Tariffs suck for the country implementing the tariff. But before I tell you why they suck, let me tell you the way they are supposed to help.
Here’s the way tariffs are supposed to work according to people that like tariffs (spoiler alert, this thing I’m about to describe is a fantasy and I’ll explain why).
Let’s say people in the US can make widgets for $10 and sell them for $12 and have a viable business. But mean old foreign country can make widgets for $5 and sell them for $7 and have a viable business. The foreign country sells the people of the US widgets for $7, which is great if you live in the US and want to buy a widget but sucks if you live in the US and want to make a widget.
Tariffs are supposed to protect local businesses by making foreign goods less competitive. If every time someone imports a foreign widget they have to pay a $10 tariff, well now that $7 foreign widget costs $17 and the local US widget producers can compete again. Great if you are a US widget maker and shitty if you are a US widget buyer.
Now you might notice the people in the US buying widgets, even in the best fantasy scenario, end up getting dicked over. The theory goes that widget making jobs are good though and if we do that enough then everyone will have to pay more for goods but we will have lots of jobs making stuff that pay ok.
Now here’s the part that really, really sucks. Let’s say you are a US widget maker and now you know that your foreign competition can’t make a widget for less than $17. You could sell your widgets for $12 and have a viable business or you could sell them for $16.99 and have a super profitable business. I’ll just gesture broadly at the sea of corporate greed we find ourselves floating in and let you decide which is more likely.
Tariffs induce even local manufacturers to raise prices because it hurts competition. It’s basically a massive transfer of wealth from local consumers to local producers by cutting out the foreign producers and the competitive pressure they exert on the market. This is why basically every economist said “do this and kill the economy”
So why do people want tariffs? Well the promise for your average voter is that the tariffs are going to bring back good solid blue collar jobs. You can go work in a factory and pump out widgets and get a nice middle class paycheck. It’s a nice sales pitch and a lot of people would really want that to be true. I suspect though that the manufacturers will automate most of this work and pocket the profits, again, gestures broadly at the late stage capitalism hellscape all around us.
You impose a tariff that will allow the local industry to compete with imports. Not blow them out of the water.
The $10 you gave is objectively wrong. If we know the cost of making a widget in-country, we can easily calculate the correct tariff. In your example, it’s about 5.01$ (making a local widget just a bit cheaper than an imported one, but not too high to incentivize a raising prices).
In practice, the issue is that usually local manufacturers will claim it costs them $15 to make a widget so they can get the $10 tariff. This is an issue in countries with high historic tariffs, and the local industry claims lowering tariffs will take them out of business, or (to a somewhat lesser degree) where there’s very little local industry, and entrepreneurs claim they need the price to be $15 to make it economical for them to build factories. That’s why, ideally, before imposing tariffs, the government should do an economical study of the local industry to figure out how much manufacturing actually costs them.
That said, my bet is that Trump will impose high tariffs on industries with local operations owned by him and his cronies.
First, this is a great explanation and example. That being said, tarrifs can be good for the country implementing them in a very narrow set of circumstances.
Let’s say you are in a not very industrialized nation, maybe one recovering from colonialism or war. In that case almost everything is cheaper to import, and so it’s really difficult to get any economy going past subsistence farming. Targeted tariffs can help in that case to encourage local investment in the basic commodities needed to get the economy started.
Similarly, if you have one specific part of your economy that you really care about but it needs some help getting going, tarrifs can help to grow that sector.
In both cases, the tarrifs need to be narrowly targeted and be regularly monitored for when they should be phased out.
But in all cases, a large economy raising broad tarrifs is stupid.
As an anecdote about this, most countries in South America charge a 100% import tax on almost all electronic devices (laptops, phones, pc parts, cameras, etc). Not only the exchange rates already make these purchases almost impossible, they also have to pay double. The ripple effects on the future of a country where people don’t have access to the tools they might need to develop themselves is tragic.
The US widget buyers in the fantasy scenario are 100% not getting fucked by tariffs, because–again, fantasy scenario–their dollars are not supporting slavery, wage slavery, or some unjustifiable bullshit that’s barely technically not wage slavery. Gutting economic opportunities for bad actors that exploit labor is a win for everybody, and claiming otherwise is evidence of a misunderstanding born of too narrow a scope.
Basically, if I save a buck by poisoning my town’s water, I haven’t won.
That aside, I loved reading this. I already kind of knew it but your version made me know it better. Thanks for writing it.
