Tariffs: A Tax on Consumers (EP.131)

Tariffs

Introduction

Tariffs are a tax on consumers and businesses, and damage economies. When it costs more to import something, like appliances or smart phones, prices naturally rise. And the price of similar domestically produced items also rises. To date, the relatively modest 10% tariffs added months ago cost the average family almost $800 per year. What will happen if they go to the announced 25%?

Tariffs are also a tax on businesses. When it costs more to export goods, fewer will be sold. For example, if a country, either retaliating or simply initiating a tariff, puts a tax (that’s what a tariff is) on American farm goods, the American farmers will be hurt. As they are being hurt now. And the government is subsidizing them to ease tariff pain. That hurts the taxpayers. Apple stock was down 6% on May 13th–a one day drop–due the announced increase in tariffs. (Apple smartphones are made in China.) Now we are hurting shareholders, including public and private pension plans and 401(k) individual retirement plans.

Tariff and trade wars have no winner. That’s the subject of today’s 10-minute podcast

Continuing

“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” This dialogue is from Ernest Hemingway’s 1926 novel, The Sun Also Rises. That’s exactly how things like this go; it looks okay for a long while, then all the wheels fall off at the same time, seemingly with no warning.

Pause for a moment of truth: We live in a global economy. As we live in a national economy. Different states in the United States have different economic strengths and weakness. Nobody is pushing for all regions in the US to be able to supply everything; we are interdependent. For example, no one is trying to fund a social media startup in Iowa to dethrone FaceBook. And no one is trying to produce pork bellies (bacon) in Silicon Valley. In exactly the same way, different regions, different countries on the planet, are far better at economically producing different and excellent goods and services. Smartphones are made in China. Wheat comes from “America’s breadbasket of the world.” Again, we are interdependent.

We can easily break that interdependence, but inevitably we will pay a lot more for a whole lot of the things we buy, often getting lower quality goods and services for the higher prices we will need to pay. Mercantilism, a trade policy that pursues/demands a balance of imports and exports–or better a favorable ratio–is a justifiably discredited way of handling global trade.

So, Will, what happens when we buy $500 Billion a year more from, say China, then they buy from us? The first thing we need to observe is that we obviously have more money and better lifestyles than those in China. We buy 4 times as much from them as they do from us. We have the money and want the stuff. China needs the money, and sells us the stuff. If someone else came along with a better deal, we’d take it. Buying stuff made in China is a good deal for us, or we would not do it. Selling us stuff is a good deal for China, or they would not do it either. Long-term trade imbalances are “balanced out” with borrowing or foreign investment. If we don’t want to do that, we will need to pay a lot more for far less quality.

To date, the average family is paying about $800/year more for more things than before the new tariffs of a few months ago. Imagine what you would have to pay for a smartphone if they were suddenly included in the tariffs, and the tariffs went to the announced 25%? And aren’t smartphones already overpriced?

Now to retaliatory tariffs. When we add or raise tariffs on imports, the other country imposes tariffs on things they buy from us. Retaliatory tariffs. Farmers and ranchers are already hurting due to depressed prices, environmental disasters and chronic oversupply. Retaliatory tariffs are adding to that hurt, because that makes what they sell more expensive in that other country, so they sell less. Remember, governments get the tariffs; individuals and businesses get the hurt. And the economy as a whole will suffer.

But, Will, doesn’t China cheat with trade? Yes. And they have for as long as I could spell the word trade. And well before that. They ignore intellectual property rights. When they are not ignoring intellectual property rights, they are stealing them. They make it unfairly difficult to sell them things, and to do business in China. But tariff wars that hurt people, businesses and national economies are not the answer. The best tariff is no tariff. Just like between states. Address cheating directly, not indirectly with tariffs that hurt just about everyone.

Let’s hear another voice, “That the US and China couldn’t have a breakthrough shows there’s some big fundamental divides there, and all the happy talk that we were getting earlier, from both sides, was misplaced,” said Rufus Yerxa, president of the National Foreign Trade Council and a former deputy US trade representative for President George H.W. Bush and Bill Clinton.

Segueing from the specifics of today’s topic to overall principles, the core, driving principles at Revolution 2.0, are:

  1. Personal Responsibility; take it, teach it and,
  2. Be Your Brother’s Keeper. The answer to the biblical question, “Am I my brother’s keeper?” is a ringing, unequivocal “Yes.” There is no other answer.

And do it all in love; without love, these are empty gestures, destined to go nowhere and mean nothing.

If we apply those two core principles, personal responsibility and brother’s keepers, simultaneously, never only one or the other, we will always be on the right path. Depending upon what we face, one principle or the other may appropriately be given more emphasis, but they are always acted upon together.

