Raw Materials & Essentials

Intermediate Goods

When Finished Goods Create Jobs

When it's Crony Capitalism

Shooting Ourselves in the Foot

Can Tariffs Bring Jobs Back?

Tariffs to Trade Wars

Solution

Peter Navarro - Trump's rabid anti-China trade adviser - is now a staunch proponent of protectionism and tariffs. However, in his 1984 book, he warned that ,"." He went on to say that, "." Thus we see that economic theories are very political and fungible. Ignoring such hypocrisies, the fact is that tariffs are neither good nor bad by themselves, and the optimal solution will be based on the specifics of a particular situation.Tariffs can be helpful if a country has infant industries that need to be protected against advanced foreign competition. China has successfully used protective tariffs in the last 40 years to become an economic superpower; andConsider a hypothetical case of a 25% tariff on coffee beans imported into the US. Nobody will benefit from this, since we are almost entirely dependent on imports for that product. Starbucks and other coffee stores will see their profits go down and will simply pass on some or all of the extra cost to the customers.The same logic applies to all raw materials such as oil, iron, coal, cotton etc. The economy as a whole benefits when businesses have access to cheap raw materials from which profitable products can be made.Tariffs on essential products such as food also hurt the economy. Look at all the vegetables, fruits and grains in the supermarket with foreign labels, and you can see why tariffs on them will be harmful.Then there are intermediate goods such as steel and lumber, which are used to manufacture or build value-added products. Raise the price of steel and the prices of numerous finished goods from cans to appliances to cars will also rise. A stark example of this domino effect is that thanks to the steel tariffs, one of the largest nail manufacturers in the US has already laid off people and it's now on the verge of going out of business.Similarly, Trump's tariff on Canadian lumber has raised the price of an average American home by $9000. The number of jobs gained in the US lumber industry will be dwarfed by the jobs lost in the construction, real estate and housing-related sectors. (A new home also creates demands for appliances, furniture and numerous other goods).Trump wanted to save the US solar industry, so he levied a whopping 30% tariff on imported solar panels. While this may help a handful of US companies sell solar panels at a higher price, the overall sales in the industry will go down.Cheaper solar panels means more Americans saving money on their utilities, less pollution from fossil fuels, and more service jobs through installation. Thus there's a balancing act here between manufacturing jobs versus service jobs plus other benefits to the society.In this case, a better solution might be for the US government to subsidize R&D to innovate solar panels that generate more electricity. This will allow US companies to sell relatively expensive products while staying competitive, and consumers will also have more choices.Sometimes, corporations simply bribe politicians to raise tariffs on foreign competitors, without justification. For example, take a look at the revenues of washing machine giant Whirlpool Whirlpool is quite profitable, but it faces a stiff competition from South Korean companies such as LG and Samsung. Rather than working hard to make better and cheaper washing machines, Whirlpool simply spends millions of dollars on lobbying politicians:A few million dollars spent on bribing politicians has resulted in US tariffs on Korean products, which has allowed Whirlpool to raise prices by 20% in the last few months. This is simply corrupt crony-capitalism, which harms consumers and innovation.Thus tariffs on "Chinese" goods - as defined by the US Commerce Department - means tariffs on American corporations and consumers.Many goods from China also include parts from our allies such as Japan, South Korea, Taiwan etc. Thus, it's no surprise that, as the chart from PIIE shows, tariffs on "Chinese" goods impact multi-national corporations more than Chinese firms:Even ostensibly all-American products such as Tesla cars have numerous parts from all over the world.Finally, many consumer goods - garments, toys etc. - involve low-end manufacturing and extremely cheap labor, and thus will probably never be made in America again. Tariffs on these goods will simply mean higher business costs for retailers and inflation for US consumers.The most revealing and enlightening aspect of the tariff debate is that corporations and business groups are almost unanimously against Trump's plans for bringing jobs back to the US. General Motors has said that the tariffs would raise vehicle prices, reduce sales and would result in lower wages and fewer workers. The discussion of "What's good for America?" is complex,Sudden, punitive tariffs can escalate into trade wars where no country wants to look weak. The repercussions of such trade wars can be enormously damaging for world trade, global stock markets and national economies. Hundreds of millions of jobs around the world depend on imports and exports. No country is an island in our highly interlinked, globalized economy.Tariffs have been around for centuries and will stay despite all the free trade agreements. There will always be some sectors that are politically or strategically too important for countries to sacrifice on the altar of free trade. The most effective tariffs are carefully planned out and narrowly targeted. We should have a non-partisan, neutral committee to analyze specific situations, and make judicious recommendations that can include tariffs, quotas and subsidies. At the same time, we need to get commitments from the beneficiary corporations to increase domestic production, hire Americans, and not engage in price-gouging.