Introduction

Tariffs are a tax on consumers and businesses, and damage economies. When it costs more to import something, like appliances or smart phones, prices naturally rise. And the price of similar domestically produced items also rises. To date, the relatively modest 10% tariffs added months ago cost the average family almost $800 per year. What will happen if they go to the announced 25%?

Tariffs are also a tax on businesses. When it costs more to export goods, fewer will be sold. For example, if a country, either retaliating or simply initiating a tariff, puts a tax (that’s what a tariff is) on American farm goods, the American farmers will be hurt. As they are being hurt now. And the government is subsidizing them to ease tariff pain. That hurts the taxpayers. Apple stock was down 6% on May 13th--a one day drop--due the announced increase in tariffs. (Apple smartphones are made in China.) Now we are hurting shareholders, including public and private pension plans and 401(k) individual retirement plans.

Tariff and trade wars have no winner. That’s the subject of today’s 10-minute podcast

Continuing

“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” This dialogue is from Ernest Hemingway’s 1926 novel, The Sun Also Rises. That’s exactly how things like this go; it looks okay for a long while, then all the wheels fall off at the same time, seemingly with no warning.

Pause for a moment of truth: We live in a global economy. As we live in a national economy. Different states in the United States have different economic strengths and weakness. Nobody is pushing for all regions in the US to be able to supply everything; we are interdependent. For example, no one is trying to fund a social media startup in Iowa to dethrone FaceBook. And no one is trying to produce pork bellies (bacon) in Silicon Valley. In exactly the same way, different regions, different countries on the planet, are far better at economically producing different and excellent goods and services. Smartphones are made in China. Wheat comes from “America’s breadbasket of the world.” Again, we are interdependent.

We can easily break that interdependence, but inevitably we will pay a lot more for a whole lot of the things we buy, often getting lower quality goods and services for the higher prices we will need to pay. Mercantilism, a trade policy that pursues/demands a balance of imports and exports--or better a favorable ratio--is a justifiably discredited way of handling global trade.

So, Will, what happens when we buy $500 Billion a year more from, say China, then they buy from us? The first thing we need to observe is that we obviously have more money and better lifestyles than those in China. We buy 4 times as much from them as they do from us. We have the money and want the stuff. China needs the money, and sells us the stuff. If someone else came along with a better deal, we’d take it. Buying stuff made in China is a good deal for us, or we would not do it. Selling us stuff is a good deal for China, or they would not do it either. Long-term trade imbalances are “balanced out” with borrowing or foreign investment. If we don’t want to do that, we will need to pay a lot more for far less quality.

To date, the average family is paying about $800/year more for more things than before the new tariffs of a few months ago. Imagine what you would have to pay for a smartphone if they were suddenly included in the tariffs, and the tariffs went to the announced 25%? And aren’t smartphones already overpriced?

Now to retaliatory tariffs. When we add or raise tariffs on imports, the other country imposes tariffs on things they buy from us. Retaliatory tariffs. Farmers and ranchers are already hurting due to depressed prices, environmental disasters and chronic oversupply.