The Founders, Revolution 1.0, were declared traitors by the British Crown, and their lives were forfeit if caught. We risk very little by stepping up and participating in Revolution 2.0™. In fact, we risk our futures if we don’t. I am inviting you, recruiting you, to join Revolution 2.0™ today. Join with me in using what we know how to do–what we know we must do–to everyone’s advantage. Let’s practice thinking well of others as we seek common goals, research the facts that apply to those goals, and use non agenda-based reasoning to achieve those goals together. Practice personal responsibility and be your brother’s keeper.

Let’s continue to build on the revolutionary vision that we inherited. Read the blog, listen to the podcast, subscribe, recruit, act. Here’s what I mean by “acting.”

  • Read the blogs and/or listen to the podcasts.
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Revolution 1.0 in 1776 was built by people talking to other people, agreeing and disagreeing, but always finding ways to stay united and go forward. Revolution 2.0 will be built the same way.

Join me. Join the others. Think about what we are talking about and share these thoughts and principles with others. Subscribe, encourage others to subscribe. Act. Let’s grow this together.

And visit the store. Fun stuff, including hats, mugs and t-shirts. Recommend other items that you’d like to see.

Links and References

Mercantilism

Contact

As we get ready to wrap up, please do respond in the blog with comments or questions about this podcast or anything that comes to mind, or connect with me on Twitter, Facebook, and LinkedIn. And you can subscribe to the podcast on your favorite device through Apple Podcasts, Google, or Stitcher.

Now it is time for our usual parting thought. It is not enough to be informed. It is not enough to be a well informed voter. We need to act. And if we, you and I, don’t do something, then the others who are doing something, will continue to run the show.

Know your stuff, then act on it. Knowing your stuff without acting is empty; acting without knowing is dangerous.

Will Luden, writing to you from my home office at 7,200’ in Colorado Springs.

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Will Luden

I am your host, Will Luden, former long-time high-tech CEO and Board Chair. I had no idea when I started this podcast that it would become the highest calling of my professional career. Lincoln famously hoped that a government, “…of the people, by the people and for the people…”, would not perish from this earth. My hope, the reason for Revolution 2.0 ”A Booster Shot”, is that a government based on common goals, achieved by applying non agenda-based reasoning to core facts, will allow us to continue to build on our mutual inheritance of a legacy of dedication to seemingly impossible ideals, a legacy that also includes a history of achieving them.
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3 Responses

  1. Sid Reply

    I agree with most of what you’ve posted. There are a few factors in play here that I’m not sure have had the full due notice. Your comment that China has unfairly subsidized it’s own industry and placed high tariffs on American goods is true. I actually think that they have set the playing field with unfair tariffs. It makes it very difficult for us (American industry) to export to them. Although this “trade war” that we have recently engaged in will, short term, hurt American sales of all kinds to China, it may well be the only way to address this inequality and bring them to the table to reduce tariffs on both sides. I certainly hope so. I am an agriculture producer and we are taking hits harder than most. I sincerely hope that this short term pain leads to a ten-fold relief from unfair trade practices and pain in the marketplace.

    I’m not sure that your comments about overproduction are completely accurate. I may be wrong. If governments would stay out of the marketplace and allow supply and demand to determine production and price… What a wonderful and honest world it would be.

    Cheers

    • Will Luden Reply

      Sid, many thanks for your thoughtful response. China has been playing fast and loose with trade rules for many decades. As did Japan for decades post WWII before their economy hit the wall. I believe there are better ways to address this than both or all sides increasing tariffs; some initiating, others retaliating. See Hatfields and McCoys…:). What would you do?

  2. Charles Cabral Reply

    As you know, I am no fan of the twit-in-chief, but even a clock that doesn’t run is right twice a day. I have been concerned since long before 2016 that America’s consumerism has resulted in a large part of our wealth going to China, where much of it was reinvested in US companies or monetary instruments. This has left us with an increasing danger of foreign control over our economy, even conceivably the ability to artificially cause disruptions through manipulation. Is it not possible that US importers and tech companies might respond by relocating their sources? Vietnam, Philippines, Indonesia and other developing countries would not present nearly the strategic or technological threat that China does. Note that suddenly Canada has agreed to the more favorable NAFTA terms. Is it also possible that, faced with higher prices, Americans will just buy less and save more.
    BTW, I take issue with the hoo hoo over the price of sneakers. Most of the sneakers I have bought over the past few years were made in America (New Balance) or somewhere in southern Asia. It appears to me that the major impact of the tariffs will be on Nike (already overpriced) or those sheep who mindlessly buy their shoes.
    As far as the effects on the agricultural sector, food is not a discretionary purchase. Eventually the world markets will have to come to the food basket to get what they need.
    It seems to me that he greatest impacts is going to be on the bottom lines of the high-tech companies (part of the leftists 1%) who have blithely caved in to China’s demands and, with no regard to Amaerica’s strategic interests, done business on its terms.

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