chinese government decides it wants to dominate the world market in widget production and so subsidizes the production of widgets by Chinese counties. This has happened in the past with steel.
But the downside is so much worse. And we experienced it not that long ago. Good read is here: https://www.ers.usda.gov/amber-waves/2022/march/retaliatory-tariffs-reduced-u-s-states-exports-of-agricultural-commodities/
Basically, the US applied tariffs on a bunch of stuff from a bunch of counties. The stuff we bought produced in those counties or made from things produced in those countries became more expensive. (I remember washing machines becoming substantially more expensive as a result of the tariff since I had to buy one at the time).
But that’s not the end. Those countries applied retaliatory tariffs to stuff the US exports - mainly agricultural goods. Those things are commodities produced by many countries, so a bunch of them simply stopped buying the tariffed US products, and instead started sourcing them from places like Brazil. I’ll leave it an exercise to the reader to figure out whether there’s a link between US tariffs the accelerated destruction of the Amazon rainforest to satisfy sudden new demand for produce.
And here we are years later and while many of those tariffs are gone, the US agricultural industry never recovered much of that lost business.
Anti-dumping orders can be very specifically targeted (down to a manufacturing company level) to combat the issue in your first paragraph. Sometimes the duties can be over 100% on items that get ADD.
There are still high tariffs on many raw steel products from many countries - it’s called Section 232 duties.
Not too mention that tariffs also caused the Great Depression in 20s.
Any sources on this?
They didn’t cause the Great depression, but they did make it worse.
First, this is a great explanation and example. That being said, tarrifs can be good for the country implementing them in a very narrow set of circumstances.
Let’s say you are in a not very industrialized nation, maybe one recovering from colonialism or war. In that case almost everything is cheaper to import, and so it’s really difficult to get any economy going past subsistence farming. Targeted tariffs can help in that case to encourage local investment in the basic commodities needed to get the economy started.
Similarly, if you have one specific part of your economy that you really care about but it needs some help getting going, tarrifs can help to grow that sector.
In both cases, the tarrifs need to be narrowly targeted and be regularly monitored for when they should be phased out.
But in all cases, a large economy raising broad tarrifs is stupid.
As an anecdote about this, most countries in South America charge a 100% import tax on almost all electronic devices (laptops, phones, pc parts, cameras, etc). Not only the exchange rates already make these purchases almost impossible, they also have to pay double. The ripple effects on the future of a country where people don’t have access to the tools they might need to develop themselves is tragic.
Well under that logic why bother with any business expenses ?
Why bother with labour laws, or income tax, or work insurance, or workers compo, or environmental laws ?
Because they are all costs on business. And you can bet the foreign manufacturer doesn’t comply with anything like the US regulations.
You mean those great US regulations that are among the worst on the planet?
I buy widgets from China and they are 75% lower than US made. The tariff has to be much higher to start to consider to move the business here.
Isn’t this exactly what happened with the tariff on washing machines?
The US widget buyers in the fantasy scenario are 100% not getting fucked by tariffs, because–again, fantasy scenario–their dollars are not supporting slavery, wage slavery, or some unjustifiable bullshit that’s barely technically not wage slavery. Gutting economic opportunities for bad actors that exploit labor is a win for everybody, and claiming otherwise is evidence of a misunderstanding born of too narrow a scope.
Basically, if I save a buck by poisoning my town’s water, I haven’t won.
That aside, I loved reading this. I already kind of knew it but your version made me know it better. Thanks for writing it.
The way you improve the lot of foreign workers (a good idea) is by putting in place trade agreements that mandate worker protections. “You can only sell us cheap widgets if the working conditions are reasonable “. Two further points. 1 - with tariffs the worker exploitation continues, the goods just cost more (see example above) and 2 - look at the vibrant and dynamic US motorcycle industry for an example of the long term consequences of being insulated from competition.
That’s not how tariffs are suppose to work.
You impose a tariff that will allow the local industry to compete with imports. Not blow them out of the water.
The $10 you gave is objectively wrong. If we know the cost of making a widget in-country, we can easily calculate the correct tariff. In your example, it’s about 5.01$ (making a local widget just a bit cheaper than an imported one, but not too high to incentivize a raising prices).
In practice, the issue is that usually local manufacturers will claim it costs them $15 to make a widget so they can get the $10 tariff. This is an issue in countries with high historic tariffs, and the local industry claims lowering tariffs will take them out of business, or (to a somewhat lesser degree) where there’s very little local industry, and entrepreneurs claim they need the price to be $15 to make it economical for them to build factories. That’s why, ideally, before imposing tariffs, the government should do an economical study of the local industry to figure out how much manufacturing actually costs them.
