Tariffs suck for the country implementing the tariff. But before I tell you why they suck, let me tell you the way they are supposed to help.
Here’s the way tariffs are supposed to work according to people that like tariffs (spoiler alert, this thing I’m about to describe is a fantasy and I’ll explain why).
Let’s say people in the US can make widgets for $10 and sell them for $12 and have a viable business. But mean old foreign country can make widgets for $5 and sell them for $7 and have a viable business. The foreign country sells the people of the US widgets for $7, which is great if you live in the US and want to buy a widget but sucks if you live in the US and want to make a widget.
Tariffs are supposed to protect local businesses by making foreign goods less competitive. Let’s say we pass a law putting a $10 tariff on foreign widgets. I used to import widgets from foreign country and pay the manufacturer $5 per widget and sell them to Americans for $7. Now when I import the widget from the foreign country I still pay the manufacturer $5 per widget but now I have to pay the US government a tariff of $10 per widget. Each imported widget now costs me $15 and so I have to sell them for $17 to make a profit. This now means that American made widgets are competitive again, the locally made $12 widget is a great deal compared to the $17 imported one. Great if you are a US widget maker and shitty if you are a US widget buyer.
Now you might notice the people in the US buying widgets, even in the best fantasy scenario, end up getting dicked over. The theory goes that widget making jobs are good though and if we do that enough then everyone will have to pay more for goods but we will have lots of jobs making stuff that pay ok.
Now here’s the part that really, really sucks. Let’s say you are a US widget maker and now you know that your foreign competition can’t make a widget for less than $17. You could sell your widgets for $12 and have a viable business or you could sell them for $16.99 and have a super profitable business. I’ll just gesture broadly at the sea of corporate greed we find ourselves floating in and let you decide which is more likely.
Tariffs induce even local manufacturers to raise prices because it hurts competition. It’s basically a massive transfer of wealth from local consumers to local producers by cutting out the foreign producers and the competitive pressure they exert on the market. This is why basically every economist said “do this and kill the economy”
So why do people want tariffs? Well the promise for your average voter is that the tariffs are going to bring back good solid blue collar jobs. You can go work in a factory and pump out widgets and get a nice middle class paycheck. It’s a nice sales pitch and a lot of people would really want that to be true. I suspect though that the manufacturers will automate most of this work and pocket the profits, again, gestures broadly at the late stage capitalism hellscape all around us.
there’s one layer missing, which is that the US widget makers make their widgets from ingredients and components that don’t exist in the US, if you put a tarrif on everything, you can’t make a $12 US widget any more because widget juice now costs twice as much
Excellent point and kudos to you for knowing that widgets are juiced based.
you can’t male a $12 US widget any more because widget juice now costs twice as much
At my job, I turn $20 of raw material into 25 pieces I sell for $16 each. Double my material costs, and to break even, I have to make another $20 from the sale of those 25 pieces. I have to charge $16.80 instead of $16.
it depends on what you make. Margins on food, farming, automobiles, oil and gas, medical devices tend to be pretty small, comparatively speaking. Which are all fairly critical industries.
Also : what does the government plan to do with all this new tax money?
They’ll do fuck all with my money because I’ll be spending as little as fucking possible for the foreseeable future. Learning to sew to fix holes in old clothes instead of buying new ones, taking public transit a lot more (deeply discounted on account of my autism!), getting back into cooking, donating time in my community for the feel good chemicals instead of buying whatzits, and still giving the middle finger to winter
peerfamily pressure gift giving holidays.Since they’re about to let go all of these gov employees, they will need a lot of money to hire consulting companies for pretty much everything. That’s what started happening in France and Canada already.
These private companies consultants are so much more efficient and cheaper than low paid gov employees who’ve been running the ship for decades. You totally believe it, right?
Oh and don’t look behind the curtain, it’s definitely not Musk or someone similar who owns the consultant companies they happen to use federal funds on, nor do they just so happened to be big donors to Our Lord and Savior Trump™
No no no, that would be corruption to the core and we all know the incoming administration is comprised of all the Paragons of Virtue™ our society has to offer.
Build another wall?
EDIT: Silly me. It’s for tax cuts to the rich. Of course.
A tariff can be helpful if, for example, the Chinese government decides it wants to dominate the world market in widget production and so subsidizes the production of widgets by Chinese counties. This has happened in the past with steel.
But the downside is so much worse. And we experienced it not that long ago. Good read is here: https://www.ers.usda.gov/amber-waves/2022/march/retaliatory-tariffs-reduced-u-s-states-exports-of-agricultural-commodities/
Basically, the US applied tariffs on a bunch of stuff from a bunch of counties. The stuff we bought produced in those counties or made from things produced in those countries became more expensive. (I remember washing machines becoming substantially more expensive as a result of the tariff since I had to buy one at the time).
But that’s not the end. Those countries applied retaliatory tariffs to stuff the US exports - mainly agricultural goods. Those things are commodities produced by many countries, so a bunch of them simply stopped buying the tariffed US products, and instead started sourcing them from places like Brazil. I’ll leave it an exercise to the reader to figure out whether there’s a link between US tariffs the accelerated destruction of the Amazon rainforest to satisfy sudden new demand for produce.
