Tariffs Are Always Bad – Right? (Maybe Not)

Categories : Financial, News
May 29, 2019

A simple definition of tariff is a tax levied on imports. There is considerable discussion as to who actually pays any tariff. Eventually, all taxes are passed on to the ultimate consumer. The tariff is not, however, called a tax at the point of purchase. Instead, the tariff is embedded in the price of the item being purchased, which then costs more. Once collected, tariff revenues are sent to the Customs Agency of our Federal Government.

There are tariffs built into the cost structure of a vast array of imports purchased in the USA. Generally small, most tariffs do not completely offset the cost of buying American counterpoints, but they make our goods somewhat more competitive. The remaining inequity results from bad trade “deals” negotiated over decades by US trade officials. The North American Free Trade Agreement, or NAFTA, is a great example. There are dozens of Trade Agreements, but NAFTA has proven extremely onerous to Americans.

NAFTA was implemented on January 1, 1994, after which our economy boomed. At that time, NAFTA was apparently doing no harm, and perhaps was even contributing to the success of the economy. That is exactly what we were told by politicians and the media. Below the economic surface, in America’s Rust Belt things were deteriorating fast. Factory closings and job losses were mounting, and replacement jobs were nowhere to be seen. Still, macroeconomic numbers remained strong for a long time, due to the burgeoning Internet economy. Then, in early 2000, the “Dot-Com” bubble burst.

Most political conservatives were free trade disciples, and many still are. From now on, however, we will find out just how “free” and just how “fair” our Agreements are in reality. Merely including the word “free” in a trade agreement does not make it so. Details matter, words mean things, and information is now readily available, thanks to the Internet.

The Trump Administration is currently imposing tariffs in order to eliminate tariffs. As strange as that may sound, it is working. Tariffs imposed by the Administration in 2018 on steel and aluminum imports from Canada were lifted several days ago. Three days later Canada lifted the retaliatory tariffs they had imposed on our farmers and ranchers. This is a giant step toward fairness and complete implementation of the USMCA (United States, Mexico, and Canada Trade Agreement), otherwise known as “NAFTA 2.0.

President Trump claims that tariffs are a necessary tool toward “getting to zero tariffs.” So far it has worked as advertised. If correct, this will be a turning point in worldwide trade, eventually benefiting everyone, everywhere, for a long time. What an incredible legacy that would be.

Brilliant economist Milton Friedman once said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” Recent results suggest that tariffs can be used as a force for free and fair trade.

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