That said, my bet is that Trump will impose high tariffs on industries with local operations owned by him and his cronies.
Tariffs are not meant to be a stimulator of your own economy, they are a more so a test of it’s endurance. Let me explain.
Globalism is a double edged sword. We collectively came to the agreement to put it on every country themselves to figure out what they’re good at and how they can survive on the global market. It got us as far as we are today. A country can specialize creating a product from the most available resources within it’s borders be it natural resources or skilled/unskilled labor. Having access to the global market means way higher profits than just selling to your own people.
The problem with globalism is that it is completely unregulated by an overseeing entity, and since recent times have shown that hostile territorial takeovers are generally frowned upon, every country is essentially stuck with the resources it already got. This means some countries have lucked out and have more resources available than others and are therefore a bigger economic power. Generally the more complex the product your country is exporting is, the higher the state of development your country has. A lot of countries struggle to build a complex industries to meet global demands (see Korea with stem cell reasearch in the 90s and 2000s).
So if territorial takeovers are a no no, then economical takeovers are the peaceful alternative. The problem is that China has the most amount of manpower in the world, it isn’t exactly a small country either and therefore has a lot of natural resources. If China was a culturally open and peacefull democracy, this wouldn’t be an issue, but as we all know - it isn’t. If China decides to take over a market - they can. Additionally the have always been ‘rules for thee, not for me’, China buys up other countries property and land but doesn’t allow others to do the same for it.
Yes, in the end, everybody profits from the efficiency of globalism and open trade but the scales are not evenly tipped for all. This leaves most countries vulnerable to economic attacks from bigger global players. Tariffs are in a way a bargaining chip in the global market. The idea behind it is to say ‘I’ll take my business else where’ in the hope that being a big enough importer that jumps ship, would be enough to damage the tariffed countries economy. It’s essentially an economic attack from the bottom up.
An additional reason for US tariffs being bad is that it will weaken their relationship with China, and will turn China even more towards Russia, which is presumably the whole purpose given Trumps ties to Putin. All in all the next 4 years are going to be difficult for everybody.
No, not really.
That logic only holds if american consumers have infinite money, which they dont. You cant just raise the prices indefinitely, eventually people just cant afford to buy the product so they dont buy it at all.
So it hurts everyone, the actual outcome is the product straight up just vaporizes off the proverbial shelves, you’re supply dries up.
For canada this heavily includes:
- Automobiles, enjoy going back to having year long + waits for getting your car you wanna buy
- oil, gas prices will skyrocket because the US has its own supply, so people will still buy it but yeah, prices will just go sky high
- Machinery, including construction equipment, refinery equipment, turbines, etc etc. So this will result in massively hiked up city level taxes as your local power plants, processing plants, etc find their repairs skyrocket in costs. Also potentially a lot of refineries and plants will no longer be able to afford operating costs so they’ll just shut down, so unemployment will skyrocket
- Medication, Im sure you see where that one ends up going…
- Aircraft and Spacecraft
I don’t know how the US thinks this isn’t just shuffling money around as the primary money for this is from federal spending, so they’re literally just imposing tariffs on themselves, which is pretty stupid. Par for the course though.
Shuffling it because he can say, “I’m going to cut your taxes!” And then do so and people say yay, he did what he said he was going to do, then he throws on the Tariffs and it taxes everyone across the board. What that means is he was able to directly increase the taxes on the lower and middle class, and get them to vote for it. While his decreases on taxes and the tarrifs end in a net positive for the rich still.
Shift the weight onto the masses who are struggling.
Yup, lowering a progressive income tax and increasing a regressive (sales) tax. The poor get hurt much more than the rich.
Exactly. Companies and the rich usually make most of their profits off whats below the bottom line and expectations of the bottom line going up. The majority of the population, lives and breathes what is above the bottom line. Their wages, their equipment, their healthcare, 401k matches… day to day perks, everything down to the coffee quality to keep people going when you should have crashed. That’s where the cuts come from to make sure the bottom line stays positive and increasing, otherwise they would lose investors and stock buyers. So long as they keep buying, they don’t give a damn what happens above the line. Hire micromanagers if they have to, cut bonuses, make employees who would make 55k a year hourly into managers with a set 45k salary with no overtime bonuses because it falls into the loopholes that a certain party keeps fighting to leave open.
Yes it will absolutely raise virtually all consumer prices, across the board. Some more than others.
Youre got the right conclusion, wrong start.
Tariffs are taxes paid by the company doing the importing, not the country.
If my company buys shirts from Canada, its not the canadians that pay that tax, its my company. And you can bet your ass im raising my prices.
