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For years now, competent commentators have tried to explain that tariffs do no one any good (on net). They are taxes. They increase business costs. They force businesses to cough up to the government for no particular reason. They don’t work to open economies. They sow seeds of distrust. They invite retaliation thus ruining export markets in addition to raising prices and tipping small businesses into the failing side of thin margins.
Time was when protectionist policies benefited powerful industrial interests by insulating them from competition. But with more than 60% of world GDP now bound up with imports and exports, those times are over. Tariffs have never really worked on the whole; now they are literally outmoded.
Not a single incident of mercantilist policies in history refutes those points.
Now we are living through a real-time experiment that is testing these propositions once again. Daily, reports appear that reveal that we are once again discovering what we already knew: to be a “tariff man” is to be a person who lives in denial of reality.
Let us review here the authoritative evidence.
The New York Fed just conducted a business survey and found the following.
When asked how much, if at all, recent increases in tariffs have raised input costs—either directly or indirectly—79 percent of manufacturers and 60 percent of service firms said at least slightly, with 14 percent and 12 percent, respectively, characterizing the increase as substantial. The data illustrate a considerably more widespread effect of higher input costs among service firms than in last year’s survey. Businesses were also asked how they saw changes in trade policy affecting the prices they pay, their selling prices, and other measures in 2019 and in 2020. For both years, roughly two-thirds of manufacturers saw an upward effect on prices paid, and roughly 45 percent saw an upward effect on selling prices. Among service-sector respondents, the numbers were somewhat lower but up noticeably from last August’s survey: for the current year, 60 percent saw an upward effect on prices paid (up from 49 percent in the 2018 survey), and 39 percent reported an upward effect on their selling prices (up from 32 percent last year).
Here is a Tweet storm by importer Josh Jordon that provides some flavor to what business is dealing with here.
Since my business is now caught up in the trade war, I want to go over how crippling it is not just from the tariffs alone, but the uncertainty that Trump’s constant back and forth are causing for a lot of small businesses like myself.
Over the last few years we’ve had products made in the US and in China. The products we make in China would cost anywhere from 2-4x what the cost to make in China.
What that means is if we made them in the US, we would have almost no sales. You can only increase prices so much.
In making these products in China, we have to put or orders in about 45 days before they ship. This is normally not a problem, but when Trump unilaterally slaps tariffs on items with little notice it becomes one.
This has happened with two of our orders this month alone.
We placed two orders that will be “on the water” before Sept 1, but Trump is giving no exemption for those containers.
In other words, we placed the order well before Trump’s new tariff announcement, they will leave China before 9/1, but we’re still going to pay 10% tariffs.
These are low margin products that sell well during the holidays which now have a 10% tariff tax attached to them.
That forces us to either increase the costs to consumers or to eat the tariffs. We’re looking at that now, but will likely increase slightly and eat some of them.
The uncertainty makes this so difficult, and there are so many small businesses like mine doing the same thing (I know because I talk to them), and so many are trying now to get orders in for the holidays.
While Trump delayed *some* of these new tariffs, he left most in place.
By Trump delaying some of the new tariffs until 12/15, he arbitrarily chose winners and losers.
In other words – Trump went through a list of products and decided which categories (companies) he did not want to harm for holiday sales, and which he didn’t care about either way.
So now we have two containers that are coming in that will have a 10% tariff bill attached to them that we will have to pay 100% of — China will not pay one cent of the tariffs as I’ve screamed about for months.
And now we’re looking at the next orders and wondering what to do.
Every order placed now will have a 10% tariff attached to it, with Trump threatening to raise it to 25% if China doesn’t back off.
And while the 10% tariff will be very painful to our small business, a 25% tariff would be crippling.
So many businesses are going through this.
I hope this illustrates how chaotic Trump’s trade policies are for US businesses, and why Trump’s impulsive tariff decisions are devastating.
We all fear that Trump will add/increase the tariffs while orders are en route to us, and it’s really awful to plan a business that way.
