A Quick Thought On Tariffs
By now, you’re certainly aware President Trump raised the tariffs the US government charges on a wide range of Chinese goods. This came primarily as a result of Chinese recalcitrance in the most recent trade negotiation.
Certainly, you’re familiar with the free trade arguments against tariffs. Generally speaking, these arguments are correct. A tariff raises the cost of those goods for the importing distributor. Those increased coast are then passed on to the consumer. Not only that, but in states that charge sales tax, the increased price that comes from the tariff also results in a higher sales tax. So the net effect is not unlike a VAT, a tax that gets compounded at various stages and eventually adds up to much higher costs for the consumer.
Think of it this way: Maytag imports a $300 washing machine from China. The new 25% tariff increases that COG to $375. Maytag, in order to sustain it’s business, sells it to Lowe’s with a 10% mark-up, so Lowe’s cost for the washing machine is $412.50. Lowe’s the sells it the consumer with the standard 25% markup found on retail hard goods, so it costs you $515 to purchase it. Only that isn’t your final cost. The state charges 6.5% sales tax, so your final purchase price comes to $548.48 – of which $108.48 is taxes.
That’s a $69.23 increase in cost to you, of which $49.23 is in taxes. Or if you prefer, that 25% tariff actually resulted in a 83% increase in the amount of tax you paid on your brand new washing machine.
So, increasing tariffs is obviously increasing the burden to the consumer. It is even a more regressive form of taxation than an ordinary sales tax. Because it is charged at the point of import, there is a downstream effect of cumulative price increases, until the final price for the consumer is artificially increased to the point of near unaffordability. So, there can be no doubt that in a nation that relies on consumer spending for economic growth, increasing tariffs is going to result in a downturn in at least the rate of growth.
So why would we slide back into a mercantilist trade policy, when global prosperity has demonstrated that reducing trade barriers has lifted everyone’s standard of iving?
According to the President, it is a result of an ever expanding trade deficit with China. Frankly, that is hardly a problem. It is a result of the fact that Chinese workers earn less than their American counterparts, that property and building costs are lower and there are fewer regulatory hurdles to running a factory. Tariffs might reduce the trade deficit slightly, but they won’t send companies fleeing China for the beautiful environs of Akron. It might make a few move to someplace like Vietnam or Indonesia. So what then, do we raise tariffs on imports from those countries, too?
Our real trade problem as regards the People’s Republic of China is not a deficit of goods. Rather, it is their own mercantilist policies that require technology transfers and encourage software piracy. The question becomes, are tariffs the right weapon to deploy to combat those policies?
Probably not. For starters, the basic memory chip devised by the American company Intel is the gold standard in solid state memory, But the Qualcomm copy is nearly as good and about half the price. If you’re unfamiliar with these little pieces of silicon, they can be found in everything from your $9.99 alarm clock to your $65,000 Mercedes. Qualcomm exports those chips to companies all around the world. Trying to target Qualcomm RAM and ROM chips with punitive tariffs would, quite literally, mean raising tariffs on thousands of products coming from all around the world.
Add into that headache that Qualcomm doesn’t just build those chips in China. They also build them here, in a factory in San Diego, as well some 28 other countries. Trying to track where each chip was built, where it was sent, and whether that particular chip was then imported into the US is impossible. And this is just one product from one company.
So, tariffs are an ineffective tool when dealing with China’s policy of enforced technology theft. Are there any other tools at our disposal? Well, there is the WTO, but it has proven effectively useless in handling the problem. There is diplomacy, but gathering enough nations together willing to take on these policies has proven almost impossible. Even the TPP, championed by the Obama administration and thankfully scrapped by the Trump admin, ignored the problem outright.
So what’s left? As much as I hate to say it, it might be simply barring any American technology company from doing any business in China whatsoever. I’m certain that adopting that particular stance would draw howls from not only the tech companies but a host of other interests. Additionally, it’s naive to think China wouldn’t retaliate in some fashion, perhaps by doing something as extreme as charging an export fee on any goods headed to the US.
It would mark one hell of an escalation in what has been, to now, a pretty mild trade war. As much as I hate the idea of imposing such rigid barriers to trade, the reality is that China has for decades been getting away with a very mercantilist approach to technology. It might be time to fight fire with fire.