Tariffs and the war on trade

A tariff is a tax, it’s that simple. But things can, and recently have, been getting a little more complicated.

“You can actually think of it like a sales tax,” said Michael Kurtz, assistant professor of Economics at Lycoming College. “If you’re bringing goods in from abroad, you have to pay an extra tax to sell them here.”

Kurtz used the example of buying a car from another country.

“If I were wanting to buy a car from Germany, there would be some tax for that company to sell it to me because I’m here and they’re not.”

Another example he used was buying a pack of cigarettes, which has a sales tax on it. If you go to a store to purchase cigarettes, there’s a sales tax on those that the company who is selling them pays in order to sell them.

“It’s the same with a tariff, except now we’re exclusively imposing that on foreign sellers instead of domestic sellers,” Kurtz said.

The idea is that the company bringing goods into the country pays the tariffs as a priviledge for tapping into the market here.

Trade war

Since the beginning of the year, there have been tariffs imposed on certain countries offering their goods to Americans. China, Canada and Mexico are the countries most often cited in what is being called a trade war.

Recently, the stock market has reacted to the higher prices on steel and aluminum related to tariffs, which impacts manufacturing such as Caterpillar, which specializes in heavy equipment and uses the raw materials in the process.

“Most recently there’s been a lot of talk about the steel and aluminum tariffs that we’ve imposed on most foreign sellers,” Kurtz said. “There are a few exempt from that–China is not.”

In turn, China and other countries have retaliated with tariffs of their own.

“We put on these tariffs and that makes their goods more expensive. That’s not good for them, so they retaliate by putting their own tariffs on what they want and traditionally agriculture goods have been the go-to retaliatory area,” he said.

Higher prices, but less profit

How does this affect consumers? Some would feel the affect of the tariffs when goods become more expensive to manufacture, raising cost of items in turn, Kurtz said.

“Sometimes we talk about the tax wedge. All that means is if there is no tariff or no tax, then the price that I as the consumer pay is the amount of money that the seller gets to keep. That is just how things work without a tax,” Kurtz said.

“With a tax, I’m going to probably have to pay a little bit more and the seller is going to probably get to keep a little bit less with the difference being the size of the tax. So, when you say it’s the consumers that are ultimately hurt, yes that is true. Consumers are going to pay a higher price, but the sellers are also hurt. They’re going to receive a lower price. I pay them more, but they have to pay more to the US government,” he added.

Firms, like automakers, that buy a lot of foreign steel and aluminum will be more affected by the tariffs and the consumers who buy the cars will suffer right along with them.

“You don’t have to buy raw steel and raw aluminum to be affected by this tariff,” he said. “You just have to buy products that are made with those things.”

A history of harm

The effect on the economy is not definitely known as yet, but Kurtz cited a time in history when tariffs had a negative effect, although he cautioned that things have not reached this point yet.

The year after the Great Depression began in 1929, Congress enacted a huge series of tariffs called the Smoot-Hawley tariffs.

Kurtz related that what happened is there were a few congressmen who wanted to put some tariffs on goods, but in order to get them passed they needed many votes. Congressmen from many states said they’d back the tariffs if they related to items produced in their respective states. When foreign goods become more expensive, domestically produced goods look cheaper.

So there was a huge sweep of tariffs that were placed on imports of all kinds, but the problem was the country was already in a recession. Kurtz noted that some believe that imposing the tariffs actually deepened the Great Depression.

A cycle that’s tough to break

“When things are more expensive, people buy less of them,” Kurtz said. “We buy less foreign things because they’re more expensive because of the tariff,” he said.

That should have been good for domestic goods, which were less expensive than their foreign counterparts, but according to Kurtz, that is not what happened.

“If I’m a producer of steel and foreign steel is more expensive, I’m going to raise my price. There’s not an incentive to keep the prices low,” he said.

So, what happens is that not only do foreign goods become more expensive, domestic goods become more expensive as well. And when things become more expensive, people cut back on how much they buy and when people cut back on how much they’re buying, firms cut back on how much they produce and when they cut back on how much they produce, people lose jobs, he said.

“That’s what happened in the Great Depression and that is a concern,” he added.

So how does the trade war end?

“I don’t know how it ends,” Kurtz said. “It doesn’t end well because it is a ‘who blinks first’ thing. Additionally, trade wars have not been easy to negotiate and to resolve.”

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