Understanding Tariffs

Keynesian economics, which is taught at colleges and universities around the country, explains that tariffs are a simple tax on imports. But they are not really that simple and without larger ramifications and are not just used for political posturing.

A larger tariff would benefit domestic producers if there was a manufacturing industry competing with the tariffed goods arriving from abroad. We are told that tariffs were a major source of U.S. government revenue during the 18^th and 19^th centuries.

Tariffs bring much political controversy. The U.S. has been a low tariff country with a few exceptions. Some countries, to protect their industries, levy heavy tariffs by as much as 100-400 percent to protect their domestic industries.

Canada provided a retaliation list of the items they are imposing tariffs on to match President Trump’s tariff of 25%. https://immigrationnewscanada.ca/us-goods-in-canada-affected-by-tariff/

President Trump announced in his Oval Office briefing today that Canada and India charge as much as 400% tariff tax on certain American products and farm produce. The United States charges European automakers only 2 ½% tariffs on European cars. European auto makers just announced, President Trump said, the lowering of their tariffs against U.S. car manufacturers to 2 ½%.

Major industries currently affected by tariffs are manufacturing of heavy machinery, autos, auto parts, consumer electronics, agricultural products, steel, and aluminum.

“A tariff handicaps all foreign suppliers equally, and it awards sales to those firms and nations that can supply the goods most cheaply, presumably because they are more efficient,” not because they may have cut corners in the production process or used substandard materials.

A type of disguised tariff is a quota. A quota is a government’s legal maximum amount of goods permitted into the country from abroad per year or some other unit of time. The few items enumerated under quotas are textiles, meat, and sugar. Quotas naturally raise the price of goods which are subject to quantity/number limitations because the supply is diminished, and we do not have much domestic production of said goods.

Sometimes the government provides payment to an exporter to reduce the exporter’s costs thus the exporter reduces their selling price of a specific good. Some governments use such export subsidies heavily to help their domestic exporters compete more easily with other countries.

A tariff is acknowledged to be more beneficial to domestic producers as they are not exposed to such a tax. A quota is more capricious as it can be rewarded to other countries based on political favoritism. For example, Keynesian economists believe that the “U.S. sugar quota was for years suspected of being a major source of corruption in the Caribbean” because of potential political favoritism.

The issue of tariffs and quotas is not as simple as it seems. A nation imposing higher tariffs will force the opposing countries to raise their own tariffs resulting in a trade war. Trade wars lead to a reduction of trade. Keynesian economists give as an example what happened to the world economy in the 1930s which helped prolong the worldwide depression.

If a country can impose tariffs and quotas without fear of retaliation, it will work, however when all countries are able to use them, everyone will lose eventually.

A country can restrict trade by tariffs to protect specific domestic industries from foreign competition. The “cheap foreign labor” argument pops up. The government can set up trade adjustment assistance for those hurt by foreign competition, i.e., specific unemployment benefits, loans, retraining programs, college courses, and other aid to workers and firms. At what point should such aid stop?

The third argument for trade protection in the form of tariffs and quotas would be to maintain national defense. If military parts and equipment is produced by a nation that has been or is suddenly becoming hostile, what would keep them from stopping the production and exportation to the U.S. of a strategic product?

President Trump placed tariffs in 2025 on imports from Canada, Mexico, and China with the goal to bring back manufacturing jobs or protect the existing domestic ones.

According to CEO Magazine, 25% tariffs on Canadian steel and aluminum affected the production costs of the auto industry which uses steel and aluminum. Some of the costs may be passed on to consumers. Supply chain disruption may affect the supply from Mexico and Canada. Companies affected are Ford, GM, Tesla, BorgWarner, and Aptiv, relying on global semiconductor supply chains.

President Trump imposed a 20% tariff on Chinese imports affecting everyone who uses many electronic components produced in China. Higher prices will be paid for smartphones and laptops. Supply chain disruptions will be expected, like the Covid ones resulting from the forced lockdowns.

The 20% tariff on Chinese imports will result on higher prices in retail and apparel industries such as Nike, Adidas, and companies like Walmart and Target. Higher costs for consumers, reduced profit margin, and potential reduction in consumer demand which may not be so devastating for consumers who already own too much stuff.