And here we are years later and while many of those tariffs are gone, the US agricultural industry never recovered much of that lost business.
Anti-dumping orders can be very specifically targeted (down to a manufacturing company level) to combat the issue in your first paragraph. Sometimes the duties can be over 100% on items that get ADD.
There are still high tariffs on many raw steel products from many countries - it’s called Section 232 duties.
First, this is a great explanation and example. That being said, tarrifs can be good for the country implementing them in a very narrow set of circumstances.
Let’s say you are in a not very industrialized nation, maybe one recovering from colonialism or war. In that case almost everything is cheaper to import, and so it’s really difficult to get any economy going past subsistence farming. Targeted tariffs can help in that case to encourage local investment in the basic commodities needed to get the economy started.
Similarly, if you have one specific part of your economy that you really care about but it needs some help getting going, tarrifs can help to grow that sector.
In both cases, the tarrifs need to be narrowly targeted and be regularly monitored for when they should be phased out.
But in all cases, a large economy raising broad tarrifs is stupid.
10/10 ELI5. Bravo.
That’s not how tariffs are suppose to work.
You impose a tariff that will allow the local industry to compete with imports. Not blow them out of the water.
The $10 you gave is objectively wrong. If we know the cost of making a widget in-country, we can easily calculate the correct tariff. In your example, it’s about 5.01$ (making a local widget just a bit cheaper than an imported one, but not too high to incentivize a raising prices).
In practice, the issue is that usually local manufacturers will claim it costs them $15 to make a widget so they can get the $10 tariff. This is an issue in countries with high historic tariffs, and the local industry claims lowering tariffs will take them out of business, or (to a somewhat lesser degree) where there’s very little local industry, and entrepreneurs claim they need the price to be $15 to make it economical for them to build factories. That’s why, ideally, before imposing tariffs, the government should do an economical study of the local industry to figure out how much manufacturing actually costs them.
That said, my bet is that Trump will impose high tariffs on industries with local operations owned by him and his cronies.
I buy widgets from China and they are 75% lower than US made. The tariff has to be much higher to start to consider to move the business here.
Not too mention that tariffs also caused the Great Depression in 20s.
They didn’t cause the Great depression, but they did make it worse.
Any sources on this?
The US widget buyers in the fantasy scenario are 100% not getting fucked by tariffs, because–again, fantasy scenario–their dollars are not supporting slavery, wage slavery, or some unjustifiable bullshit that’s barely technically not wage slavery. Gutting economic opportunities for bad actors that exploit labor is a win for everybody, and claiming otherwise is evidence of a misunderstanding born of too narrow a scope.
Basically, if I save a buck by poisoning my town’s water, I haven’t won.
That aside, I loved reading this. I already kind of knew it but your version made me know it better. Thanks for writing it.
The way you improve the lot of foreign workers (a good idea) is by putting in place trade agreements that mandate worker protections. “You can only sell us cheap widgets if the working conditions are reasonable “. Two further points. 1 - with tariffs the worker exploitation continues, the goods just cost more (see example above) and 2 - look at the vibrant and dynamic US motorcycle industry for an example of the long term consequences of being insulated from competition.
Isn’t this exactly what happened with the tariff on washing machines?
Well under that logic why bother with any business expenses ?
Why bother with labour laws, or income tax, or work insurance, or workers compo, or environmental laws ?
Because they are all costs on business. And you can bet the foreign manufacturer doesn’t comply with anything like the US regulations.
Okay, that’s not how tariffs work, a tariff is just a tax on a foreign good that american companies have to pay when they bring that good into the country.
Let’s say that a vacuum cleaner costs 100 dollars, a 25% tariff is a 25% tax that the company that brings that vacuum cleaner into the country has to pay. That company still wants to make a profit, so they raise the price by 25 dollars.
It’s american companies that pay tariffs, and that extra cost gets passed on to the consumer. The reasoning behind it is that as foreign goods become more expensive consumers will want to buy more american made products. (This is a huge oversimplification)
So yes it does hurt american consumers, and it will make stuff more expensive. Most actual experts say that these tariffs make no sense economically.
However, Trump wants the tariffs because they look good politically, and he’s willing to make things more expensive if it means people will vote for him.
TLDR: Tariffs will make stuff more expensive, but they’re popular.
They’ll want to make the same profit margin (if they aren’t changing the way they do business) so if the margin is 10% the price would go up 27.5 dollars in your example.
Wait, is my math right?
That company still wants to make a profit, so they raise the price by 25 dollars.
Or they raise the price by $40, do stock buybacks, lay off 10% of their workforce, close underperforming stores, and book their CEO on CNBC to squeal about “organized retail theft,” and pay record bonuses to the execs.
You also just explained the last few years of inflation.
Youre got the right conclusion, wrong start.
Tariffs are taxes paid by the company doing the importing, not the country.
