Tariffs, and the 4 ways they hurt the economy (explained in plain English)

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What’s a tariff?

A tariff is a tax imposed by a government upon certain imported goods from other nations. It’s a protectionist measure enacted by the government meant to insulate domestic producers from competing foreign industries.

The logic follows that, if foreign-produced goods are artificially made to be more expensive than domestic goods, then citizens of that country will be forced to purchase goods manufactured at home, thus inciting growth in the nation’s own economy.

Among his plethora of anti-establishment promises, President Donald Trump vowed to levy a 45 percent tariff on all Chinese exports to the United States during his campaign run. It was one of his chief rallying cries — American manufacturers are threatened by cheaply made foreign goods and is driving down the American economy.

Just like any action of the government, the argument is motivated by emotional appeal. “My industry is being destroyed by foreign competition,” says the lobbyist. “If the government does nothing, my industry will flee the country or go out of business. Thousands of workers will be out of work and poor!”

To ignore the plight would seem calloused, cruel, utterly inhumane. Indeed, that industry probably will die out and result in many job losses.

Yet the mistake made by those ignorant of economics is looking only at what immediately results from an event, and ignoring the long-term side effects of the action. True economists are swayed by logic. Not emotion.

While we believe that there are big problems with the American economy that require radical, sweeping solutions, imposing tariffs will do more harm than good to the burgeoning eCommerce industry.

As of this writing, the online retail industry is experiencing record growth. According to the U.S. Commerce Department, online sales accounted for more than one third of all total retail sales in 2015, a level unmatched previously. The National Retail Federation expects that online retail will increase 8-12 percent in 2017, which lands anywhere from $427 billion to $443 billion — three times the growth of the traditional variety. There’s no doubt that e-Commerce is set to become the economy of the future, though a tariff would slow down its growth along with all other industries.

Whether brick-and-mortar or on the Web, a free market is always the healthiest market. Government manipulation of the economy almost always produces a result opposite to what was promised, and favor a few industries at the expense of many. Tariffs are no exception. From Adam Smith to Murray Rothbard, classical economists have unanimously agreed that tariffs are not going to make America greater.

They will make us poorer.

1. Higher prices

Of course, that’s the whole idea of a tariff: to use political force to artificially raise the prices of foreign competitors in your country. Domestically produced products are now the cheapest. Consumers will flock to goods made in the homeland, and business will return. Right?

But by artificially increasing the price of foreign goods above the amount the free market allows them to be, that interferes with the ability for individual people to exchange with each other at the rates they choose.

It isn’t just the protected industry whose products grow more protected. The prices of all products that contain steel or rely on steel also increase and the price of services that rely on those products will also rise. So the unintended consequence is a continuing spiral of rising prices.

Adam Smith stated the case for free trade in The Wealth of Nations:

“In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it the cheapest.”

In a healthy economy, prices would rise due to increased demand. But under a tariff, demand actually decreases — consumers will sensibly purchase less of a more expensive product. With the added price to the product “protected” by a tariff, consumers have that much less to purchase on other products. Less cash flows into other industries.

It takes generations of propaganda from governments to rid people of their natural common sense.

Forcing people to pay more for stuff is never going to grow the market.

2. Reduced wages

Take a current example: in 2002, the current president George W. Bush passed a tariff on all imported steel, in response to lobbyists from American steel companies.

In brief, it was incredibly short-lived and ravaged the American economy.

The legislation was meant to rescue the U.S. steel industry from doom. Not only were its effects on the steel industry nonexistent, but it wreaked havoc upon all the companies that relied on cheap steal for their production. Metal manufacturing, machinery and equipment, and transportation industries all suffered.

As stated above, companies that relied upon steel to manufacture their products suffered a loss of profits from the increased steel prices. To compensate, the company reduces the wages of its workers. This resulted in approximately $4 billion in lost wages during the year 2002, according to a report prepared for the CITAC Foundation.

3. Job loss

If lowering wages does not mitigate the damage of a tariff, a company will resort to outright downsizing of its employment. According to the report on the 2002 American steel tariff, “200,000 Americans lost their jobs to higher steel prices during 2002.”

Say, wasn’t it the threat that a particular industry was going to go extinct and cause unemployment, that the tariff was enacted in the first place?

To add salt to the wound, the report elaborates: “More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself.”

Do you see the familiar pattern yet? A tariff, like any legislation passed by the government, has unintended effects that are opposite from the original intentions.

4. International tension

If you listen closely to the language politicians use when talking about tariffs — “protection,” “trade abuses,” “cheating,” among others — it is nearly identical as when they talk about war. The very concept of a tariff acts as a wall to repel an army of invading foreign goods.

If a nation raises a tariff wall against another nation, it should be expected that the other nation will retaliate with a counter-tariff. Mexico has vowed to raise “mirror” tariffs on apparel products imported from the United States if Trump imposed his tariff.

Combative trade barriers can even lead into a full-out war. Heavy duties imposed by the British crown were what led to the American Revolution. The Townshed Acts were a series of taxes Great Britain imposed on imports into the American colonies, in an attempt to generate revenue for the salaries of governors, so that they would remain loyal to the crown. There was resistance from the colonists, which eventually led to the English occupation of Boston, the Boston Massacre, and the American Revolutionary War. The Declaration of Independence condemns King George for “cutting off our trade with all parts of the world.”

“When goods do not cross borders, armies will.” Often attribute to economist Frederic Bastiat, the historical occurrences of tariffs, unfortunately, proves his point.

With less variety of goods for people in either country and higher prices, everyone loses.