Why tariffs are bad


This post was written in connection with a larger post, Why I am voting third party, so I’m going to take a decidedly Trump-centric approach here. Sorry if you stumbled upon this looking for a more generic discussion.

The idea of protecting U.S. businesses through tariffs is one of the reasons that a lot of people support Trump. I can’t count the number of times I heard him say “We’re getting beat on trade all over the world.” He argues often that other countries charge tariffs and therefore we need tariffs to make things fair. Well, here’s a fun life rule. Tariffs nearly always increase prices, decrease consumer choices, and lead to lower product quality. We’re going to discuss all of these in depth, and I’ll be using the U.S. and Mexico as the example since that’s where Trump’s strongest tariff arguments are pointed.

A little about the U.S. and Mexico

These data are taken from the Office of the U.S. Trade Representative’s website.

  • Mexico was the United States’ 3rd largest supplier of goods imports in 2015.
  • The top import categories in 2015 were: vehicles ($74 billion), electrical machinery ($63 billion), machinery ($49 billion), mineral fuels ($14 billion), and optical and medical instruments ($12 billion).
  • U.S. imports of agricultural products from Mexico totaled $21 billion in 2015, our 2nd largest supplier of agricultural imports. Leading categories include: fresh vegetables ($4.8 billion), other fresh fruit ($4.3 billion), wine and beer ($2.7 billion), snack foods ($1.7 billion), and processed fruit & vegetables ($1.4 billion).

Tariffs increase prices.

This is literally the definition of what a tariff is…you charge a tax for things brought into your country, which then is passed on to the consumer in the form of increased prices. The oft-used rationale for why this is a good thing is that imports being more expensive means domestic producers are favored. They can ramp up production, hire more people, and the economy prospers.

However, let me give you a hypothetical here. You’re a business that was charging competitive prices and producing as much as you could sell at those prices. Suddenly, the prices all your competitors charge goes up 35% (Trump’s suggested tariff amount for Mexico). Suddenly everyone is buying from you. You can’t keep product on the shelves. So, you hire more people. Well, you had already hired the best people you could find, so these people aren’t quite as good at the task. You could try to hire people away from other companies, but you have to offer them more than they’re making now. In addition, assuming you’re producing any of the major items that we import from Mexico (cars, machinery, fruits, wine), you’re going to have to invest in significantly more capital. You need equipment to make cars. You need land to make fruit. Well, even if you don’t have any direct competitors in your industry, all the other companies in industries that competed with Mexico are about to be looking to buy land, facilities, and equipment as well. There’s only so much of these things to go around, and so prices for those production inputs start rising with demand. So, you’re paying more for capital and staffing it with less qualified people or people you’re paying more. Your production costs have increased. My guess is that you’re going to increase your prices. You probably won’t increase them by the full 35% that Mexico just had to endure, but you could easily bump them up 25% and still have the full market share.

For this reason, nearly every time a tariff is put in place, prices go up. There’s a word for prices going up, and that word is inflation. Most people learn that inflation means that their money is worth less, and they’re right, but the implicit cause of this is that money is worth less when things cost more. In our hypothetical Trump-induced tariff situation, prices for things like cars, machinery, fruit, and beer would go up. Sure, some people might have jobs that wouldn’t have had them otherwise, and that’s a definite positive, but that has to be weighed against significant price increases in key industries for the entire country. We’re talking things like avocados, tomatoes, cucumbers, peppers, and Honda accords.

Also, there’s no assurance that the jobs will even be created in the U.S. Companies could move to a country that we don’t have a tariff on, or natives in those countries could start businesses to supply those goods to us. In either case, prices would still go up because there’s a reason we were buying from Mexico in the first place. So, if you don’t want higher prices and you don’t like inflation, you should never support tariffs.

Tariffs decrease consumer choices

This one is a little more obscure than the price increases, but it makes sense when you think about it. If the price for a good that comes from Mexico (fruit, etc.) suddenly goes up by 20%, stores may stop carrying it due to not being able to sell as much stock as they need to make it worth using the space.

Tariffs decrease product quality

This is the most difficult result of tariffs to quantify, but it makes sense intuitively when you think about it. Competition forces companies to be held responsible for their products. A company with few or no competitors (think Comcast) has little incentive outside of government regulations to create quality products or consumer experiences. Decreased competition due to higher priced imports from tariffs means companies would have the ability to produce lower quality products with no consequences. While this is not an assured outcome, it is a very likely one.

Where does that leave us?

Having said all this, Trump would have you believe that to be “competitive,” the U.S. needs tariffs on imports. However, I would argue the opposite is true. Tariffs actually destroy competitive markets. Said another way, if you’re someone who believes in competitive markets, then you don’t want tariffs.

Consider this quote from someone who is strongly in favor of allowing insurance companies to compete across political boundaries:

Artificial lines, where we stop…companies from…competing…gives the…companies essentially monopolies. We want competition.

-Donald Trump, 2nd presidential debate

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