Tariffs have been a largely discussed issue over the last two years and a popular policy tool of the Trump administration. This post hopes to make them easy to understand and why Americans should care and how they might impact you.
What is a tariff?
A tariff is a tax imposed by the United States on products being imported from another country.
How do tariffs work?
When a company in the United States buys a product that has a tariff on it, when it goes through customs, the company must pay the tax to the US Customs and Border Protection.
So, for example, in 2018 the Trump administration placed a 15-30% Tariff on solar panels produced outside the US. If a US company buys a solar panel from China for $1,000, then it must pay $150-$300 to US Customs for the tariff.
Why are tariffs used and when are they effective?
The main reason to use tariffs is to protect domestic companies. A tariff makes foreign products more expensive and therefore domestic companies may be more likely to buy domestic as oppose to foreign products.
Tariffs can be effective in developing countries where an industry is new and not ready to compete with developed countries. By imposing tariffs, it gives time for a new industry to grow and eventually compete with industries in developed countries.
Why are the current tariffs potentially harmful?
Over the last several decades, the US has seen many manufacturing jobs move to other countries. Over the course of the last several decades, the US workforce has become more skilled and more productive and that has led to higher wages (wage growth in the US will be saved for another blog). As a result, companies have closed manufacturing plants and relocated them to other countries such as China and Mexico where they can produce the products cheaper and then import them.
Some politicians claim this is bad. If you are a congressman or a senator from a traditionally manufacturing state and people lose their jobs this way, it is good politics to oppose manufacturing jobs going overseas. But it is not good economics. Most economists generally oppose tariffs because they raise prices and decrease the quantity of products produced, thus making people in both countries worse off.
Since US companies are paying the tariff, they generally either pass that cost on to the consumer by raising the prices you or they cut costs which could lead to job losses.
Likely, foreign countries will respond by raising tariffs on the US as a response which further exasperates the problem. People in both countries suffer and the companies that the tariff was designed to protect ends up still being hurt.
Initially tariffs may boost the economy of the US, and so far, it seems they have. However, long-term they have consequences.
What are the cost of the Trump tariffs to you?
A 2018 study shows that the Trump administrations tariffs will have several affects on Americans and the economy:
- In 2019, households would lose on average $2,357 (or about $915 per person)
- A 1.25% decrease in long-term Gross Domestic Product (GDP) accumulating to $2.8 trillion loss to the economy between 2019-2030
- Potential job losses totaling 2.75 million, largely in agricultural and low-skill manufacturing sector
In a developed country like the United States, imposing tariffs on imported products does not benefit American companies or its people.
Why should we encourage free trade and a loss of manufacturing jobs?
While the initial impact of a plant closing can be hard on local economies and families, long-term they will benefit. Products they buy will be cheaper and as we lose manufacturing jobs; new industries will arise. The start-up and healthcare sectors in the US are large and growing. Tech companies like Uber, AirBnB, Dropbox, Snapchat, Slack, and many more are new and growing. Start-up companies like these are creating lots of jobs and opportunities. We should encourage innovation and these new sectors to grow and become the backbone of the 21st century American economy as oppose to trying to cling to the economy of the 20th century.
There are issues with allowing this kind of change. Manufacturing workers who lose their jobs may lack the skills necessary to find a job in these new sectors. They may also be stuck in a location where these jobs are not available. Moving is expensive, especially if you have a family. With no job it can be impossible. These two things combined are an issue with allowing free trade and industries to leave. However, these issues are solvable with proper policy. Promoting job and skill training programs at community colleges can allow for workers who lose their jobs to acquire the skills needed for a different industry. Providing subsidies or incentives that make it cheaper and easier for an unemployed worker to move can alleviate the financial pain and stress of moving. Policies like this can be debated, discussed, and implemented. They will allow the American economy to flourish and provide well-paying jobs for its citizens. Being afraid of changes in the future is not a good reason to impose tariffs to protect an economy from the past. With proper leadership from our elected officials (which I know is a lot to ask in 2019) we can overcome the potential issues that arise from allowing jobs to go to other countries. Tariffs are not the solution to a robust and growing economy; they are the opposite.