Tag: Trade Deficit

Understanding Tariff Issues in Five Minutes

When I was an economics professor with John Brown University, the subject of tariffs was just a part of one class session. I never thought I would see the impact it is currently having on the world economy and trade. Everyone should have a general understanding of how increased tariffs will affect their lives and should pay special attention to the present turbulence in international markets. Let’s take a five-minute quick course on tariff issues.

Tariffs are taxes governments place on products and services imported from other countries. They are a percentage of the prices of the imports, just like a sales tax. But the tariff is paid by the supplier, not the buyer. For a realistic example, if a Volkswagen is imported from Germany with the original price tag of $40,000, and the U.S. government places a 2.5% tariff on it, the manufacturer will charge the wholesale consumer $41,000 for the vehicle to make up for the $1,000 tariff charge. Conversely, if a Ford is exported to Germany with the original price tag of $40,000, and Germany places a 10% tariff on it, the manufacturer will charge the German wholesaler $44,000 for the vehicle to make up for the $4,000 tariff charge.

Proceeds from these tariffs go to the government which imposes the tariffs. So, the $1,000 U.S. tariff on the Volkswagen is paid by the car’s German manufacturer to the U.S. treasury. The $4,000 Germany tariff on the Ford is paid by the car’s U.S. manufacturer to the German treasury. No one in the sales transactions gets any of the tariff money. Tariffs are supplements to the treasuries of both governments. In fact, tariffs were the primary source for funding the U.S. government prior to the introduction of income taxes in 1913.

Tariffs are an immediate financial burden for both the supplier and the consumer. The manufacturer and service provider’s export customers have to pay a higher price for their products and services than the consumers of domestic products and services pay. This is true of both countries involved. Therefore, it is more difficult for these manufacturers and service providers to compete with their foreign competitors whose same products and services are lower in price. On the other hand, the consumers in each country have to pay a higher price for desired imports from the other country.

In the example above, the Ford maker is disadvantaged in the German market, since Fords are $4,000 higher priced than Volkswagens. Similarly, the Volkswagen maker is disadvantaged in the U.S. market, since Volkswagens are $1,000 higher priced than Fords. The U.S. consumers will probably buy more Fords than Volkswagens, because the Fords are $1,000 lower priced. The German consumers will probably buy more Volkswagens than Fords, because the Volkswagens are $4,000 lower priced.

The offsetting advanatage to each automaker is that the tariffs tend to protect the domestic market. Ford will sell more Fords in the U.S., and Volkswagen will sell more Volkswagens in Germany, since the exports are higher in price. Often, this advantage of tariffs is more profitable than having a more equatible international market.

Note that the example demonstrates a greater advantage for Germany than for the U.S. The 10% German tariff on U.S. cars is stardard throughout the European Union nations. This uneven playing field for international trade is mostly what is driving President Trump to raise tariffs rather dramatically. For decades of world trade, tariffs in other countries have been greater than U.S. tariffs. This is one of the reasons the U.S. has a substantial trade deficit with the majority of other nations, meaning the other nations export more to the U.S. than the U.S. exports to them. With the uneven tariffs in the example, many more Volkswagens are purchased in the U.S. than Fords in Germany. This is true of products and services traded with most countries.

China is an outlier in this world-wide tariff standoff, refusing to negotiate and slapping unprecedented tariffs on the U.S. in retaliation. Although all tariff tensions have a political dynamic, China’s President Xi is taking it to a whole new level with a 125% tariff on U.S. imports. President Trump has responded with a 145% tariff on China imports. This essentially shuts down most trade between the two nations and can’t possibly remain in effect very long.

After years of this tariff and trade imbalance uncorrected by previous administrations, President Trump is invoking unusually high tariffs to shock the world trade markets into lowering their tariffs. Many nations are panicking and running to the U.S. negotiating table. Until this economic instability settles, American consumers will pay higher prices on imported products and services, and manufacturers and service providers will have fewer sales abroad. Of course, this instability results in nervous investors and a volatile stock market. I believe, eventually, we will find a more equivocal balance of trade with fewer tariffs or more reciprocal tariffs–each nation matching the tariff percentage of its trading partner. When we will reach that international trade utopia is anyone’s guess. But we had to do something, and the president is doing it.

