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.”
9 thoughts on “Tariffs Transfer Wealth From the Poor To The Rich”
Harvey, I generally agree with your comments with a couple of exceptions, namely corporate taxes and foreign dumping. When you look at our corporate tax structure, US companies are already at a 15-25% disadvantage compared to foreign companies right off the bat. Tariffs are one way, perhaps not the best, to counter that differential. The dumping issue is even more concerning without safeguards. We have seen countries, China as example, sell goods, like steel, in our country at prices that we cannot even produce the product at, much less make a profit. This practice has been very successful at shuttering many US factories costing tens of thousands of American jobs. Situations like these require tools that even the playing field, tariffs being one of those tools. I do agree there are many options that must be considered when looking at world trade.
You are raising the kind of arguments in favor of tariffs I mentioned in the third paragraph. There is much to be said in response to your comment, so I’ll address that in a separate post down the road. It is important to note that the wealth transfer from the poor to the rich remains even if what you say about tariffs is true.
It seems you are equating the “rich” with companies when many companies are owned by the general public. In those cases the tariff scenario would seem to be transferring wealth to both the rich and the middle class. Also, in practice, the larger portion of imported goods effected would probably not be purchased by the poor (depending on definition) in any event (I.e. Mercedes parts).
You are certainly correct that the headline and some of the body of post used the words “poor” and “rich.” Those words were terse, but imprecise. I more precisely stated my case when I said, “This blog, however, focuses only on how tariffs transfer wealth from the poorer to the richer.”
I intended this statement to apply all along the range of poorest to richest. So I definitely agree that the middle class both bears the brunt of the tariff negatives, but participates in some of the positives of tariffs.
So you are also correct that there are exceptions to my generalization. IMO, however, the generalization is correct for the most part.
At a minimum, you have shown me this blogging thing might be harder than I had guessed.
[…] had planned on my next blog being on a subject other than trade, but I ran across THIS POST which presents some great charts which should dispel some popular misconceptions about trade. I […]
The article linked below adds a wrinkle to the idea that tariffs transfer wealth from the poorer to the richer.
It describes how many US automakers have auto plants in Mexico. It mentions that a Mexican automaker earns about $8/hr. in wages and benefits, while unionized US automakers earn $58/hr. The article did not mention that the land on which the factory sits and the cost of construction of the facilities in Mexico are substantially less than in the US. These facts allow US companies to profit from selling their cars which are made in Mexico to US and foreign customers for much less than would otherwise be the case. This helps US car buyers and makes US companies more competitive against SE Asian and European automakers in the US and abroad. This boosts US company profits which makes US auto company jobs more secure, boosts the economy with the purchases of other goods which could not have been afforded without the additional company income, helps rich and middle class shareholders, and provides additional income tax revenue to US governments.
Not all bad. In this case, however, a tariff on Mexican imports would hurt shareholders (the richer) most without doing much of anything for the poorer. [Supporting Ed Williamson’s claim that my claim is not universally true.] Do note, however, this is not this kind of situation (the import of American company goods made in other countries) which Trump is targeting. The net of Trump’s proposed tariff snags this situation nevertheless.
Trump’s reported solution to fix the problem for US companies which his policies will create is to engage in crony capitalism, i.e., give US automakers special tax breaks. More government to fix bad government is rarely a good idea.
The much better idea is to make America a much easier and more profitable place to do business. A bunch of regulations tinkering with free trade is heading in the other direction.
This morning I listened to THIS GREAT PODCAST: http://www.econtalk.org/archives/2017/02/when_is_a_worke.html
It is a discussion of immigration. Nevertheless, it was amazing how much of this podcast confirms some of my points and contests some others.
Perhaps it is not surprising because immigration restrictions has to do with restricting the flow of people and tariffs have to do with restricting the flow of goods. In any event if you found my comment about tariffs interesting, you should find Russ Roberts’s podcast interesting.
[…] [viii] See, “Tariffs Transfer Wealth From the Poor To The Rich.” […]
[…] [xvii] For example, tariffs. See “Tariffs Transfer Wealth From the Poor To The Rich.” […]