Ok was reading a post somewhere else and came across someone saying how trump likes tariffs too much, which is not the first time i have heard tariffs frowned upon. I have always been of the opposite opinion and I guess would also ‘like tariffs too much’ so please enlighten me as to why they are bad.
My view:
I like to visualize the flow of wealth and whether wealth is flowing in to or out of an area. When I researched Fredrick the Great, he had become ‘the great’ thru making Prussia wealthy, and he had done this by freeing up and empowering local producers while limiting… thru tariffs… goods externally produced. This makes total sense to me. Prussian producers then pull wealth in while foreign producers no longer pull wealth out.
Another parallel is when developing countries have farmers that cannot produce goods cheaply enough to compete with the oversubsidized foreign goods flooding their market and, because their government does not tariff up the prices of the foreign goods, the locals get thrown in to poverty. These two things have always, to me, implied the role of tariffs is to prevent wealth from being drained out of an area and, as a byproduct, divert business and thus success inward instead. Because this helps local prosperity, I, I guess similarly to Trump (?), have historically viewed tariffs as generally a ‘good’ tool.
So please, explain where I’m wrong, if I am, and why tariffs would be bad. thank you
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Good answers here, but another issue with generalized tarrifs is that if the business already exists in America the increased price of the foreign good gives the American business the means to raise their price to be closer to the now more expensive foreign good.
If China sells a shirt for $10 and now it’s $20, but US company sold their shirt at $14 they can now safely raise the price of their shirts to $18 and still be the “cheaper” option.
funneling money straight to the shareholder, as is intended
Exactly. EV tariffs give US EV manufacturers more room to raise prices. The same is true for subsidies.
That sounds good for US companies, but then other countries raise their tariffs on US goods to compensate, so consumers both inside and outside the US end up paying more.
You are forgetting that other countries respond with tariffs of their own. Ultimately, the outcome balances out, just with higher prices for everyone. Local producers that rely on exports lose while those that sell locally win - as long as they don’t rely on imports for raw materials.
Consumers lose, especially on stuff that will never be produced locally, or rules on raw materials that can’t be sourced locally.
local producers take the opportunity to also jack up the prices, but pocket the difference. What choice does the customer have anyway?
The US imports everything. Food, clothes, all kinds of basic goods. We shifted from a manufacturing economy a long time ago.
Tariffs come into play when goods enter the country. They don’t exist until then. So if you put a tariff in place, it’s the local consumers who pay them. This drives prices up.
Nobody wants tariffs imposed on them, because it means their exports won’t be bought as much. But what happens when there’s essentially no competition from the importing country? The people suffer. That’s it.
Tariffs are a brute force tool to attempt to bully another country into doing what you want, but they cut off your nose to spite your face.
In general, incentivizing local production is good for many reasons, like jobs and the environment. It’s also one of the (not the only!) reason Switzerland is so wealthy.
I think the problem is that you have to transition and not just impose it immediately. US produced goods often aren’t currently affordable to the average American. Make foreign goods unaffordable through tariffs too, and many people will be between a rock and a hard place.
It’s also terrible for international relationships to basically cut economic ties at such short notice.
An alternative would be subsidies for small businesses rather than huge global ones, and for sustainable local farming.
Just my two cents as a European who tried to keep up.
Instead, america gives multiple massive subsidies to industrial farmers growing corn for oil additives and cow feed and gives next to nothing to small famers growing food for human consumption.
And they give business relief and tax breaks to multi billion dollar mega corporations and proportionally much much less to small businesses.
It also makes absolutely no sense to put tariffs on products and raw materials that are literally not available locally, e.g. if they are only mined in certain parts of the world or required specialized knowledge not available locally.
many people will be between a rock and a hard place.
And incomes tend to lag price increases by quite a bit, so the average consumer gets screwed in the meantime. Assuming tariffs are offset by increased pay (due to increased revenue), it shouldn’t matter a ton longer term, but the initial price shock will have a ripple effect across the economy as people struggle to keep up.
You’re correct, tariffs can protect (as in protectionism) the local economy. The only downside is to consumers, as they no longer have the possibility to buy cheaper foreign goods.
But what if there is no local production for the goods being tariffed (not sure that’s a word)? The government collects a bit of money and the price rises for two reasons: to pass the tariff to the consumer and because of the increased rarity/scarcity, as foreign traders will tend to sell their goods elsewhere.
Now I’m no expert, but I’m pretty sure that a lot of stuff is no longer locally produced in the US. Tariffs could lead (in the long term) to a re-industrialisation of the country, creating jobs, reducing pollution (reduced cargo transport, better regulations if Trump doesn’t gut them), etc. But in the short term, it will be price rise galore.
What Tariffs Do
Say we create a tariff for chicken. Locally, the chicken costs $1.50. For Germany to export chicken, it’s $2.25. The goal is to protect the local price, but it incents the local price rising to competition. Why? Because your competition cannot sell for less because of the tariff (otherwise it’s a business loss). So local chicken raises to $2.24. The government sets the market rate now. Local capitalist make bank for the market being set. The cost is passed to consumer.
Worse, countries can impose counter tariffs. That can penalize US economies, hence tariff “trade wars.”