The way you improve the lot of foreign workers (a good idea) is by putting in place trade agreements that mandate worker protections. “You can only sell us cheap widgets if the working conditions are reasonable “. Two further points. 1 - with tariffs the worker exploitation continues, the goods just cost more (see example above) and 2 - look at the vibrant and dynamic US motorcycle industry for an example of the long term consequences of being insulated from competition.
A tariff can be helpful if, for example, the Chinese government decides it wants to dominate the world market in widget production and so subsidizes the production of widgets by Chinese counties. This has happened in the past with steel.
Basically, the US applied tariffs on a bunch of stuff from a bunch of counties. The stuff we bought produced in those counties or made from things produced in those countries became more expensive. (I remember washing machines becoming substantially more expensive as a result of the tariff since I had to buy one at the time).
But that’s not the end. Those countries applied retaliatory tariffs to stuff the US exports - mainly agricultural goods. Those things are commodities produced by many countries, so a bunch of them simply stopped buying the tariffed US products, and instead started sourcing them from places like Brazil. I’ll leave it an exercise to the reader to figure out whether there’s a link between US tariffs the accelerated destruction of the Amazon rainforest to satisfy sudden new demand for produce.
And here we are years later and while many of those tariffs are gone, the US agricultural industry never recovered much of that lost business.
Anti-dumping orders can be very specifically targeted (down to a manufacturing company level) to combat the issue in your first paragraph. Sometimes the duties can be over 100% on items that get ADD.
There are still high tariffs on many raw steel products from many countries - it’s called Section 232 duties.
there’s one layer missing, which is that the US widget makers make their widgets from ingredients and components that don’t exist in the US, if you put a tarrif on everything, you can’t male a $12 US widget any more because widget juice now costs twice as much
you can’t male a $12 US widget any more because widget juice now costs twice as much
At my job, I turn $20 of raw material into 25 pieces I sell for $16 each. Double my material costs, and to break even, I have to make another $20 from the sale of those 25 pieces. I have to charge $16.80 instead of $16.
it depends on what you make. Margins on food, farming, automobiles, oil and gas, medical devices tend to be pretty small, comparatively speaking. Which are all fairly critical industries.
They’ll do fuck all with my money because I’ll be spending as little as fucking possible for the foreseeable future. Learning to sew to fix holes in old clothes instead of buying new ones, taking public transit a lot more (deeply discounted on account of my autism!), getting back into cooking, donating time in my community for the feel good chemicals instead of buying whatzits, and still giving the middle finger to winter peer family pressure gift giving holidays.
Since they’re about to let go all of these gov employees, they will need a lot of money to hire consulting companies for pretty much everything. That’s what started happening in France and Canada already.
These private companies consultants are so much more efficient and cheaper than low paid gov employees who’ve been running the ship for decades. You totally believe it, right?
Oh and don’t look behind the curtain, it’s definitely not Musk or someone similar who owns the consultant companies they happen to use federal funds on, nor do they just so happened to be big donors to Our Lord and Savior Trump™
No no no, that would be corruption to the core and we all know the incoming administration is comprised of all the Paragons of Virtue™ our society has to offer.
A caveat. In your scenario, there is apparently only one widget maker in each country and they have a monopoly?
If widgets could be made in the US for $7 and sustainably priced at $9 to be a viable business, then they wouldn’t be selling them for $16.99, because ten other US businesses would start up selling widgets for less.
Tariffs don’t work for everything, but how many jobs in the US are in making something? What would you have of them? Because in the US you need like $25 an hour to make a living and we have health and safety implementations and labor laws. China pays their employees $2 an hour. They can undercut anything we could make in the US.
A small widget manufacturer attempting that would get bought out by a larger widget manufacturer because anti-trust laws are unenforced. A mid-size or large widget manufacturer would make more money by not doing that and instead forming a widget cartel with the other larger manufacturers because anti-cartel laws are unenforced.
Tariffs suck for the country implementing the tariff. But before I tell you why they suck, let me tell you the way they are supposed to help.
Here’s the way tariffs are supposed to work according to people that like tariffs (spoiler alert, this thing I’m about to describe is a fantasy and I’ll explain why).
Let’s say people in the US can make widgets for $10 and sell them for $12 and have a viable business. But mean old foreign country can make widgets for $5 and sell them for $7 and have a viable business. The foreign country sells the people of the US widgets for $7, which is great if you live in the US and want to buy a widget but sucks if you live in the US and want to make a widget.
