Monday, May 13, 2019

Your holiday surprise


My first job involved the manufacturing of cloth goods. Some of these we produced ourselves. Others we imported. We used a customs broker to help clear our goods through their port of entry. The laws governing tarrifs (or duties) are complex and generally beyond the expertise of small businesses like ours was. Customs brokers know how to navigate the legal complexity involved in importing. They know, for example, that if a particular product is manufactured with a particular percent of American labor or materials, then the duty is less than if its origin is entirely foreign. They know, too, what types of products are subject to high tariffs and what types of products avoid tariffs entirely. Before we brought a product into the country we made every attempt to know what its tariff would be. Without this knowledge we couldn’t set our prices or estimate our profits. An unexpected rate of duty caused us a substantial loss on one occasion.

None of these calculations would have been necessary if the tariffs were paid before the goods were exported. But that’s not the case with tariffs. President Trump has repeatedly said that China is paying tariffs to the United States. That’s a total fabrication. The importer always pays the tariff, never the exporter. A tariff becomes part of a product’s price and is ultimately paid by its consumer. Expect to pay more for gifts this Christmas.

Trump intends to reimburse farmers for tariffs imposed by the Chinese in retaliation. He says that it will only cost us a small amount of what we earn on tariffs collected from China. That’s nonsense. Consumers pay tariffs. Expect to pay more for gifts this Christmas. Trump’s thinking is that we will ultimately win a trade war. Perhaps we will. However before we do, a hungry China will pay more for food staples like soy beans, and gadget loving Americans will pay more for their iPhones. But that’s not the whole story. The US has been gradually climbing out of the slump begun in 2008, but most Americans wages have not kept pace with the cost of living. Tariffs were high during the 1920s before the Great Depression begun in 1929. Most economists agree that the Great Depression was worsened by even higher tariffs created by the 1930 Smoot-Hawley Tariff Act. Additionally, the damage to the European economy fueled the rise of Hitler.

Perhaps the US-China tariff war won’t rock the economy much, but I doubt that. I expect people will pay more for gifts this Christmas, that is if they still have jobs to help buy them.

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