Tariffs already starting to bruise US consumers, businesses

Despite strong objections and expressions of concern from many quarters, President Trump continues to push for a broad range of tariffs on imports even though those tariffs, and the consequent retaliatory tariffs levied by other countries, will hurt American consumers and businesses.

As The Hill has reported, a broad coalition of businesses increasingly opposes the president’s proposed tariffs, for they understand how damaging tariffs will be to businesses and consumers.

Consumers already are suffering as retailers hike prices to recover the increased cost of the imported goods they sell due to tariffs levied on those goods. 

{mosads}Many domestic manufacturers of comparable products are boosting their prices to match the increased price of imports, illustrating the reality that tariffs effectively subsidize domestic manufacturers at the expense of their customers.

A seating manufacturer in Maine, for example, stated “domestic steel suppliers added 25 percent to their prices as soon as the 25 percent tariffs on Canadian steel imports went into effect.”

Presumably, this tariff subsidy will encourage companies — domestic and foreign — to increase U.S. production of currently imported goods.  Whether that happens, and to what extent, is questionable, but consumers and businesses definitely will pay more.

The proposed tariffs and the inevitable retaliatory tariffs have secondary effects that few understand — including the president.

Theoretically, the higher price of imported goods will incentivize companies to manufacture more products in the United States, and there have been scattered reports that tariffs will have that effect.

That effect, though, will be neither universal nor immediate, especially when new manufacturing facilities have to be built rather than existing factories reactivated or expanded. 

Worse, the ability of companies to increase U.S. manufacturing output is constrained by difficulties in finding qualified personnel to build and operate new or expanded factories during a time of record-low unemployment.

Given how easily tariffs can be rescinded or quickly lowered, companies will understandably be reluctant to expand U.S. manufacturing facilities if their future profitability is dependent on the continuation of a tariff.

Worse, tariffs will harm U.S. exports if the exported goods contain imported material subject to a tariff, forcing exporters to increase their prices because they cannot absorb the cost of the tariffs. Higher prices will lead to lost sales in foreign markets and lost jobs in the United States.

Some U.S. manufacturers will shift production outside of the United States in order to escape retaliatory tariffs levied by other countries that would harm sales in those countries.  Harley-Davidson, for example, has decided to do just that despite President Trump’s criticism.

Longer term, U.S. manufacturers will lose business in foreign markets to companies headquartered in other countries due to a combination of U.S. and retaliatory tariffs. 

Once lost, that market share will be difficult to recapture should U.S. tariffs later be reduced because foreign-based companies will fight to retain markets that U.S. tariffs handed to them. U.S. farmers, too, will lose foreign markets due to retaliatory tariffs.

Tariffs also will disrupt, and therefore harm, the value of cross-border supply chains, thereby denying to U.S. companies the efficiencies and lower costs of global manufacturing strategies. Consumers will pay for that inefficiency in the form of higher prices. 

Shifting the manufacturing of goods into the United States, as the president has demanded Apple do, will lead to higher prices for U.S. businesses and consumers and thus less utilization of computers and other equipment that enhances the productivity of U.S. workers.

Especially pernicious for consumers are instances where a U.S. tariff kills the importation of a product that cannot profitably be manufactured in the United States.

Due to a higher tariff, Ford Motor Company has scrapped plans to import the Focus compact vehicle, which would have been manufactured in China, thereby denying American consumers the opportunity to buy a relatively inexpensive car.

Tariffs are a tax, and like any tax, those subject to it will act to minimize or completely sidestep the tax, regardless of the unintended consequences of that action. As history has repeatedly shown, tariff avoidance harms consumer welfare and impairs the economic sustainability of whatever industry supposedly is protected by a tariff.

The United States clearly runs a trade deficit only partially offset by the positive balance of services U.S. firms sell to the rest of the world. Consequently, the United States has become the world’s largest debtor nation. 

While that status has allowed the country to reap the benefits of the low interest rates of recent years, arguably, the United States would be stronger economically if it was less of a debtor nation. Tariffs, though, are not the answer. 

Instead, tax and regulatory policies, fiscal prudence and productivity enhancing investments should be relied up to improve the United States’ global competitiveness and a consequent reduction in its external debt. 

Continuing to negotiate reductions in non-tariff trade barriers would be beneficial, too. More aggressive efforts, such as selective trade and investment sanctions, also should be employed to protect the intellectual property of U.S.-based companies from theft by businesses headquartered in China, India and other countries with weak property-rights enforcement. 

Levying tariffs on U.S. imports will undercut efforts to protect those property rights.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system, and the growing federalization of credit risk. Prior articles by Ely on banking issues and cryptocurrencies can be found here. Follow Ely on Twitter: @BertEly