If you made it this far, thanks for reading.
If you did not read the thread, here’s a TLDR: Trump’s trade war is making life tough for small businesses, China isn’t paying one cent of the tariffs, and I will be hit with tariffs next month.
“Trade wars are good and easy to win.”
Meanwhile, the Peterson Institute comments:
The typical effect of an import tariff is to raise prices. For imported inputs like semiconductors or steel, these taxes mean higher costs for American businesses that use them to then provide other goods and services. Because Trump’s tariffs to date have focused on these imported parts, the main impact on the US economy has arisen through American companies finding it more difficult to compete with firms in other countries that do not face these tariffs on their inputs. And different US firms react in different ways. Some pass along the higher costs to end consumers in the form of higher prices. Others choose to earn lower profits, or to cut costs elsewhere, including by keeping wages low.
The channels through which the US economy is affected by Trump’s tariffs may change with the September 1 duties. Imposing tariffs directly on consumer products may mean that households see price increases even more quickly than has been the case thus far….
These next two rounds of tariffs will nearly double the coverage of affected products. The September 1, 2019 tariffs on $112 billion of Chinese imports will increase product coverage to 68.5 percent of all US imports from China. And the 10 percent tariffs on another $160 billion of new products on December 15 will result in 96.8 percent of US imports from China being affected by Trump’s extra tariffs…. There is no good news in these tariff announcements. The only minor consolation comes in their timing. By putting off the next two rounds until the import surges have already arrived to stock this year’s back-to-school and winter holiday shopping seasons, President Trump may be coming around, albeit belatedly, to the economic evidence on the costs of his trade war. Thus far, it is American consumers and companies—and not China—who are bearing the burden of his tariffs.
And the academic evidence is piling up too:
We analyze the impacts of the 2018 trade war on the U.S. economy. We estimate import demand and export supply elasticities using changes in U.S. and retaliatory tariffs over time. Imports from targeted countries declined 31.5% within products, while targeted U.S. exports fell 11.0%. We find complete pass-through of U.S. tariffs to variety-level import prices. Using a general equilibrium framework that matches these elasticities, we compute the aggregate and regional impacts. Annual consumer and producer losses from higher costs of imports were $68.8 billion (0.37% of GDP). After accounting for higher tariff revenue and gains to domestic producers from higher prices, the aggregate welfare loss was $7.8 billion (0.04% of GDP). U.S. tariffs favored sectors located in politically competitive counties, but retaliatory tariffs offset the benefits to these counties. We find that tradeable-sector workers in heavily Republican counties were the most negatively affected by the trade war.
But again, does the evidence actually matter? Maybe not to politicians in power but markets, the fierce honey badger that doesn’t care about powerful wishes, are responding as one might expect.
Jeffrey A. Tucker
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Why Is the System Rigged?
It’s crazy season, that special time on the American calendar when aspiring candidates for the nation’s highest office try to outdo each other in an effort to attract more voters to their platforms. This time around, background support is provided by a virtual anvil chorus of anti-capitalism clatter. Senator Elizabeth Warren, for example, frequently unleashes criticism of American capitalism by asserting that the “system is rigged,” a complaint that seems to resonate with meaningful populist appeal. It’s an old refrain that has echoed across the years from Karl Marx onward.
Nobel Laureate Robert J. Shiller explains why this may be the case in his new book, “Narrative Economics.” As Shiller points out, when a story is repeated enough, the viral message may be accepted as conventional wisdom, more like an article of belief than a matter of reason.
I’ll also emphasize that for a message to prevail, it helps if its content rests on a preexisting and inherently moral foundation that reflects our tribal instincts as an evolved human species. And what works for a small tribe doesn’t necessarily work so well for a huge industrialized nation.
Consider this: Some may inquire, “Do you believe in capitalism?” almost as if the position one takes is a matter of religion. When answering, we reflect on our tribal preferences, and cooperating and sharing with our family and neighbors is often a key to success. Thus, many people will almost instinctively answer “no,” or at least “yes, but …” followed by some serious caveats and exceptions.
