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
Let’s say that Mexico can grow sugar cheaper than it can be grown in the US. They have a warmer climate, more rainfall, and sugar grows easier there. Many consumers want to buy sugar at lower prices and don’t really care where it’s grown. In a free market, this would mean that sugar farmers in the US would go out of business, as they can’t compete with the lower costs of growing sugar in Mexico. They’d probably end up growing something else instead, like corn, which seems well suited for farmland in the US. However, there might be some costs associated with switching from sugar to corn, and also change can be scary.
Let’s say politicians in the US want to support American farmers. It’s a very popular political position and gets them more votes. They want to make sure that American sugar farmers stay in business. They do this by imposing a tariff. A tarriff is a tax on imported goods. So now, sugar from Mexico can’t be sold as cheaply in the US. US consumers who would buy sugar at lower prices are forced to pay higher prices. This also means that sugar farmers in the US will be able to sell their sugar at those higher prices and they can stay in business.
So yes, tariffs raise prices to consumers.
Now, let’s go a step further. With sugar prices in the US being artificially high because of the tariffs, some other things start to happen:
First, politicians can waive these tariffs as a political tool, granting favors to certain businesses. So let’s say that the city of Chicago sets up a special method for Tootsie Roll to bring sugar into the US without having to pay the sugar tariff. This would give Tootsie Roll a huge advantage over other candy makers. This would also mean Tootsie Roll would have a huge incentive to operate their business in Chicago, providing jobs and tax revenue to the city of Chicago.
Another thing that might happen when sugar prices are artificially inflated is that people in the US start looking for cheaper ways to sweeten things. Maybe they find a way to use corn, which grows plentiful in the US, to make a sweetener. They process corn and create High-Fructose Corn Syrup. HFCS makes a great sugar substitute. It’s significantly less healthy than sugar, but since there’s a tariff on sugar in the US, it’s cheaper. And so, the US starts using HFCS to sweeten things, like Coke. Coke in Mexico still uses real sugar because sugar is still cheaper in Mexico, and healthier than HFCS.
In the end, because politicians stepped in and put a tariff on sugar:
American sugar farmers can keep growing sugar instead of growing corn.
American corn farmers get to sell their corn to become artificial sugar.
American people see increases in diabetes due to artificial sugar.
American consumers have to pay more for sugar.
Certain American businesses get special favors.
Mexican Coke becomes a sought-after item in America.
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