Tariffs = Taxes - Theirs and Ours

October 11, 2018

 

Dollar Tree customers are feeling the effects of tariffs imposed last month. Steel and aluminum tariffs imposed earlier in the year touched primarily industrial goods, but the new round of tariffs imposed on Chinese products are now touching everyday consumer items. The article in USA Today notes Dollar Tree imports 42% of its products (USA Today 10-8-18), mostly from China. Management remedies will be pulling items off shelves, higher prices or pulling back on opening new stores and/or hiring. Ouch!

 

The BBC World News posted this yesterday: “the International Monetary Fund has warned a trade war between the US and China risks making the world a “poorer and more dangerous place… trade barriers would hit households, businesses and the world economy.”

 

So, why impose tariffs? The argument goes like this: If we make “their” products much more expensive, businesses and consumers will buy the same product from some manufacturer or supplier here in the US. Yes, it is more expensive, but now with the tariffs imposed, it’s maybe the same or even less than the imported product. So, if we buy more American goods, domestic trade increases, and more jobs are created.  Does this really work? Let’s look at historical examples.

 

A New York Times article (9-17-18) reminds us that tariffs are really boomerang taxes paid by consumers – you and me. But are we saving or increasing jobs in the US by paying a little more for just about everything? When the Obama administration levied tariffs on Chinese tires in 2011 Americans spent an additional $1.1 Billion on tires that saved around 1,200 American jobs. For those doing the math – that’s $1 Million per $40,000 job. 

 

In the past, reacting to tariffs on Japanese cars, film, and tires, the Asian manufacturers responded by building factories in the US. It is unclear if the same response from China would be welcomed by this administration. The Chinese have already reduced direct investment in the US from $45.6 Billion in 2016 to $2 Billion in the first half of this year.

 

Whereas the tariffs on steel and aluminum were imposed to limit imports from Canada and save the US aluminum smelters and steel manufacturers, the US companies then raised their prices and increased the wider cost of domestic production for all companies that use their products. We are starting to see anecdotal evidence of manufacturers being happy that a specific tariff immediately benefits them because they can and will charge higher prices and earn larger profits, but they are then dismayed to find that other items in their supply chain (such as steel or aluminum) are now costing them more, eating into those anticipated profits.

 

Mr. Trump has said the imbalance of trade shows the US is being cheated of “fair trade.” There is a legitimate concern over the theft of intellectual property by the Chinese, but it is not all legitimate to assume a trade war will fix that. That argument for “fair trade” through the imposition of tariffs is hard to defend in light of historical experience that documents the high cost of tariffs when viewed through the real world lens of the global supply chain that is our economy. Irate policymakers in Europe as well as China have pushed back, imposing their own tariffs on US manufactured goods. If we buy less of their stuff, and they buy less of ours all trade slows. And, as the IMF has pointed out, tariffs imposed and threatened slow trade for both or all sides in the war. It is hard to see how this time it would be different and the world, including the US, would not be a poorer and more dangerous place.

 

Linda P. Erickson, CFP

Registered Representative

 

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The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. 

 

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