how do tariffs on exports work. The R’s are saying increased tariffs won’t cause manufacturers/distributors to pass the costs onto consumers here in the US. I was wondering if American manufacturers follow that same model. Are goods exported to foreign countries outside the US subject to tariffs, and are those tariffs absorbed, or passed onto foreign consumers?
In: Economics
I work for a wholesaler/manufacturer that imports a lot of products, so I have a bit more direct experience with tariffs than most people do. Not that it’s a terribly difficult concept, it’s just that usually tariffs and things like them are obfuscated beyond the view of the consumer.
So, that said:
The R’s are lying. Straight-up.
When we place an order with a factory in India, there are costs associated with that order. Those costs include:
* The cost of the product itself (which includes the cost of labor, the cost of equipment, and the cost of the raw materials)
* Shipping from the factory’s home port to our port in the US
* The exchange rate between our two currencies
* Taxes and import duties.
When we receive that order from the factory, ALL of those costs are figured in to the final price for our products. If cotton becomes more expensive, then our products will be more expensive. If the factory starts paying its workers more, then our products will be more expensive. If the exchange rate shifts unfavorably, then our products will be more expensive. And if an orangutan in a suit slaps an arbitrary 10% tax on those goods because they come from India, our products will be more expensive.
We have profit margins that we have to maintain in order to pay for our facilities and the salaries of our employees and contractors. We can’t just absorb extra costs, especially if we have reason to believe that those costs are going to persist.
When Trump forced extra tariffs onto our products, we raised our prices. Something that used to cost the end consumer $8/unit now costs them $10/unit. We didn’t put out a flashing neon sign that said, “Oh, we raised the prices on this because of Trump’s tariffs,” but that was absolutely why we did it.
We are not unique. When the cost to import increases, companies don’t just nobly take it on the chin and maintain their prices. They adjust the price to adjust for it.
And some might say that’s fine, it makes American producers more competitive. The thing is, though, it really doesn’t. If American producers were really close enough that a 10-20% tariff would make them price-competitive with imports, globalism would never have become the thing that it is. Even after adjusting the price to reflect the tariffs, foreign goods are still cheaper than American goods in many cases. So all you’ve done is made the products that most people were buying more expensive while reducing the pressure on American companies to innovate ways to bring their costs down.
There is reason to use tariffs, but usually for strategic rather than economic reason. Steel is a good example. America has a huge military and military is very hungry for steel. If a war happens and you suddenly need to increase your military production, you need massive amounts of steel. If you’re dependent on a foreign supplier, you might not be able to make all the steel you need – especially if that foreign supplier is who you’re at war with.
So you need the capacity to make literal tons of steel, but you don’t necessarily want to just pay companies to sit around on the concept of a plan to make more steel. You need them to be able to survive on their own with the capacity to make as much steel as you need, but you’d like them to survive on their own. You could give them the money, but then you’re just giving a private company taxpayer funds, and that’s not very popular.
Or you could let the market sort itself out, but that wouldn’t end well. US labor is more expensive than most other labor on the planet, and that impacts the price of goods. US-made steel is about $700/ton, and Chinese-made steel is about $500/ton. Some people might be happy paying an extra 40% to buy US steel for whatever reason, but most people who need steel just need carbonated iron. They don’t need whatever might be special about US steel, so they’re going to choose the cheapest option. So left to their own devices, US steel manufacturers would likely go out of business.
Enter the tariff. If you can artificially make Chinese steel more expensive, then the disparity between Chinese steel and American steel isn’t so drastic, and more companies will be willing to buy American steel. This allows your American manufacturers to limp along until you need them. They’re still not doing great, but they can survive.
So it’s not that there isn’t a reason for tariffs, but the whole reason you use a tariff is to increase the price of a foreign-made product. So if you’re trying to sell tariffs to the American public, telling them that tariffs won’t increase the price of foreign products is a bald-faced lie. That’s the entire point of tariffs.
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