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Trump’s Tariffs: Good or Bad for America?

As a teacher of college economics, I am generally a free trade advocate. Tariffs are usually hindrances to free trade. However, the complex issues of a huge international trade deficit and a sharp decline in manufacturing in America warrant consideration of increasing tariffs on some of our most critical imports. Our future economic health requires leveling the playing field between us and our international trading partners.

The subject of international economics is, of course, far too intricate to accommodate in a short blog post. But, we need to understand a few fundamentals in order to make sense of what is at stake in the current controversial tariff decision by the president. A capitalist free market is without question the best overall trade system known to man. In the best of all worlds, open competition driven by profit incentive and unconstrained by government yields the highest quality of life for everyone. Unfortunately, this utopian economic system is always subject to corruption by the selfish, power-seeking participants.

America’s domestic free market is protected from bad players by various anti-trust laws, monopoly restrictions, and price stabilization controls. Buyers and sellers are virtually free to deal according to supply and demand, but within certain parameters that ensure fairness. This free, but guarded, economy has made America the richest nation in the world. Although a few international trade agreements attempt to provide similar protections for world markets, the restraints are minimum. International trade is a different environment occasionally requiring government intervention.

Two realities place America at a disadvantage in trading with other countries. First, our economic advantage has become our economic disadvantage. We have attained a quality of life that requires a level of individual wealth not enjoyed by most other countries. Therefore, Americans are not willing to produce at the lower income levels accepted by foreign workers. That means other countries can produce most goods and services at lower prices than we can. Second, to keep the price gap wide between American and foreign products, other countries often add burdensome tariff taxes or place limiting quotas on products we export to them. Conversely, the U.S. rarely places tariffs or quotas on imports from those countries. These practices make American products more expensive in foreign countries, while foreign products enter our country at prices far less than like products made in America. That results in high demand for foreign products in America, and low demand for American products in other countries.

This situation has caused a serious trade deficit in America in the amount we export versus the amount we import. In 2017, we imported $2.895 trillion in goods and services while exporting only $2.329 trillion. That is a deficit of $566 billion, a serious outflow of America’s wealth (20% gap) to other nations. To sustain a healthy economy, the export-import ratio should be zero–exports equal to imports–or even a net-export surplus. The dilemma is how to level the playing field without hurting our own citizens.

American consumers benefit greatly from lower prices of foreign goods and services due to lower labor costs of the other countries. At the same time, our corporations and employees suffer in sales decreases, job losses, and pay reductions due to export restrictions and lower prices on imports. President Trumps tariff proposals on steel and aluminum are a step toward resolving this dilemma, although there are valid downsides.

Such tariffs would allow American steel and aluminum producers to compete in price with foreign producers, since the higher taxed foreign products would cost more in our country. Of course, higher priced raw materials will drive up the prices of steel- and aluminum-based products for all American consumers. We Americans will have to feel some pain in order to meet our national economic objectives. The reductions in sales of foreign products to America should provide incentive for other countries to lower or withdraw their tariffs on American products as a move toward a more balanced market. Other countries need to get the message that flooding the American market with lower priced imports is no longer an option unless they allow our exports to enter their market without tariff.

Some lawmakers decry the tariffs as provoking an international trade war with other countries banning American products and America banning theirs. We may see some of that, but the risk is worth the reward of ultimately balancing our imports and exports. The bottom line is we can’t continue our increasingly negative trade balance that is so detrimental to our economy.

I hope the Chicken Little reaction from the left and even some conservatives will cease, and we will all give the president’s plan a chance. Let him have the bargaining tools he needs to make America great again.

I encourage your feedback.

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