Tariffs are just a tax. Similar to a sales tax, but it needs to be paid on import. To be clear, it's a tax on your own citizens, not foreign exports.
If a product is cheaply produced in another country, and your domestic industry cannot match that price, your domestic industry might disappear. Suppose that other country is subsidizing their industry, then it's quite unfair, and it legitimizes supporting your own industry either by your own subsidies or retaliatory tariffs. As they say, to level the playing field.
If the domestic industry is already dead, tariffs won't magically resurrect it. For example, building a chip industry can take billions of dollars in investments and years of development. All that time, those taxes are basically just costing consumers money. They need to be kept in place up until the new factories come online AND are paid off. This can take decades. Will those tariffs still be there? Will those other countries have ALSO invested? Those uncertainties make it hard to invest in a dead/dying industry, even with tariffs in place.
One feature of tariffs is that it's a tax on consumption, so it's ultimately paid by consumers, and it's a regressive tax; the wealthiest will pay the smallest ratio of their income and/or wealth, while the working Joe will just see stuff getting more expensive - especially in the short term.
Tariffs can work to retaliate against, and discourage, dumping. They can play a role in protecting vital industries. But arbitrarily imposing them for political points is a dangerous gambit.
> For example, building a chip industry can take billions of dollars in investments and years of development.
Worse than that... you also need all the other things in the "ecosystem" that support them chips, such as discrete components, circuit board fabrication, assembly, etc.
Yes, and if the tariffs are indiscriminate, all of those things will be more expensive, making a domestic industry less competitive, for no good reason.
“One feature of tariffs is that it's a tax on consumption, so it's ultimately paid by consumers, and it's a regressive tax; the wealthiest will pay the smallest ratio of their income and/or wealth, while the working Joe will just see stuff getting more expensive - especially in the short term.”
I don’t think it’s this simple. The wealthy fat cats that are making money producing their stuff overseas or simply operating as middlemen for overseas manufacturers are going to have a reduction of income and profits.
Furthermore, it depends on how the revenue from tariffs were used. If revenue from tariffs is used to lower taxes for lower income citizens, it would be effectively a progressive tax.
I run a tiny (<$30k annual revenue and much much smaller profit, or negative if I paid myself an hourly wage) side business that relies on custom manufacturing of open source hardware products I've designed. So very much not a "wealthy fat cat" - here's my experience with manufacturing:
For die-cut plastic cards (think custom-shaped gift cards or hotel door hangers), I reached out to several US manufacturers for quotes and most never even responded. The one that did respond basically laughed at me and said my design was impossible to cut. So I went on Alibaba and had tons of quotes instantly and found a manufacturer. Not one of the responses were concerned about the design's manufacturability. And the manufacturer I picked does an incredible job with what is admittedly a challenging die cut design.
As a tiny business, most of my orders end up being under de minimis (which is actually great for helping small businesses avoid the overhead of dealing with tariffs and level the playing field against large players that can be much more efficient at handling regulatory overhead through high volume).
But with the change to eliminate de minimis and increase tariffs another 10% essentially overnight, my COGS is going to increase ~30%, which means either I shut down my business due to losing nearly all of my margin, or I increase prices substantially. It just hurts consumers AND small businesses like mine in the US.
There isn't a US manufacturer I can switch to (again, price wasn't the issue). And the US manufacturers in the space that WERE still selling products despite the international competition will just increase their prices now that competition is more expensive.
That is what people like trump don't understand (not surprising). Instead of gradually rebuilding the manufacturing capabilities of the US while supporting essential industries (like steel production) to create competition, they think slapping tariff will magically make the domestic manufacturing come back. Like you said, the US manufacturers will just ride along the coattails of tariffs instead of trying to be competitive and/or expand their production (they have no incentive to do so).
Again, knowing how short-sighted the US politicians and the society as a whole (e.g., look at how a majority of corps only care about short-term/quarterly profit) have become, it is not surprising but saddening to observe (because I have been living in the US for a bit over two decades and cannot move back to my home country, which is, at the moment, riddle with civil war).
> they think slapping tariff will magically make the domestic manufacturing come back.
Certainly not when tariff policy changes every few days on a whim. That doesn't make you want to build a chip resistor plant in the US. Or even a smartphone plant.
> Instead of gradually rebuilding the manufacturing capabilities of the US while supporting essential industries (like steel production) to create competition, they think slapping tariff will magically make the domestic manufacturing come back.
