I read an example recently where the Obama administration imposed tariffs on tires from China and in response China imposed tariffs on chicken from the U.S. Both were said to have ‘cost’ the U.S. (in tire prices passed to consumers and … it wasn’t clear). How does this work?
In: Economics
China can produce tires more cheaply than America can, even after imports are taken into account. So when tariffs are raised, tires get more expensive in America, costing the American consumer
On the flip side, China buys meat from the US. When China introduces tariffs, that reduces the demand for US chicken, as it becomes more expensive for the Chinese consumer. Less demand means less money is coming into US companies, which also hurts the US consumer.
To clarify, this hurts both the US and China, that’s the nature of these kind of tariffs, each country is just better the other will blink first.
It’s not really that simple. On one hand, many foods and services are outsourced because they are cheaper overseas – thereby saving the consumer money (good), but also results in the loss of domestic jobs (bad). On the other, you can raise tariffs enough so that the cheapest vendors for goods and services are domestic, which results in the creation of domestic jobs (good), but a higher cost to the consumer (bad)
Tariffs cost other countries money because when they are hit by tariffs, they have to *lower* their prices in order to maintain demand. For example, Scotland charges 50 dollars for a bottle of scotch, and there is a 10 dollar tariff. That cost is passed onto the consumer, and the bottle costs 60 dollars on the shelf. One year later, the tariff is raised to 20 dollars. Scotland can choose to pass the cost onto the consumer, resulting in a bottle now costing 70 dollars, or they can lower their base price to 40 dollars so that their bottle is still 60 dollars at your local liquor store. If they don’t eat the tariff cost, then that bottle of American-taste-alike priced at 65 becomes the consumer pick, and people buy less bottles of scotch from Scotland.
The idea is if we put tariffs on Chinese tires, then Chinese tires cost more. Yes, China will pass costs on to buyers. So, tires will get more expensive. However, this should encourage others to begin manufacturing tires in the US (or at least counties that don’t have tariffs).
They have a market advantage and can offer products cheaper than China. That’s how it helps the US economy. By making US manufacturing more competitive than cheaper, foreign manufacturing.
That is one reason Toyota started opening assembly plants in the US. To get around import costs, they do a certain percentage of the manufacturing in the US. This created thousands of jobs in the US.
If you want usa made goods to remain competitive when a country like China can produce them with cents on the dollar you add an import tariff to try and balance what it would cost to manufacture that same item in the US.
Nobody is mentioning here that domestic suppliers will automatically raise their prices as much as they can, all while staying below the price of imports. Tariffs are inflationary.
In general tariffs of any kind are an economic distortion and will cause market inefficiencies. It is always consumers in the country with the tariff that pays for it. They are generally to be avoided. However they can be important tools for some special cases:
– To fight against predatory dumping by another country, usually funded by a foreign government through subsidies with the intention of harming domestic producers.
– To ease the transition of a sector that is moving from one region of the world to another. You would start out with a protective tariff and slowly lower it as the domestic industry winds down.
– As a retaliatory measure against a country that has enacted trade barriers.
Trade barriers dont strengthen economies at all, quite the opposite. You basically use them as punishment as it injures both economies. One reason you might do that is for long term economic health: if the other country is practicing unfair tactics like high subsidies, you want to deter this as it will distort the market (driving down prices below costs, running otherwise good companies out of the business). However, this might not have the fully intended impact since you only control your own tariffs.
Realistically though, tariffs tend to be used very haphazardly as there is no real way to know what the “right” tariff is. Even if you did, it’s a decision made by politicians and therefore probably has less to do with economic optimization and more to do with dealmaking and currying favor. You also get very bizarre combinations of situations like the USPS essentially subsidizing shipping for small businesses in china while the rest of the federal government tariffs them.
The way it can strengthen a country’s economy is by making sure that it is financially feasible to domestically manufacture the goods in question. For example if a US manufacturer can make solar panels for $1 per watt, but China can manufacture them for $.50 per watt, there would need to be an import tariff of 100% (an extra $.50 per watt) in order to keep the US manufacturer afloat, otherwise there would be no financial reason to buy from the US manufacturer. If the US manufacturer can sell solar panels, that means there will be more jobs for these domestics manufacturers, but the buyers of solar panels in the US have to pay the $1 per watt instead of $.50 per watt, so solar energy is more expensive for the consumer.
In order to keep these important industries afloat (which generally, people do want), you can either do government subsidies to reduce the consumer cost (e.g. either tax rebates for solar panels, or providing grants to build manufacturing plants, thus lowering cost to produce the solar panels directly), or you can do tariffs to make the competition less favorable to the consumer. People generally don’t like government subsidies because they think the money gets wasted/pretty much just taken by corporate execs, so the tariff option is easier because it sounds “free” even though the consumer is still paying the same money (either to the government to afford the subsidies, or to the government to pay for the import tariffs).
Tariffs don’t really strengthen a countries economy directly – but rather puts more money into the pockets of that producer of that domestic good by raising prices for everyone else.
For example, if there were a tariff on foreign beef, all beef would get more expensive and people who produce beef domestically would benefit from people paying higher prices for their beef.
Longer-term, an economy may benefit if you build up beef production expertise so it could get really efficient, etc. However, there may be better, more efficient ways to accomplish that other than what amounts to taxing consumers for beef.
For foreign beef producers, tariffs drop the demand for your beef since it’s more expensive for a consumer which leads to less sales and profits.
All of these examples are ignoring historical cases of salutary tariffs. In the late 1800s, British steel was the best in the world. Nevertheless, Congress put a tariff on it so that the nascent US steel industry could compete with it. It worked. By 1900, US steel was much improved and incredibly abundant. US steel production went on to be a pivotal factor in changing world history in the 1900s.
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