Stupid Question about Tariffs ?????

[frayne]

When the government imposes say a 10% tariff on a product, who actually gets the 10% mark-up differential, the government ? If so, isn't this just another form of taxation even though it is hurting the producer or manufacturer of the product, not to mention the consumer who pays a higher price ? Just something I'm having a hard time wrapping my head around this morning, maybe more caffeine is needed.

 

[USGrant1962]

Yes, tariffs are a tax. I understand that tariffs were the primary funding for the Federal government before the 16th Amendment allowed income taxes.

All taxes hurt.

 

[dixonge]

All taxes [-]hurt[/-] pay for essential services.

fixed that for ya

 

[pb4uski]

When the government imposes say a 10% tariff on a product, who actually gets the 10% mark-up differential, the government ? If so, isn't this just another form of taxation even though it is hurting the producer or manufacturer of the product, not to mention the consumer who pays a higher price ? Just something I'm having a hard time wrapping my head around this morning, maybe more caffeine is needed.

The government would receive the tariff so the producer/manufacturer cost increases... then they have to decide whether and how to adjust the prices that they charge for the product that the tariffed item goes into. If they decide to pass it on, then consumer prices increase... however, that increase might be muted if there are substitute products that consumer could jump to... gets back to the whole demand/supply/substitution thing.

 

[ERD50]

The government would receive the tariff so the producer/manufacturer cost increases... then they have to decide whether and how to adjust the prices that they charge for the product that the tariffed item goes into. If they decide to pass it on, then consumer prices increase... however, that increase might be muted if there are substitute products that consumer could jump to... gets back to the whole demand/supply/substitution thing.

Right, the simpler explanations use a 'static model', but there are dynamics to supply/demand.

In most cases, it's probably a combination - some price increase, so therefore a 'tax' on the consumer. But probably softened by the supplier needing to reduce prices to maintain demand. So the consumer isn't paying the full 'tax'.

Plus some indirect offset by the intended effect of increasing domestic production, which though it is also at a higher price or lower value (or you would have been buying domestic all along), but may provide more jobs and boost the economy.

I'm not a fan of tariffs for those reasons (we lose efficiency if we don't buy from the best price/value producer), but there might, maybe be some justification if the other countries aren't playing 'fair'?

fixed that for ya

Well, I could fix it some more, but that might bring Porky into play.


-ERD50

 

[frayne]

Using a static model where the producer does not back down his price and the tariff actually becomes a VAT type tax of dubious value and the consumer suffers. Using a dynamic model of the producer actually lowering his price, he takes it on the chin and has to lower his profit margin, employee wages, and possibly force his suppliers into like measures. Am I correct in my assumptions here ? If so it just seems like a never ending downward cycle hurting either consumers, businesses or employees regardless of nation and in a global type economy are there really ever any winners ? Guess the caffeine isn't helping !

 

[OldShooter]

Just to stir the pot some more, a Chinese tariff on a commodity like soy beans means that US soybeans will be less competitive in the Chinese market, so they will buy elsewhere. But assuming the worldwide supply and demand for soy beans are roughly at equilibrium, US suppliers can sell to whatever market whose available supply has been reduced by new Chinese buying.

Thinking from the US tariffs end there are also substitution effects where consumers will switch to buying acceptably equivalent products from sources not subject to a particular tariff.

Econ 101 argues that all trade restrictions are bad and that even if one country is a victim of tariffs by another, that victim is better off not reciprocating. The China situation is more complicated than Econ 101 because many of the trade restrictions are things like prohibiting foreign direct investment without having a majority Chinese partner, and requiring that trade secrets be disclosed as a price for market entry. I would like to see Trump emphasize this type of thing on a tit-for-tat basis. No Chinese FDI in the US except as a minority partner with highly restricted access to US trade secrets.

 

[HFWR]

I'm not a fan of tariffs for those reasons (we lose efficiency if we don't buy from the best price/value producer), but there might, maybe be some justification if the other countries aren't playing 'fair'?
-ERD50

But that assumes that “someone” actually knows what’s in the trade agreements, a leap of faith, imho...

Intellectual property theft might be a good reason though.

 

[USGrant1962]

If so it just seems like a never ending downward cycle hurting either consumers, businesses or employees regardless of nation and in a global type economy are there really ever any winners ?

