Tariffs Are An Outdated Concept

Photo by Emil Kalibradov on Unsplash

The original idea behind imposing tariffs on imports goes something like this:

• People are buying cheap foreign products instead of American products.
• This is bad for American businesses, and for the economy in general.
• If we make foreign goods more expensive, people will stop buying them.
• Adding a tariff (tax) to imports will make those foreign goods so expensive that people will buy American products instead.

Of course, it's never quite that simple. This doesn't take into account the possibility that other countries will put tariffs on American goods, or that there may be reasons why people buy the foreign products even with the tariff. It doesn't take into account that American companies will decide to raise their prices, so their products become just as expensive as the imports. There are many possible complications.

The world today doesn't operate like it did back in the 18th century. Because the economy operates differently now, the old tariff theory just doesn't fit in the modern world.

Many - perhaps most - of those American companies actually use a lot of imported products. Their machinery and tools may come from other countries. They may be importing certain parts or raw materials. When the price of foreign products goes up because of tariffs, it creates higher costs for American businesses. They may be forced out of business because they can't afford to purchase more expensive materials. Or they may go forward, but they have to raise their prices because of the tariffs, and now they can't offer a lower price than the imported products.

Tariff of 1790
Tariff of 1792
Tariff of 1930

 

The Failure of Tariffs

If a politician tells you that tariffs will make a lot of money for the government, he's telling you that tariffs don't work.

What?

Here's why. A tariff is a sales tax on foreign goods. This tax is paid by American companies when they import products from other countries, and then it's passed on to the consumer in the form of higher prices.

The purpose of the tariff (sales tax) is to make imported items so expensive that people will stop buying them. If the tariff works, people stop buying those things. When they stop buying the things, the things no longer come into the country, and so there is no tariff to pay.

If tariffs are still being paid, it means the goods are still being imported, because the tariff didn't get people to stop buying those items. A tariff that continues to bring in lots of money is a tariff that failed to stop the influx of foreign goods.

So, the politician who tells you that tariffs will provide the government with an ongoing stream of billions of dollars is a politician who is telling you he already expects -or plans - for his tariffs to fail.