Yes, the beneficial-but-invisible hand of commerce driven by self-interest has never been an instinctually lovable idea. Gains from trade, while well-documented since the days of Adam Smith, can be more elusive than we may first realize. Given the widespread negative views on the subject, politicians’ calls for greater accountability and government intervention may not be welcomed by all, but they’re understandable.
Shiller adds another dimension to his narrative economics story by using data from Google’s Ngram Viewer. The viewer produces charts based on the frequency of particular words and phrases in Google Books, which include some 8 million downloaded volumes in various languages.
Consider an Ngram we might apply to Senator Warren’s comments. The nearby figure contains one for “system is rigged” that shows the frequency of the phrase’s occurrence from 1940 through 2008, the final year in the database. I have smoothed the data by using a three-year running average:
The data show four viral periods: 1940-1950, 1960-1985, 1990-1998, and 2000-2008. The first period encompasses World War II, a time of draft, rationing, price controls, defense contracting, and related cronyism that may in some cases have been highly profitable for hand-picked firms.
The second viral period is much longer and encompasses a period including the Vietnam War and related draft, Watergate and significant social unrest.
The third period includes the first Iraq war, and the fourth contains anti-capitalism protests and budding expressions of concern about income inequality as a version of the economy closer to what we know today took shape.
The Ngram suggests that in seeking to communicate to her base, Senator Warren artfully chose a phrase that had gone viral before—which is to suggest that there may be an embedded tribal norm that reacts during periods when a relatively small number of people are able to build large fortunes or avoid burdens, such as the draft, as a result of government actions and favors.
Oddly enough, Senator Warren and other capitalism critics seldom ask how the system got rigged and what might be done to undo the rigging. But of course, the rigging is done in Washington, sometimes when special interest groups—including corporations—lobby congress for favorable treatment.
And how might that be undone? By trimming away uneven regulation and adopting policies that expose all business firms to the refreshing winds of competition. Put another way, by forcing capitalists to act like capitalists and not lobbyists.
Bruce Yandle
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science.
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Holiday Spending Off to a Modest Start
Retail sales and food-services spending increased 0.2 percent in November following a 0.4 percent gain in October. Excluding gasoline station sales, retail sales and food services were up 0.1 percent in November after a gain of 0.7 percent in October. Over the past year, total retail sales and food services were up 3.3 percent through November, while retail sales and food services excluding gas have increased 3.6 percent (see chart).
The November performance was mixed, with gains in 7 retail-spending categories, two posting declines and one essentially unchanged. Gains were led by a 0.8 percent increase for nonstore retailers (primarily online shopping), and a 0.7 percent rise for electronics and appliance stores – two traditional holiday spending categories. Gasoline stations also posted a 0.7 percent gain which is a surprise since average retail gasoline prices (which often drive monthly changes in retail sales spending) were actually down 2.0 percent. Also posting gains for the month were motor vehicles and parts (autos), up 0.5 percent, food and beverage stores, up 0.3 percent, home furnishings stores and general merchandise stores, each up 0.1 percent.
On the negative side, health and personal care stores saw sales fall 1.1 percent, clothing and accessories stores had a 0.6 percent fall, sporting-goods, hobby, musical-instruments, and book stores posted a 0.5 percent decline, miscellaneous retailers had a 0.4 percent setback, and food services (restaurants) saw a 0.3 percent fall. Building materials, and gardening supply store sales were essentially unchanged for the month.
The mediocre retail sales data for November suggest that the early predictions of a booming holiday spending season may have been premature. Certainly, consumer fundamentals are generally solid with a low unemployment rate, decent income growth, and positive consumer sentiment. Government data are subject to revisions and there is plenty of time for consumers to spend, but today’s data suggest slow growth remains the most likely path.
Robert Hughes
