Boring, I know, but most Americans know little or nothing about tariffs. Most are too young (or not born yet) to remember 1969 when a Japanese car manufacture flooded the US market with cheap and fuel-efficient Hondas, eventually destroying AMC and Chrysler and crippling GM and Ford. Toyota jumped in, as well. If not for tariffs, the US auto industry would have been scuttled. Take a look at what’s happened since then.
First, the facts: A tariff is a tax or duty to be paid on a particular class of imports or exports. Tariffs provide an incentive to develop domestic production and reduce foreign competition in the US marketplace. Tariffs are paid to US Customs and Border Patrol by US import firms. Importers pass on the tax to US manufactures and wholesalers who, in turn, pass the additional costs to US consumers. Thus imported goods become more expensive, giving domestic goods a fair advantage in the retail marketplace.
How does this advantage work? Let’s say a US company (employing union labor and operating under strict environmental regulations) makes t-shirts that wholesale for $10. The same quality t-shirt imported from a Chinese company (employing cheap labor without any regulations) wholesales for $8. The US company is at an economic disadvantage, so let’s say the government imposes a 25% tariff on China’s t-shirts ($2), thus raising the wholesale price to $10. Without this tariff that evens the playing field, the US company could go out of business, thus tariffs protect American jobs.
However, what if there’s no US company making t-shirts anymore? US consumers must still purchase the imported shirts and suffer higher prices. What if the tariff isn’t sufficient enough to offset the high price of American-made t-shirts? US consumers will still purchase the imported shirts and suffer higher prices.
This is currently the case with today’s tariffs on China. The global market is so complex and intertwining that most goods Americans purchase are made in China, in whole or in part, or made in other countries, as well. US importers, to avoid the tariffs, may purchase t-shirts from countries where they’re made in sweatshops by child labor. This harms the Chinese company’s sales and triggers a retaliatory response where China levees high tariffs on US goods, thus harming US companies and farmers who rely on exports to pay their bills. Tariffs then become punitive instead of protective, and the result is a trade war with no benefit for either side.
Back in 1979, tariffs placed on Japanese imports forced a change in the auto industry, the results of which we still see today. Honda, to avoid the tariffs, started producing their cars in the USA, employing non-union workers, and because these cheaper cars directly competed with Chevy and Ford, they moved their factories to Mexico where costs were lower, just to stay afloat. Lee Iacocca took a different approach. He purchased Japanese engines and drivetrains to install in Chrysler cars and spurred the beginning of the end for 100% Made in America. Today, of the seven car models now made in America, three are Hondas, one Chevy (Volt), one Ford (Taurus), the Jeep Cherokee, and Acura’s MDX. Toyota is built with the most American-made parts but assembled in Mexico, as are Chevrolets and Fords with parts manufactured all around the globe. Now you know the effects of tariffs are far-reaching and bad for US workers.
So, at the pig trough of American materialism, as we gorge ourselves on more-expensive imports, remember who’s paying the price for these punitive tariffs on China (you and I) and worry about the indigestion to come. Oink! Oink!