Companies like Nvidia, AMD, and Intel who produce their chips overseas, will have higher costs thus their production price increases may be passed on to the consumer. Impact of 2025 U.S. Tariffs on Key Industries and Companies

In the short run, prices may be higher in those industries affected by increased tariffs and supply chain disruptions may occur. Eventually, President Trump’s tariffs may help the (re)establishment of a domestic industry production and the creation of jobs unless it involves the type of jobs typically done robotically.

 

 

Trump's Wall

President Trump proposed a 20 percent tariff on imports from Mexico in order to pay for the wall he plans to build on the southern border. It is assumed that the 20 percent tariff is a negotiating starting point. A tariff is a tax on imports which will make a product more expensive and favor domestically produced goods over imports, while raising revenue for the government of our country.

Tariffs were a major government revenue source during the eighteenth and nineteenth centuries but today we are a low tariff country, with a few exceptions. Other countries protect their domestic industries by charging heavy tariffs and some as much as 100 percent.

A tariff helps those companies and countries that can supply goods most cheaply, presumably because they are more efficient, but some governments provide their companies with export subsidies in order to allow them to reduce the selling price of their goods on foreign markets.

Dan Lombard argued that “a 3% transit tax over three years would pay for a wall.” Infuriated by the economically illiterate commentators who claim that the tariff would be passed on entirely to the consumer, Lombard said that a $700 washing machine crosses the border with a price tag of $400, but time transit charges, warehousing expenses, sales commissions, overhead markup, and profit are added onto the $400 price, pricing the washer at $700 but the tariff is applied onto the $400 price tag. Customers will pay a certain amount more for that brand produced in Mexico but the company that makes the washing machine “will absorb the cost as the price of doing business.”

What exactly does Mexico export to us? http://www.cbsnews.com/news/what-does-the-u-s-import-from-mexico-a-whole-lot/

According to government trade data, Mexico exported $295 billion worth of goods to the U.S. in 2015: autos (74 billion), electrical machinery (63 billion), machinery (49 billion), agricultural products (21 billion), fuels (14 billion), plastics (17 billion), optical and medical instruments (12 billion).  In the agricultural products category Mexico exported to the U.S. corn, soybeans, dairy products, pork and pork products, beef and beef products.  https://ustr.gov/countries-regions/americas/mexico

On January 27, 2017, President Trump tweeted that “Mexico has taken advantage of the U.S. for long enough. Massive trade deficits and little help on the very weak border must change, NOW!”

A trade deficit with Mexico is the excess of our imports over exports. U.S. goods trade deficit with Mexico was $58 billion in 2015 and U.S. services trade surplus with Mexico in 2015 was $9.2 billion. Mexico was the third largest supplier of goods to the U.S. in 2014 and supplied services in transportation, travel, and intellectual property (software). https://ustr.gov/countries-regions/americas/mexico

U.S. foreign investment in Mexico totaled $107.8 billion in 2014 by nonbank holding companies, manufacturing, and finance/insurance.

Texas Congressman Louis Gohmert told Fox News that billions of dollars had been appropriated for a virtual wall on the southern border during the Bush administration but Janet Napolitano disregarded Congress and “we let her get away with disobeying the law.”  http://investmentwatchblog.com/funds-already-appropriated-for-wall-its-going-to-happen/

According to the Daily Caller, “The transition team is planning big spending negotiations with Congress, which will include money for the wall.” President Trump “plans to make Mexico pay for the wall directly or indirectly by increasing fees on visas and border crossing cards, enforcing trade tariffs and taxing money transfers abroad.” The pre-cast concrete wall will be 35-50 feet tall, costing an estimated $8-$12 billion. Of the 2,000 mile border with Mexico, 650 miles are already fenced and illegals have no problem climbing the existing barrier. http://dailycaller.com/2016/11/10/trumps-plan-for-the-wall-on-the-mexican-border-materializes/

It is obvious to any traveler that Mexico must repair their own country and must stop using the United States as their social security blanket at the expense of American taxpayers. Drug cartels operate across the border back and forth unimpeded, and illegals send home billions of dollars of untaxed money to Mexico.