If my company buys shirts from Canada, its not the canadians that pay that tax, its my company. And you can bet your ass im raising my prices.
It’s not that it also hurt americans, it Only hurt americans… and maybe one or another country that really rely on american imports…like china
Just to add, I work with this stuff all day as a Licensed Customs Broker. The US already has a lot of low tariffs (duties) on a huge range of goods. There are also a lot of free trade agreements in place that reduce or eliminate these tariffs if certain requirements can be met. The first round of tariffs on China are still around, tons of products from China already have 25% duty on top of the ‘normal’ duty rate for a said product.
I am curious what mechanism they will use to try and impose the tariffs quickly - there are only certain legal ways to do this and they take time and some need Congressional approval and investigations.
Seeing questions like this is so scary that so many people don’t get that simple concept.
Seeing stuff like this is mind blowing: https://youtube.com/shorts/bf3sLnZ0S04
Tariffs is just a fancy name for tax that you pay if you buy something from another country. The producers in that country already got paid, you pay that tax when the product is crossing the border.
Yes. Theoretically, affected companies could move manufacturing onshore, but that takes years of planning, so realistically, won’t happen.
Why? When all you know is a hammer…
When all you know is a hammer…
…you can’t touch this
When all you know is a hammer…
You begin dancing eratically with flashy vinyl pants that sparkle?
HAMMER! DON’T HURT EM!!!
No, not really.
That logic only holds if american consumers have infinite money, which they dont. You cant just raise the prices indefinitely, eventually people just cant afford to buy the product so they dont buy it at all.
So it hurts everyone, the actual outcome is the product straight up just vaporizes off the proverbial shelves, you’re supply dries up.
For canada this heavily includes:
- Automobiles, enjoy going back to having year long + waits for getting your car you wanna buy
- oil, gas prices will skyrocket because the US has its own supply, so people will still buy it but yeah, prices will just go sky high
- Machinery, including construction equipment, refinery equipment, turbines, etc etc. So this will result in massively hiked up city level taxes as your local power plants, processing plants, etc find their repairs skyrocket in costs. Also potentially a lot of refineries and plants will no longer be able to afford operating costs so they’ll just shut down, so unemployment will skyrocket
- Medication, Im sure you see where that one ends up going…
- Aircraft and Spacecraft
I don’t know how the US thinks this isn’t just shuffling money around as the primary money for this is from federal spending, so they’re literally just imposing tariffs on themselves, which is pretty stupid. Par for the course though.
Shuffling it because he can say, “I’m going to cut your taxes!” And then do so and people say yay, he did what he said he was going to do, then he throws on the Tariffs and it taxes everyone across the board. What that means is he was able to directly increase the taxes on the lower and middle class, and get them to vote for it. While his decreases on taxes and the tarrifs end in a net positive for the rich still.
Shift the weight onto the masses who are struggling.
Yup, lowering a progressive income tax and increasing a regressive (sales) tax. The poor get hurt much more than the rich.
Exactly. Companies and the rich usually make most of their profits off whats below the bottom line and expectations of the bottom line going up. The majority of the population, lives and breathes what is above the bottom line. Their wages, their equipment, their healthcare, 401k matches… day to day perks, everything down to the coffee quality to keep people going when you should have crashed. That’s where the cuts come from to make sure the bottom line stays positive and increasing, otherwise they would lose investors and stock buyers. So long as they keep buying, they don’t give a damn what happens above the line. Hire micromanagers if they have to, cut bonuses, make employees who would make 55k a year hourly into managers with a set 45k salary with no overtime bonuses because it falls into the loopholes that a certain party keeps fighting to leave open.
Well, this may just be what Canada needs to finally start selling their oil to China!
Higher prices incentivises alternative suppliers.
If you apply blanket tariffs, the only alternative suppliers are domestic, and the current reality is that domestic production of all affected goods is either severely lacking or literally impossible.
There isn’t a magic phrase that makes it possible for farmers to grow lettuce under 2 feet of snow, unfortunately.
I aint here to defend the tariffs, just provide some basic economic literacy. If alternative suppliers arent possible, why arent they charging more already?
The goal is to incentivise American manufacturing. Off shoring has hurt Americans a lot. Tariffs are supposed to help that
Consider for a moment that the largest industrial import is crude oil, accounting for 164 billion dollars in 2023 [1].
Slapping a tariff on imports sounds good in theory, but domestic production is not currently capable of supplying an equivalent amount of oil. Ramping up production to that scale takes a long time, and imports are going to be necessary in the meantime.
So, what happens when an X% import tax is introduced? Gasoline refineries pay X% more and pass the cost down to the consumer by raising prices at least X%.
In the short term, this is going to fuck the average American. And unless America fights hard against non-renewable energy and EVs, it’s also going to fuck America in the long run by investing in the production of something with (ideally) dwindling demand.
And that’s just oil/gas. There’s a lot more raw materials that are difficult and/or expensive to extract domestically but cheap to obtain through global trade.
[1] https://www.census.gov/foreign-trade/Press-Release/ft900/final_2023.pdf