It’s not that it also hurt americans, it Only hurt americans… and maybe one or another country that really rely on american imports…like china
You mean that rely on exports to America?
Yes. Theoretically, affected companies could move manufacturing onshore, but that takes years of planning, so realistically, won’t happen.
Why? When all you know is a hammer…
When all you know is a hammer…
…you can’t touch this
When all you know is a hammer…
You begin dancing eratically with flashy vinyl pants that sparkle?
HAMMER! DON’T HURT EM!!!
Okay, that’s not how tariffs work, a tariff is just a tax on a foreign good that american companies have to pay when they bring that good into the country.
Let’s say that a vacuum cleaner costs 100 dollars, a 25% tariff is a 25% tax that the company that brings that vacuum cleaner into the country has to pay. That company still wants to make a profit, so they raise the price by 25 dollars.
It’s american companies that pay tariffs, and that extra cost gets passed on to the consumer. The reasoning behind it is that as foreign goods become more expensive consumers will want to buy more american made products. (This is a huge oversimplification)
So yes it does hurt american consumers, and it will make stuff more expensive. Most actual experts say that these tariffs make no sense economically.
However, Trump wants the tariffs because they look good politically, and he’s willing to make things more expensive if it means people will vote for him.
TLDR: Tariffs will make stuff more expensive, but they’re popular.
That company still wants to make a profit, so they raise the price by 25 dollars.
Or they raise the price by $40, do stock buybacks, lay off 10% of their workforce, close underperforming stores, and book their CEO on CNBC to squeal about “organized retail theft,” and pay record bonuses to the execs.
You also just explained the last few years of inflation.
We spent a year forcibly shutting down small businesses and printing new money. That easily explains the inflation.
Bad bot
Actually if that company really wants to make money, they raise the price by $10000000000
They’ll want to make the same profit margin (if they aren’t changing the way they do business) so if the margin is 10% the price would go up 27.5 dollars in your example.
Wait, is my math right?
The tariffs will be paid by the importing companies, and then it will cause the prices of those goods to rise.
The hope is that this will incentivize and result in more development of the American manufacturing sector, resulting in medium and long term gains.
Short term there will definitely be a cost, paid by us.
We can do that without import taxes. I deride Biden’s CHIPs act as a giveaway to billionaires but it is certainly going to cause chip manufacturers to move their operations to the US instead of China. While I’m not excited about more low wage jobs, I’m less excited about import taxes that codify domestic monopolies and often cost jobs.
How do you figure it would cost jobs? Just less economic activity over all? Importing business just can’t do business any more and goes under? That will definitely happen in some places, if those companies are just barely hanging on.
Long term the cost will also be paid by us. Prices won’t go down when we start producing locally.
Compared to importing for 30% extra? The only reason that would happen is some mass market collusion. The prices will go higher, then manufacturing picks up locally, driving prices down, lower than it was previously - since you don’t need to ferry them across an ocean. Foreign goods would be 30% more expensive.
At least that’s the theory / how it is supposed to work. In reality, probably a shitton of issues, a new great depression and not much more manufacturing potential as a result. There will be tarrifs on the US too, needlessly closing off trade both ways.
True. There will likely be retaliatory tariffs hurting our exports too. But our exports are smaller than our imports currently, so currently it doesn’t hurt us as much.
Your first paragraph assumes that labour costs are the same in both markets and that there is little development or tooling cost to setting up that manufacturing base locally. Both are false, and both of those are really the reason overseas manufacturing is a thing in the first place.
Depends on what you are manufacturing. Making shit with mills, CNC, lathes, injection molding? That’s not a problem. CMM, EDM and very precise CNC? Yeah, that needs a machine with a high upfront cost. It all depends on if you are able to get customers and if you have the raw resources / the raw resources don’t price you out of existence. Overseas manufacture is worth it because it used to be cheap labor costs. You had to fix a lot of things, but it was still cheaper than making it 100% in house. Then China started becomming less competetive and it still was cheaper, but barely. Add onto it a 30% tarrif and the entire equation changes.
Again, it probably will be painful. But we will have to see.
The expected benefits don’t include prices going down. They include:
- overall purchasing power going up
- more military independence
- more political independence
- staying ahead in the AI race
- more Americans get to spend their days building things
How is it expected for purchasing power to go up if prices increase and wages do not?
It’s expected that wages will, as more US stays within the US economy.
The hope is that this will incentivize and result in more development of the American manufacturing sector
Tariffs alone are not enough. Expanding production is a long term investment, but there’s no guarantee a tariff will still exist in 4 years. Its risky to invest capital to meet tariff-induced demand when that demand might disappear before your new factory is even finished being built.