So what would you propose as the proverbial kick in the butt to encourage domestic production? And before you say “subsidies”, remember that a large segment of the population isn’t wild about those either because they perceive it to be some sort of evil tax dodge for big corporations (see: literally every time some state gives a company incentives to build a plant or office).
The reason we’re in this mess in the first place is because we chased cheaper means of production and once everything at home was gone, we just threw our hands up and went “well it’ll be too painful to fix it, anyone who tries is an idiot.”
We've moved away from lower value manufacturing and are moving higher in the economic chain - that's great for us and how economics works. It isn't just chasing cheaper means of production - we can (and in a limited way have) put people to work elsewhere.
We dodged this in the 90s, but we
need massive training programs to move those displaced workers to new jobs + resettlement assistance to get them to where the jobs are.
Unfortunately, the vast majority of jobs and manufacturing is in The lower value manufacturing chain. So by chasing only the high value chain, you abandon the manufacturing operations that actually hire workers, thereby hollowing out the middle class of your country and reducing the consumers of the products that you sell. A counterproductive and shortsighted strategy.
> see: literally every time some state gives a company incentives to build a plant or office
You're conflating two things here, the subsidies are one issue but the bigger issue is the ability for large companies to "shop around" states looking for the most favorable tax incentives. Our government shouldn't be bidding against ourselves.
Our government shouldn't be bidding against ourselves.
Yes, it should, because that's how individual companies (and governments for that matter) find their optimal operating points.
That is the explicit central dogma behind the United States' system of government. It works pretty well for the most part. If all the states had the same laws, policies, and taxes, there would be no need for federalism at all.
But there is new incentive created here. Now someone can create a small business to serve die-cutting like the parent needs because they have the extra edge over the Chinese competition. These sorts of small shops that did small runs used to be part of the economy before they closed after they couldn't keep up with the low cost coming out of China and they can in theory come back if making stuff in China becomes expensive enough.
Is that an immediate win for the consumer and the economy? Probably not. In the long term it could be reversing the globalization which is maybe a good thing (or at least that's the argument).
Anything imposed on the whim of the executive can be taken away just as easily, so building an entire factory based on an assumption about tariffs remaining in place is probably a hard sell.
> But there is new incentive created here. Now someone can create a small business to serve die-cutting like the parent needs because they have the extra edge over the Chinese competition.
You’d need dramatically higher tariffs for there to be any chance of that. Or a complete trade embargo. And either way, it’s gonna mean much more expensive goods for consumers.
I don't get it. You go into the grocery and pay sales tax on food for the week, but you import random trash from China, pay nothing and this is "great for helping small businesses"? No matter what you think about wholesale tariffs, surely this particular arrangement must strike you as odd and impossible to compete with for local producers?
In the EU we pay full taxes on every import, it's really not that complicated once you explain to the Chinese guys to not mark it as "gift" like its 2005.
You're mixing concepts. In the EU you'll generally pay VAT on all imports, but there are still often de minimis rules for import tariffs. This is not unlike the US - I have to always pay sales tax on imports regardless of value (unless it's being resold or incorporated into a product and I have an appropriate resale certificate, because sales tax is generally only required on final sale in the US), but import tariffs have a de minimus threshold.
I'm not saying the primary objective of a de minimus policy is to help small businesses, but in practice it can make a huge difference to correct for economies of scale to promote competition. I can't afford a team of lawyers and lobbyists to creatively classify my products to avoid tariffs like the big companies do; regulatory burden disproportionately hurts smaller players, so it's typically considered good policy to promote competition to phase in regulations based on size/volume/revenue etc.
You pay the same taxes on imports too. In fact in the USA some states will hunt you down to ensure you pay tax on interstate purchases let alone imports.
“And the US manufacturers in the space that WERE still selling products despite the international competition will just increase their prices now that competition is more expensive.”
And an industrial entrepreneur, such as yourself, might start a new business, making these products at a cheaper price in the US due to the new inefficiencies of simply raising prices by existing manufacturers. It takes time for these things to move through the system.
> The wealthy fat cats that are making money producing their stuff overseas or simply operating as middlemen for overseas manufacturers are going to have a reduction of income and profits.
The companies who moved manufacturing abroad and pocketed the savings for their investors and CEOs aren’t likely to just say “oh well” and take a big hit to their margins—they’ll just mark up their products to make up the difference. Maybe, eventually, domestic competition will emerge but it’s not a given and likely takes time. In the meantime, consumers are paying the increased costs.