Tariffs are supposed to protect local businesses by making foreign goods less competitive. If every time someone imports a foreign widget they have to pay a $10 tariff, well now that $7 foreign widget costs $17 and the local US widget producers can compete again. Great if you are a US widget maker and shitty if you are a US widget buyer.
Now you might notice the people in the US buying widgets, even in the best fantasy scenario, end up getting dicked over. The theory goes that widget making jobs are good though and if we do that enough then everyone will have to pay more for goods but we will have lots of jobs making stuff that pay ok.
Now here’s the part that really, really sucks. Let’s say you are a US widget maker and now you know that your foreign competition can’t make a widget for less than $17. You could sell your widgets for $12 and have a viable business or you could sell them for $16.99 and have a super profitable business. I’ll just gesture broadly at the sea of corporate greed we find ourselves floating in and let you decide which is more likely.
Tariffs induce even local manufacturers to raise prices because it hurts competition. It’s basically a massive transfer of wealth from local consumers to local producers by cutting out the foreign producers and the competitive pressure they exert on the market. This is why basically every economist said “do this and kill the economy”
So why do people want tariffs? Well the promise for your average voter is that the tariffs are going to bring back good solid blue collar jobs. You can go work in a factory and pump out widgets and get a nice middle class paycheck. It’s a nice sales pitch and a lot of people would really want that to be true. I suspect though that the manufacturers will automate most of this work and pocket the profits, again, gestures broadly at the late stage capitalism hellscape all around us.
That’s not how tariffs are suppose to work.
You impose a tariff that will allow the local industry to compete with imports. Not blow them out of the water.
The $10 you gave is objectively wrong. If we know the cost of making a widget in-country, we can easily calculate the correct tariff. In your example, it’s about 5.01$ (making a local widget just a bit cheaper than an imported one, but not too high to incentivize a raising prices).
In practice, the issue is that usually local manufacturers will claim it costs them $15 to make a widget so they can get the $10 tariff. This is an issue in countries with high historic tariffs, and the local industry claims lowering tariffs will take them out of business, or (to a somewhat lesser degree) where there’s very little local industry, and entrepreneurs claim they need the price to be $15 to make it economical for them to build factories. That’s why, ideally, before imposing tariffs, the government should do an economical study of the local industry to figure out how much manufacturing actually costs them.
That said, my bet is that Trump will impose high tariffs on industries with local operations owned by him and his cronies.
Well under that logic why bother with any business expenses ?
Why bother with labour laws, or income tax, or work insurance, or workers compo, or environmental laws ?
Because they are all costs on business. And you can bet the foreign manufacturer doesn’t comply with anything like the US regulations.
You mean those great US regulations that are among the worst on the planet?
First, this is a great explanation and example. That being said, tarrifs can be good for the country implementing them in a very narrow set of circumstances.
Let’s say you are in a not very industrialized nation, maybe one recovering from colonialism or war. In that case almost everything is cheaper to import, and so it’s really difficult to get any economy going past subsistence farming. Targeted tariffs can help in that case to encourage local investment in the basic commodities needed to get the economy started.
Similarly, if you have one specific part of your economy that you really care about but it needs some help getting going, tarrifs can help to grow that sector.
In both cases, the tarrifs need to be narrowly targeted and be regularly monitored for when they should be phased out.
But in all cases, a large economy raising broad tarrifs is stupid.
As an anecdote about this, most countries in South America charge a 100% import tax on almost all electronic devices (laptops, phones, pc parts, cameras, etc). Not only the exchange rates already make these purchases almost impossible, they also have to pay double. The ripple effects on the future of a country where people don’t have access to the tools they might need to develop themselves is tragic.
Isn’t this exactly what happened with the tariff on washing machines?
10/10 ELI5. Bravo.
The US widget buyers in the fantasy scenario are 100% not getting fucked by tariffs, because–again, fantasy scenario–their dollars are not supporting slavery, wage slavery, or some unjustifiable bullshit that’s barely technically not wage slavery. Gutting economic opportunities for bad actors that exploit labor is a win for everybody, and claiming otherwise is evidence of a misunderstanding born of too narrow a scope.
Basically, if I save a buck by poisoning my town’s water, I haven’t won.
That aside, I loved reading this. I already kind of knew it but your version made me know it better. Thanks for writing it.