The tariff is supposed to raise money for the government, which is turned into lower taxes for citizens (since the government is generating a revenue receipt from the tariff). But the cost to GDP is often worse, and there’s no guarantee the government passes the cost on to the citizen.
They also claim to raise jobs because local economies are more favored. Like, Samsung can export from South Korea or make a plant in America. However, that behavior doesn’t usually happen because the cost of labor & doing business in the US is more expensive than just exporting from elsewhere.
Tariffs aid local capital owners while intervening on the market and hurting consumers.
Source: I work on game economies for a living & enjoy reading about economies.
There’s nothing particularly bad about tariffs but Trump isn’t using them to protect jobs, just to punish countries.
For instance, imposing a 25% tariff on Canada is meaningless when he is proposing 100% tariffs on the EU, Japan and South Korea. He seems to think its a form of punishment and that the countries have to pay the tariff.
It’s a regressive tax on goods that’s ultimately levied against your own citizens. The tarrifed country doesn’t pay the tarrifed, the business that’s importing the goods does and they aren’t going to take a hit on their net profit they’re going to raise prices and pass the cost on to their customers.
From your model, tariffs would be a heightened barrier, like a levee, against the outflow of wealth from the US.
Trouble is, the river is strong, and there are no offshoots yet, so the flow will have to continue over the levee, at higher cost.
Basically, it takes time to build up domestic production to competitive prices. Raising tariffs drastically means those who cannot do without the products just pay more.
If you have targeted tariffs, some of that demand can be soaked up by substitutes (maybe instead of buying a European car, some people get an e-bike or Chinese car). Also, targeted tariffs allow for targeted increase of production, meaning you only have to establish new car-manufacturers, rather than every industry which strains both private capital and subsidies, not to mention negotiations as everyone is scrambling.
If you have a staggered introduction of tariffs, consumers and producers can more easily adapt. Maybe a bike shop can start making e-bike conversions, or used car lots refurbish cars as they get upgraded by those rushing to buy before the tariffs get too high.
Modern production chains are more complex than in Prussian times, but over about 3-15 years, domestic production might have caught up to the domestic demand, assuming they trust that the tariffs will remain.
You can look at the chip manufacturing in the US for example. I think it was almost 6 years ago it was found Chinese chips are compromised, and a first factory is just about opened, and still not nearly at the required volumes.
Also, modern trade is a great carrier of diplomacy and influence, tariffs and other isolationist measures means you’ll have less interaction, cultural exchange, and innovation. And as cultures drift apart, relations will be harder and harder.
See Japan, still a bit awkward internationally after their isolation, even though it’s been 140 years since they rejoined the international community.
I am no economy expert, so I am glad to be corrected by others. But my understanding is the following:
The fundamental idea is that specialisation is good and because of that most things should be done where it makes the most sense and is efficient. A person in silicon valley is probably better utilized working on semi conductors (or any kind of tech) instead of growing wheat.
So ultimately globalisation, trade and division of labour grow the pie for everyone.
With tariffs you are intervening into this process. Sometimes this makes sense, e.g. to counter subsidies that distort the market. Other times it is done purely to gain an advantage.
This might work in the short term. But long term others will do the same and in the end everyone will have to produce everything. And then you have to ask yourself why we e.g. started producting clothes in Asian countries like Vietnam instead of the west.
The US especially has profited massively from free trade.
Thanks nice infos everyone. i learned alot and I guess I played too much civilization, have a longterm view, and would be a harsh leader because I view that 18$ going back inside america instead of 10$ out to china as worth it even tho consumers suffer until competition can arise and drive the price down (tho im not against china nor other countries; i just want wherever i am to prosper). Tariff = -2 citizen unhappiness for x number of months for +3 wealth gain 2 years later. I’d take it. Hence the ‘playing too much civ’ since my perspective is ‘whats best long term for the country’ instead of as an individual within the country that has to deal with the short term consequences of the decisions. So I guess, after learning alot, I agree with my previous self and see that I do indeed favor the use of tariffs and that it has to do with my personality as a unique person (while others may, because of their own personalities, be ‘generally against’ tariffs). love the perspectives
(i also now am aware of additional potential downsides mentioned here such as foreign nation responses. thank you)
Tariff = -2 citizen unhappiness for x number of months for +3 wealth gain 2 years later.
Who is getting the wealth becomes the issue. The vague sense that “America” gets the wealth ignores what we’ve already seen companies do: instead of reinvesting in the company, instead of raising wages, the major corporations aim for things like stock buybacks that boost their share prices so the board of directors are happy, the CEO keeps their job, and the leaders of the company get greater compensation as their compensation is usually in the form of stocks.
Increasing salaries is an expenditure and is often seen as a last resort. You raise salaries when you need to in order to attract new talent, or in order to retain talent. In a lot of industry the workers are no more than “meat machines” and aren’t valued as a component that needs to be maintained, management would be just fine replacing them. It’s the same argument with productivity, more output because a machine outputs more does not equal a greater pay for the workers, “they didn’t do anything more to deserve it” so a tarrif that increases prices/profit doesn’t mean that wealth will reach the general population.
“America” as in the general population loses in this scenario. Things just become more expensive, that doesn’t mean that the money comes back to us. That’s “trickle down economics” and we have over 50 years of evidence showing that doesn’t work the way it was sold to us.