As many have suggested, a tax should be levied on money wired to Mexico via Western Union, Money Gram, etc. On the average, money wires are only charged a service fee of $10.99 to transfer a few hundred dollars.

Most illegals, who do work hard and long hours, request to be paid in cash which means that they evade paying state and federal income taxes, Social Security taxes, etc.  At the same time, they benefit from our free medical care and other forms of welfare. As they consume goods and services in this country, they do pay sales taxes.

Some Illegals pay tax via ITIN (Individual Taxpayer Identification Number) also known as W7. The earned income tax credit they receive based on reported income on W7 is far greater than the actual state and federal taxes they pay. Some even claim children who are not even theirs or do not reside in the United States. Tax refunds amount to $4.2 billion according to a 2011 audit by the Treasury Inspector General for Tax Administration. http://www.forbes.com/sites/robertwood/2015/08/20/trump-bashes-4-billion-in-irs-refunds-to-illegals/#4945c4de7025

Let’s assume that the 11 million illegal aliens that apparently have not grown in numbers in 20 years since the MSM has championed their cause, send home south of the border $1,000 per month, a sum total of one billion untaxed income earned while illegally in the U.S., a cool $12 billion a year. Some may send less, some may send more. To save money, several illegals rent one apartment and use one common van as transportation. The money sent to Mexico support their families left behind for years and helps them save for building a nice home.

Michael Savage made the argument on his radio show that you cannot and should not deport law-abiding illegals (although when they cross the border of another country illegally, technically they are not law-abiding), that only criminal illegal aliens should be deported. Quoting data from the Government Accountability Office, 25 percent of the prison population is made up of illegal aliens and “criminal illegal aliens are arrested on the average 7 times.” https://www.numbersusa.org/pages/incarcerated-illegal-aliens-0

One of the reasons Savage cited for not deporting “law-abiding” illegals was that many work diligently and very hard in construction and in restaurants. “Who is going to wash the dishes,” he asked rhetorically. “And who is going to pick the crops? You?” This argument is weak as humans no longer need to pick crops, there are machines that can pick any kind of crop – back-breaking manual labor is no longer necessary. https://www.youtube.com/watch?v=H6VKBb9MmJc

The assumption is also made that millions of low-skilled Americans who are unemployed are either too educated for the job, lazy, or are unwilling to work in the restaurant business or construction industry.

But, for every illegal alien who is gainfully employed, if they are not here alone, he has a wife and children at home who are dependent on Medicaid and some or all of the thirteen U.S. Welfare Programs, costing American taxpayers plenty. And anchor babies make their parents eligible to stay in the U.S. and eventually the extended family.

The welfare programs include: http://federalsafetynet.com/us-welfare-programs.html

-          Negative income Tax (Earned Income Tax Credit or EITC, and the Child Tax Credit)

-          SNAP (food program, formerly food stamps, but is now a debit card which is often abused)

-          Housing assistance

-          SSI (cash to low-income individuals)

-          Pell Grants (up to $5,500 in grants to students from low-income households)

-          TANF (cash for individuals moving from welfare to work)

-          Child nutrition

-          Head Start (pre-school program to low-income families)

-          Job training programs

-          WIC (healthy food to pregnant women and children up to five years of age)

-          Child care (block grants to states and private agencies who administer child care programs to low-income families)

-          LIHEAP (Low Income Home Energy Assistance Program for heating and cooling)

-          Lifeline (Obama Phone) – discounted phone service to low-income individuals.

Savage argued that Americans must tread lightly in withdrawing these benefits to Mexicans as it would destabilize their economy and would create a vacuum of financial support of the population, leaving it open perhaps to a country like China to become the Big Brother provider which might not be in the best interest of the United States.

Even though Democrats and their leftist cohorts are lobbying against the southern border wall, and shrieking that it cannot be built, that it is inhumane, that it is being escalated anyway, that it would take a long time to build, and states like Texas, California, and New Mexico are rightfully Mexico’s anyway, they build tall security armed fences around their mansions and properties. The wall worked for China and it works for Israel. A former Mexican president even went as far as saying that Mexico is wherever there are Mexicans. However, if anyone crosses their borders illegally, they go straight to jail.