The way you improve the lot of foreign workers (a good idea) is by putting in place trade agreements that mandate worker protections. “You can only sell us cheap widgets if the working conditions are reasonable “. Two further points. 1 - with tariffs the worker exploitation continues, the goods just cost more (see example above) and 2 - look at the vibrant and dynamic US motorcycle industry for an example of the long term consequences of being insulated from competition.
A tariff can be helpful if, for example, the Chinese government decides it wants to dominate the world market in widget production and so subsidizes the production of widgets by Chinese counties. This has happened in the past with steel.
But the downside is so much worse. And we experienced it not that long ago. Good read is here: https://www.ers.usda.gov/amber-waves/2022/march/retaliatory-tariffs-reduced-u-s-states-exports-of-agricultural-commodities/
Basically, the US applied tariffs on a bunch of stuff from a bunch of counties. The stuff we bought produced in those counties or made from things produced in those countries became more expensive. (I remember washing machines becoming substantially more expensive as a result of the tariff since I had to buy one at the time).
But that’s not the end. Those countries applied retaliatory tariffs to stuff the US exports - mainly agricultural goods. Those things are commodities produced by many countries, so a bunch of them simply stopped buying the tariffed US products, and instead started sourcing them from places like Brazil. I’ll leave it an exercise to the reader to figure out whether there’s a link between US tariffs the accelerated destruction of the Amazon rainforest to satisfy sudden new demand for produce.
And here we are years later and while many of those tariffs are gone, the US agricultural industry never recovered much of that lost business.
Anti-dumping orders can be very specifically targeted (down to a manufacturing company level) to combat the issue in your first paragraph. Sometimes the duties can be over 100% on items that get ADD.
There are still high tariffs on many raw steel products from many countries - it’s called Section 232 duties.
I buy widgets from China and they are 75% lower than US made. The tariff has to be much higher to start to consider to move the business here.
there’s one layer missing, which is that the US widget makers make their widgets from ingredients and components that don’t exist in the US, if you put a tarrif on everything, you can’t male a $12 US widget any more because widget juice now costs twice as much
Excellent point and kudos to you for knowing that widgets are juiced based.
At my job, I turn $20 of raw material into 25 pieces I sell for $16 each. Double my material costs, and to break even, I have to make another $20 from the sale of those 25 pieces. I have to charge $16.80 instead of $16.
it depends on what you make. Margins on food, farming, automobiles, oil and gas, medical devices tend to be pretty small, comparatively speaking. Which are all fairly critical industries.
Also : what does the government plan to do with all this new tax money?
They’ll do fuck all with my money because I’ll be spending as little as fucking possible for the foreseeable future. Learning to sew to fix holes in old clothes instead of buying new ones, taking public transit a lot more (deeply discounted on account of my autism!), getting back into cooking, donating time in my community for the feel good chemicals instead of buying whatzits, and still giving the middle finger to winter
peerfamily pressure gift giving holidays.Build another wall?
EDIT: Silly me. It’s for tax cuts to the rich. Of course.
Since they’re about to let go all of these gov employees, they will need a lot of money to hire consulting companies for pretty much everything. That’s what started happening in France and Canada already.
These private companies consultants are so much more efficient and cheaper than low paid gov employees who’ve been running the ship for decades. You totally believe it, right?
Oh and don’t look behind the curtain, it’s definitely not Musk or someone similar who owns the consultant companies they happen to use federal funds on, nor do they just so happened to be big donors to Our Lord and Savior Trump™
No no no, that would be corruption to the core and we all know the incoming administration is comprised of all the Paragons of Virtue™ our society has to offer.
A caveat. In your scenario, there is apparently only one widget maker in each country and they have a monopoly?
If widgets could be made in the US for $7 and sustainably priced at $9 to be a viable business, then they wouldn’t be selling them for $16.99, because ten other US businesses would start up selling widgets for less.
Tariffs don’t work for everything, but how many jobs in the US are in making something? What would you have of them? Because in the US you need like $25 an hour to make a living and we have health and safety implementations and labor laws. China pays their employees $2 an hour. They can undercut anything we could make in the US.
A small widget manufacturer attempting that would get bought out by a larger widget manufacturer because anti-trust laws are unenforced. A mid-size or large widget manufacturer would make more money by not doing that and instead forming a widget cartel with the other larger manufacturers because anti-cartel laws are unenforced.
Not too mention that tariffs also caused the Great Depression in 20s.
They didn’t cause the Great depression, but they did make it worse.
Any sources on this?