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The Pros and Cons of Tariffs

What is a Tariff? According to Investopedia, a Tariff is simply a tax that adds to the cost of imported goods. Last week, President Trump’s talk of implementing steel and aluminum tariffs sent the market on a downward slope. Was it justified? Probably not, as even if everything that the President outlined in this plan happened, there is little to no chance that any average person would notice. However, if America continued to implement tariffs on more industries, eventually it would hit us all in the place that it hurts the most, our wallets.

There is little doubt that tariffs lead to higher costs. I don’t think there is a valid argument against that. So why would any country want to put a tariff on anything? There are a variety of reason, from politics, to government revenue, to national pride, to employment.

From a political perspective, putting tariffs on a certain industry can make a politician very popular in certain parts of the country. For instance, putting a tariff on imported coal would probably garner votes in West Virginia. Tariffs lower sales of imports and increase domestic production, leading to job (and sometimes) wage growth where that product is produced.

Sometimes tariffs are simply the best way for certain governments to raise revenue. In Costa Rica, the import tax on automobiles is astronomical. For a vehicle less than three years old, the tax is 52.29%, but if it is older than 6 years, you will pay a tax of 79.03% on the value of that car! Needless to say, cars in Costa Rica cost a lot more than they do here in the United States, and people tend to drive their cars for a lot longer. In the Bahamas, 60 percent of government revenue comes from tariffs. The basic tariff imposed on most goods is 35%.

In some instances, entire industries are protected by tariffs simply because the country places a value on their heritage of producing that product. For instance, the peanut industry in the United States is protected by huge tariffs. These run from 131% to 163.8% depending on the status of the peanut. What is the net result of this? We pay way more for peanuts than just about anywhere else in the world.

Employment is another reason that politicians sometimes support tariffs. One of the largest tariffs in US history was enacted in 1930 to increase employment during the Great Depression. The Tariff Act of 1930, or the Smoot-Hawley Tariff, raised tariffs on over 20,000 imported goods. Many economists think this act contributed to the length of the Great Depression rather than lessening it.

In the case of the steel and aluminum tariffs that Trump has imposed, we see it as mainly a negotiating tool. This wasn't highlighted in our list because it is an unusual strategy. The main driver of this seems to be fair trade, with the benefit being employment in the manufacturing industry, but we don't expect these tariffs to last long. We believe that Trump will leverage these tariffs to strengthen his negotiating position, get what he wants, and then remove the tariffs. It is an unconventional method of negotiating, but I hardly think anyone would argue that Trump is an unconventional President.