Yes, this is the case for all business/corporate taxes. They come from customers, employees, or owners - there is no other source of money. Tariffs are a clumsy way to try to get foreign owners or employees to pay, but they don't work very well.

As OldShooter said, there are a lot of ways to manipulate trade and China is doing a bunch. Tariffs are just one of them.

 

[Midpack]

But that assumes that “someone” actually knows what’s in the trade agreements, a leap of faith, imho...

Intellectual property theft might be a good reason though.

Trading tariffs on commodities can only hurt consumers of those commodities. Intellectual property theft is the most interesting aspect of this “trade war.” Whether and how tariffs reduce IP theft remains to be seen, it’s not obvious to me. IP theft is a very legit issue IMO, that can hurt USA industries/workers while seemingly benefitting USA consumers.

 

[kcowan]

A good current example is the US tariff on Canadian softwood lumber. Uncle Sam collects extra money, and the US lumber producers cannot make any more so the cost of new housing increases until the World Trade Organization rules in Canada's favour and the tariff is removed. The US producers make a windfall profit during that period because they can charge more for their product.

The Canadian producers ship less product and the US consumer pays more.

 

[youbet]

Yes, this is the case for all business/corporate taxes. They come from customers, employees, or owners - there is no other source of money.

Yep. When we purchase something at the store, we can be sure that a portion of the cost of producing it was taxes paid by the producer. Tariffs are just one (relatively small in today's world) of the costs producers indirectly pay (through higher prices) on the path to putting a product on the store shelf.

Tariffs are a clumsy way to try to get foreign owners or employees to pay, but they don't work very well.

I always think of the "internal tariffs" we have here in the USA. For example, taxes charged by localities when you book a hotel room or eat at a restaurant meal in popular tourist or convention areas.

Tariffs are just another business related tax. They're more unpopular than, say, the corporate income tax because they target specific segments and have fairly specific goals whereas the corporate income tax broad brushes across everything and everybody to a great extent.

 

[youbet]

A good current example is the US tariff on Canadian softwood lumber. Uncle Sam collects extra money, and the US lumber producers cannot make any more so the cost of new housing increases until the World Trade Organization rules in Canada's favour and the tariff is removed. The US producers make a windfall profit during that period because they can charge more for their product.

The Canadian producers ship less product and the US consumer pays more.

It's generally wrong to take a specific tariff and discuss it in isolation. Frequently, each side has a package of tariffs and other import controls in place and Canada is no exception.

This article explains some of Canada's tariffs and other controls targeted at maintaining their own industries and lifestyle goals. In some of the instances, this results in US producers shiping less product and Canadian consumers paying more.

https://www.export.gov/article?id=Canada-Import-Tariffs

You have to evaluate the whole package which currently seems to be a matter of much partisan debate!

 

[exnavynuke]

fixed that for ya

lol, "essential services" lol

Good one!

 

[youbet]

lol, "essential services" lol

Good one!

Does "essential services" include corruption, graft and payola, the largest line items in some government's budgets? (Note: I'm a long time resident of Illinois )

 

[pb4uski]

....(Note: I'm a long time resident of Illinois )

That explains it all.

 

[MRG]

A good current example is the US tariff on Canadian softwood lumber. Uncle Sam collects extra money, and the US lumber producers cannot make any more so the cost of new housing increases until the World Trade Organization rules in Canada's favour and the tariff is removed. The US producers make a windfall profit during that period because they can charge more for their product.

The Canadian producers ship less product and the US consumer pays more.

Being involved with lumber production it also shuts down mills, workers laid off, loggers have no place to sell their logs. You either cut your own throat on your prices or starve(or both).

I've seen pallets and blocking made with FAS and F1F(high grade) hardwood lumber because someone living paycheck to mouth wanted to eat. Your losing money, but logs don't taste too good.

 

[kcowan]

In some of the instances, this results in US producers shiping less product and Canadian consumers paying more.

https://www.export.gov/article?id=Canada-Import-Tariffs

You have to evaluate the whole package which currently seems to be a matter of much partisan debate!

I used that example because it has recurred many times in spite of other tariffs. It gets slapped on then overturned by WTO ruling. The actions being taken now are slapping tariffs on targeted products.