Uncle Sam can mitigate that risk by subsidizing the construction of new factories while the tariffs are in place.
According to this video, Biden maintained at least some of the targeted tariffs Trump put in place before. So there might be some bipartisan support for tariffs across multiple Presidencies.
Unfamiliar with this channel so I can’t vouch for accuracy.
Tarrifs are paid by the importer and cost passed on to the consumer. The idea is to make it comparatively cheaper to buy local and reduce dependency on China. The problem with it is that other countries will impose tarrifs on US exports as well so a lot of people will lose their jobs and prices go up but it will increase local manufacturing jobs on the other hand.
Generally speaking people are better off when there are no tarrifs
It will increase automated manufacturing. We manufacture about 3 times as much stuff today in the US as we did in 1970. The problem is that we are doing it with 1/1000 the workforce. It will add very few jobs, just a lot more robots.
Very few is key here. The robots have to come from somewhere so those people win. A lot of those types of robots are bespoke for the location and even if they also have tariffs on getting them it’s an upfront cost and will be only paid once so there is a huge difference between a single purchase, and sourcing product or material for your own manufacturing or sale
Robots will need maintenence so theres some jobs production jobs converted to maintenence, and that will be better for those specific jobs, but not to everyone else
Well, this may just be what Canada needs to finally start selling their oil to China!
you are correct. this is exactly what’s happening with Canada and Mexico.
why do it? purely speculative, but there’s some convincing evidence that he’s a Russian
assholeasset and is attempting to weaken the US.The dumbest thing Democrats did was not referring to tariffs as an Import Tax. A tax you pay to import the goods.
I mean, I wouldn’t say it is the dumbest thing, but it sure is up there.
Harris/Walz referred to tariffs as a tax over and over again. None of his supporters listened or cared.
Many of them could have been personally taken to dinner by a nobel winning economist and would have still have shouted “fake news!” when they were told how tariffs work.
Higher prices incentivises alternative suppliers.
If you apply blanket tariffs, the only alternative suppliers are domestic, and the current reality is that domestic production of all affected goods is either severely lacking or literally impossible.
There isn’t a magic phrase that makes it possible for farmers to grow lettuce under 2 feet of snow, unfortunately.
I aint here to defend the tariffs, just provide some basic economic literacy. If alternative suppliers arent possible, why arent they charging more already?
If alternative suppliers arent possible, why arent they charging more already?
In the context of blanket import tariffs, the alternative to foreign suppliers are domestic suppliers, and it does already happen. For example, produce prices fluctuate depending on whether the produce is “in season” or not. If something can’t be sourced locally or the local supply is reduced, the grocery store charges you more for it because of the additional costs in sourcing it from elsewhere.
Food aside, adding tariffs to everything imported is intended to disincentivize importing goods over domestic production. When demand exceeds domestic supply (and it will*), importing is still going to be necessary to meet that demand. This happens all throughout the supply chain, too. The only difference between now and then is that right now the consumer isn’t paying a bonus fee for those imported goods or the imported raw materials used to create them.
*There is not a single industrialized country that is entirely self-sufficient and without imports.
Just to add, I work with this stuff all day as a Licensed Customs Broker. The US already has a lot of low tariffs (duties) on a huge range of goods. There are also a lot of free trade agreements in place that reduce or eliminate these tariffs if certain requirements can be met. The first round of tariffs on China are still around, tons of products from China already have 25% duty on top of the ‘normal’ duty rate for a said product.
I am curious what mechanism they will use to try and impose the tariffs quickly - there are only certain legal ways to do this and they take time and some need Congressional approval and investigations.
The goal is to incentivise American manufacturing. Off shoring has hurt Americans a lot. Tariffs are supposed to help that
Consider for a moment that the largest industrial import is crude oil, accounting for 164 billion dollars in 2023 [1].
Slapping a tariff on imports sounds good in theory, but domestic production is not currently capable of supplying an equivalent amount of oil. Ramping up production to that scale takes a long time, and imports are going to be necessary in the meantime.
So, what happens when an X% import tax is introduced? Gasoline refineries pay X% more and pass the cost down to the consumer by raising prices at least X%.
In the short term, this is going to fuck the average American. And unless America fights hard against non-renewable energy and EVs, it’s also going to fuck America in the long run by investing in the production of something with (ideally) dwindling demand.
And that’s just oil/gas. There’s a lot more raw materials that are difficult and/or expensive to extract domestically but cheap to obtain through global trade.
[1] https://www.census.gov/foreign-trade/Press-Release/ft900/final_2023.pdf
