There is a lot of misinformation about tariffs being circulated at the moment. I have some observations that may be of interest to Valley residents, as they will be impacted by recent government actions.
Despite what some people have said, a tariff is indeed a tax on the citizens of the country where it is imposed. This isn’t even a controversial point. Tariffs were popular in the age of Mercantilism (17th and 18th centuries) when countries looked at the world through a “win-lose” lens. A positive import/export balance was viewed as important. The idea was to make goods from other countries more expensive so people would buy more domestically, and a country would be exporting more than it was importing. The result, however, was that tariffs became reciprocal, and trade stagnated. In fact, it turned into a “lose-lose” for world GDP.
In the 19th century, it began to dawn on people that trade between countries could be a “win-win.” Economists like David Ricardo pioneered the concept of “comparative advantage.” Countries, due to their proximity to input and other cost factors, could produce things at a lower opportunity cost than other countries. If every country produced its lowest opportunity cost products and traded for other goods and services, everyone would be better off economically. It turns out this is true.
It took time, but a long march toward global free trade began, accelerated by the U.S. after World War II, creating the relatively open global trade system we have today. Organizations like the World Trade Organization (WTO) were set up to develop trading rules, and regional trade agreements like the North American Free Trade Agreement (NAFTA) between the U.S., Mexico, and Canada formed tightly integrated trading blocs with trusted partners.
Tariffs were, and still are, important. But they are mainly used when a government is unfairly subsidizing an industry. Back in the '80s, for example, I worked with the U.S. steel industry to get tariffs imposed on foreign steel competitors who were “dumping” products on our domestic market at prices that were well below their cost to produce. Some governments were subsidizing their mills because they were more worried about full employment than fair competition. So, tariffs were warranted.
The current administration, for no observable good reason, is destroying this near 70-year global trading order. It appears we are going back to mercantilism. Several things really bother me about this. First, make no mistake, tariffs are a tax and not a very progressive one. They can potentially have a greater impact on those with the least ability to pay. There will undoubtedly be necessary products priced higher where no lower-cost domestic alternative is available. I’m thinking about produce and other foodstuffs we get from south of the border.
Second, as many will recall, the NAFTA agreement was renegotiated during the president’s previous administration. A revised agreement was signed with much fanfare. By unilaterally imposing tariffs now, the U.S. has abrogated a legally binding treaty (that it was signed by the current sitting president seems to make it even more egregious). In effect, we’ve gone back on our word. Rule of law aside, I learned many years ago that trust is easily destroyed and very difficult to rebuild.
Third, a tariff is an economic tool, not a club to bludgeon other sovereign nations to try to get them to do what you want. Doing something about fentanyl is important, but creating economic hardship for your citizens and those in other countries is a cruel way to try to deal with it. There are better approaches.
Finally, some are saying that tariffs are a tool to bring manufacturing back to the U.S. This is true in the long term, but not in the short term. It also neglects how globally integrated supply chains have become. Take the automotive industry, which drove the need for NAFTA in the first place. A car is made up of many parts. Manufacturers have plants and suppliers in many countries carrying out different production operations. Even just a transmission, for example, may go back and forth across the border, north or south, five or six times and have parts from many countries before it is finally assembled into a finished product. Multiply that by all the other components that go into a car.
Another example: A Boeing airplane, assembled in Washington state, is composed of parts and components that come from a network of suppliers in over 50 countries. Will a tariff be imposed on a component every time it crosses the border? If so, the impact on cost will be much greater than just the percentages we’ve heard about. But even if you could get all these supply chains back in the U.S., the end result would be higher prices to the U.S. consumer because of comparative advantage. U.S. labor and other factor costs are higher than in other parts of the world, so much of this manufacturing is going to be more expensive.
I am all for bringing manufacturing back to the U.S., particularly in critical industries like semiconductors, but the reason these supply chains diversified globally in the first place is that U.S. consumers demanded low-priced products. The end result of current actions will be higher prices either way. Re-domesticating supply chains will be hugely complex, expensive, and take many years. Tariffs are a blunt instrument. While still a useful tool, it is well understood that their general use hurts the economic growth of all involved and costs consumers money. Our current president has a business degree from Wharton. At some level, he must know all of this. My worry is that there is some other agenda that has nothing to do with economic growth, creating wealth for U.S. citizens, or “America First” manufacturing. Trade wars improve the economies of no one involved.
Mooney lives in Waitsfield.