There is no doubt that many of the existing tariffs restrain trade for political reasons. Of course we can't discuss those on ER.

 

[CardsFan]

I used that example because it has recurred many times in spite of other tariffs. It gets slapped on then overturned by WTO ruling. The actions being taken now are slapping tariffs on targeted products.

There is no doubt that many of the existing tariffs restrain trade for political reasons. Of course we can't discuss those on ER.

Every country has tariffs of some sort, on some products, from some countries. Most are designed to protect local businesses from "unfair competition", "dumping", or to preserve a local industry from outside competition. Not saying if this is right or wrong, just a fact.

I don't know if this still exists, but when I was working there was a very stiff tariff (duty) on welding wire (TIG and MIG, not coated stick), actually on any stainless steel wire fitting the description, imported to Canada. Megacorp marketed a proprietary metal, and we had customers in Canada. They complained about the cost, so I investigated. At the time there was an order in place to protect the wire drawing business in Canada, and our material fell into the description. The duty was 2x or 3x the price. If we imported the rod, and had a local company draw it to wire, no duty.

Several Canadian customers just had us deliver to a US warehouse, and they "handled" the import.

Again, just one isolated example. There are thousands more, all over the world.

 

[kcowan]

Several Canadian customers just had us deliver to a US warehouse, and they "handled" the import.

Again, just one isolated example. There are thousands more, all over the world.

Yup commonly known as a work around. To compensate for clumsy implementations by governments.

 

[MichaelB]

In matters of trade and tariffs, Michael Pettis is an expert and authority. He has written extensively on this, has an excellent book (The Great Rebalancing) and quite a few articles in the financial media. One of the things I like best about his writing is he is totally nom-partisan, and his views are not easily captured by groups with partisan or ideological leanings in any direction.

Here is an essay he wrote a year ago very pertinent to this discussion. It (unfortunately) has a title which a bit political, but the content is not. Just to highlight one paragraph which represents his writing style and view on these new tarriff announcements

I should stress, before I start, my complete agnosticism concerning the virtues or vices of trade intervention. I reject as wholly incomprehensible the views of those for whom protection is inevitably a positive strategy, and one that will resolve many or most of the problems of the U.S. economy. I also reject as equally incomprehensible the views of those for whom any trade intervention is necessarily and self-evidently harmful to the U.S. economy. I find both incomprehensible because with the minimal reflection, and based on any knowledge of economic history, they are so obviously wrong. Like many other debates in economics in which each side is treated as ideology or faith, in fact, protection can be positive or negative for an economy depending on specific underlying conditions.

His essay here Is Peter Navarro Wrong on Trade? - Carnegie Endowment for International Peace

 

[CardsFan]

In matters of trade and tariffs, Michael Pettis is an expert and authority. He has written extensively on this, has an excellent book (The Great Rebalancing) and quite a few articles in the financial media. One of the things I like best about his writing is he is totally nom-partisan, and his views are not easily captured by groups with partisan or ideological leanings in any direction.

Here is an essay he wrote a year ago very pertinent to this discussion. It (unfortunately) has a title which a bit political, but the content is not. Just to highlight one paragraph which represents his writing style and view on these new tarriff announcements

His essay here Is Peter Navarro Wrong on Trade? - Carnegie Endowment for International Peace

Thanks Michael. I am only part way though the paper, but it seems to be as you presented. Non-partisan and well thought out.

 

[OldShooter]

I am feeling kind of smug this morning regarding the first paragraph in my Post #7, observing that tariffs (on soy beans for example) will change trade flows.

In reading the Reuters business page today I found this: https://www.reuters.com/article/us-...bs-others-scoop-up-u-s-soybeans-idUSKBN1HF0FQ It discusses the fact that Chinese buyers are already switching to Brazilian beans and, as a result, the Europeans are switching from Brazil and buying near-record quantities of American beans.

Maybe I should start forecasting the stock market.

 

[youbet]

Maybe I should start forecasting the stock market.

Well....... only if you assume that your seemingly accurate observation regarding historical patterns of changing trade flows due to tariffs would somehow enable you to predict how tomorrow will go in the financial markets.

 

[youbet]

That explains it all.

Indeed. Being a taxpayer in Illinois is a "special" experience!