Of course it takes time for domestic competition to arrive. Decision decisions cannot only be made because the benefits are not immediately realized. It’s taken decades to get to the point that we are with the outsourcing and oversees manufacturing that has emptied the ability of the US to manufacture basic products. The bottom line is that the products these CEOs are selling need to have a higher price. They’re being subsidized by slave labor and foreign subsidies. The prices will increase. The margins will increase and new domestic competitors will emerge to take advantage of the increased margins, but it takes time. And dismissing it because it takes time is a self-defeating policy.
How will domestic competition be able to emerge? Trying to start a business in this country is already absurdly risky and expensive, there’s a point coming where it’ll be completely impossible unless you’re already rich. Strikes me as the most likely motive for all of this.
Middlemen for overseas manufacturers are not typically what comes to mind when I hear “wealthy fat cats.”
If all the middlemen see the same increase in costs, they are not going to be the one to try to keep prices the same. They know everyone is taking the same hit so they can just pass it along together. The consumer decides to buy or not at that level.
The innovation comes in avoiding the tariff. Often companies with sufficient scale of operations can pay additional lawyers and accountants to restructure and avoid tariffs.
Tariffs can dramatically affect specific companies, but squishy middlemen (and multinationals) can often work around them.
Sure, but how is this any different than the income tax system where companies receive tax credits, reduced tax rates, accelerated depreciation, schedules, subsidies to build factories, and direct cushy (high margin and sometimes fraudulent) contracts from government divisions.
But your view is too shortsighted as I’ve said, in other comments. There will be a reaction to these increases in prices and increases in margins. Small startups and even large companies will enter the space to take advantage of the increased margins. It’s not a static system. However, it does not happen immediately and it takes some time.
First, there are not necessarily increased margins, the margins may stay the same or even decrease. Some companies may choose to keep their margins the same, in which case profit would increase.
But importantly your _profit_ will not decrease, you'll defend that as the seller even if that means your margins decrease.
Second, small companies are _more_ sensitive to taxes (costs), not less sensitive. Existing, large players are better able to absorb costs _and_ command stronger pricing power relative to new entrants to the market.
But overall, your view of the "market" just doesn't play out in reality. You can go look at any industry that encountered tariffs in Trump's first term, you may also look at any consolidated market in the last twenty years. Market power has been heavily concentrated, regulatory capture has gone up, and the result is that markets aren't working as you may expect.
I posted this link separately and it fully demonstrates what I would expect: more jobs in the US to compensate for the increased cost to import. In this case, the jobs were provided by existing manufacturers like LG and Samsung; however, these jobs could also be produced by new competitors entering the space.
>The wealthy fat cats that are making money producing their stuff overseas or simply operating as middlemen for overseas manufacturers are going to have a reduction of income and profits.
I'd love this to be true, but where is there recent evidence this will happen? When Trump put tariffs on washers in 2018, LG and Samsung (importers of machines) didn't lose profits, their prices went up: https://youtu.be/_-eHOSq3oqI?t=130
“Imports did decline. Washing machine imports fell by about 33% the first year the tariffs were in effect and stayed below pre-tariff levels through 2022. During that time, Samsung began producing washing machines at a US factory in South Carolina, and LG opened a plant in Tennessee. Whirlpool also increased domestic production and hired more workers. All told, new domestic production may have accounted for between 1,700 and 2,000 new jobs.“
The wealthy fat cats are often heading companies in oligopolies. They just increase prices to absorb the tariffs, blame inflation and public policy, and continue to make the same profits.
If a product is cheaply produced in another country, and your domestic industry cannot match that price, your domestic industry might disappear. Suppose that other country is subsidizing their industry, then it's quite unfair, and it legitimizes supporting your own industry either by your own subsidies or retaliatory tariffs. As they say, to level the playing field.
If the domestic industry is already dead, tariffs won't magically resurrect it. For example, building a chip industry can take billions of dollars in investments and years of development. All that time, those taxes are basically just costing consumers money. They need to be kept in place up until the new factories come online AND are paid off. This can take decades. Will those tariffs still be there? Will those other countries have ALSO invested? Those uncertainties make it hard to invest in a dead/dying industry, even with tariffs in place.
One feature of tariffs is that it's a tax on consumption, so it's ultimately paid by consumers, and it's a regressive tax; the wealthiest will pay the smallest ratio of their income and/or wealth, while the working Joe will just see stuff getting more expensive - especially in the short term.
Tariffs can work to retaliate against, and discourage, dumping. They can play a role in protecting vital industries. But arbitrarily imposing them for political points is a dangerous gambit.