Trump appears to know very little about tariffs and their effects. That, of course, does not keep him from expressing heartfelt (as opposed to well-founded) beliefs about them. Sadly, many people believe he knows what he is talking about when it comes to tariffs – despite the fact that there are only tidbits of truth in what he says. Let’s sort out something pernicious about tariffs to which Trump has paid no attention.
All the many aspects of tariffs cannot be covered in one blog. This blog will focus on one very important aspect which is rarely if ever, discussed: Tariffs are another way to increase the income and wealth of wealthier people at the expense of poorer people.
Many people have never heard that description of what tariffs do. Instead, people are told and led to believe tariffs force other countries to open their markets (quit prohibiting or suppressing sales of American goods) to American manufacturers. It is argued that such closed markets have and will continue to reduce the number of jobs in America. Tariffs, it is also said, help level the playing field between American workers and foreign workers who are willing to work for wages which are untenable in America. Finally many say tariffs save jobs of some US workers in tariff protected industries. There is some truth in all of these points, and to those extents tariffs are positive. Perhaps we will discuss the merits and demerits of all of those issues in a later blog. This blog, however, focuses only on how tariffs transfer wealth from the poorer to the richer.
To see how the wealth transfer occurs, let’s discuss what tariffs are and the effects they have. For practical purposes, tariffs are the same as taxes which must be paid to the federal government upon the import of any good into the US on which a tariff is imposed. To purchase such a good, US consumers must pay the seller the sum of:
- the amount paid to the foreign seller of the good +
- the cost of transporting the good from where it was made to where it is delivered to the consumer +
- the cost of running the seller’s business +
- federal, state and local taxes paid by the seller +
- the import tariff +
- a profit to the seller large enough for the seller to stay in business.
In other words, the customers bear the burden of (pays for) the tariff when they purchase an imported good. If the tariff were eliminated, the cost of imported goods would be lowered by an amount almost exactly equal to the tariff amount. [Please do not make the mistake of believing sellers would pocket the savings. If a seller does not lower the cost of the good by the amount equal to the repealed tariff, its competitors will and gain the recalcitrant seller’s customers. It is the same reason gas stations lower their sales prices when their suppliers lower what they charge the stations for gasoline. The gas stations would prefer to continue to charge the higher prices, but they cannot if they want to keep their customers.]
If customers could buy everything they need at a lower cost (which would be the case if tariffs were repealed), then customers would have more money left over after they have purchased what they usually purchase, i.e., they would be wealthier. What would they do with that extra money? For the most part, people would spend the extra money on things they previously could not afford. This extra demand for goods and services would boost production and delivery of other goods and services – mostly made in America – thereby causing those businesses to hire people to produce and deliver the newly affordable items.
Also, note that eliminating tariffs would not lower the prices just of items which have “Made In [Foreign Country]” on them. Approximately half of US imports are component parts of goods manufactured in the US. Lowering the costs of US companies’ component parts would both make American goods cheaper to US consumers, and it would make US companies more competitive with foreign countries when trying to sell American made goods abroad. This means lower prices for everyone, and more US jobs than there would otherwise be. [Note also that lowering the cost of an item by $10 means more to a poor person than it does to a rich person, i.e., the percentage gain in wealth of a poor person would be greater than the percentage gain by the rich if tariffs were repealed.]
So clearly, lowering or eliminating tariffs would help all consumers (especially poor consumers), i.e., tariffs transfer wealth away from poorer people. But how do tariffs transfer wealth to richer people?
Tariffs are not needed for companies in the US which can make acceptable profits manufacturing and selling goods at world market prices. In short, unless a company pays politicians a whole lot (in the form of campaign contributions or otherwise), tariffs are not generally imposed on goods which can be manufactured in the US at or below the world price of the good. So tariffs typically apply to goods with respect to which US companies cannot compete in world markets with foreign producers. The effect of tariffs is to raise prices of imported goods high enough so that uncompetitive US businesses can make an acceptable profit. As a general rule, it is not poor people who participate in corporate profits. Although the rich people and politicians who profit handsomely from the imposition of tariffs want you to believe it is all about saving or creating US jobs, that is of secondary importance to the rich people who lobby for tariffs to retain profits from uncompetitive US companies. The story about jobs is just the window dressing/sales pitches/smoke screens people use to gain popular support for their wealth transfer scheme.
So, in effect, the people who are burdened the most by tariffs are the poorer and the people who benefit most from tariffs are the richer. So, as I said, tariffs are another way to increase the income and wealth of wealthy people at the expense of poorer people.
[Note: This post has been edited to eliminate the use of “poor” where I meant “poorer” and “rich” instead of “richer. This error was pointed out in one of the comments. I left the title in its more catchy form.”