Tariffs are taxes. And whenever taxes are imposed there are winners and losers. We’ve all heard about the back door taxes that governments sneak in without us taking much notice until they take their toll on our hard earned income. Insurance Premium Tax is a good example of this. It’s an amount added to most of the insurance premiums that we in the UK pay. A few years ago, without notice or noticing, we had an extra charge added to our car, home and most other insurance policies. It wasn’t a vast sum so we did what Brits usually do and gently grumbled but didn’t object. It’s risen a bit over the years but not by an amount to precipitate more than a gentle grumble.
Tariffs are front door taxes. Donald Trump has promised America that he will impose 20% tariffs on all imports and 60% or more on imports from China. At first view, and according to Trump, that is terrible for the businesses trying to sell their goods and services into the US but amazingly good for US businesses and US citizens. Is it?
Trump’s tariffs explained
Starting point: it is not the business that is doing the selling that pays the tariff. The business that pays is the one that is doing the buying. So it’s a US business that has to pay the 60% tariff if they buy anything from China. And the tariffs have to be paid at the point of entry of the goods into the US, and at the time of entry. Time and tariffs wait for no man even though the goods have yet to be sold or incorporated into something that will later be sold.
Hence, the US business doing the importing has to fund the cost of the tariff as well as pay the cost of the goods to the seller until the goods are sold.
Are you confused yet? Probably. So let’s look at a fictitious example.
Let’s say I’m a business in America and I need something that I can’t buy in America, so I have no alternative but to import it. It’s only available in China. Let’s say it’s an exotic oil from a plant that only grows in China. I can’t make my herbal products without this so I’m committed to either buying it from China or going out of business. For simplicity let’s say that this oil is half of my product so the cost of my product is going to rise by 30% if the tariff is 60%. How many of my customers are going to continue to buy my product if I increase the price by 30%? If you’re an average working person on an average income and your face cream rockets from $10 to $13 you might well opt for a cheaper product.
Trump’s objective is to stop businesses from buying from abroad. He wants them to buy only from American suppliers. That makes sense. Until you consider the cost of the labour that is involved in making any given item. The world is awash with clothes made in countries where labour is incredibly cheap. For the purposes of this discussion, we must ignore any ethical considerations despite there being many.
So let’s take an example of a simple cotton shirt made in Bangladesh. The tariff to import that would probably be 20%. Therefore a $10 shirt would now cost $12 to import after tariff application. If the labour cost of that shirt is $2 in Bangladesh but $5 if manufactured in the US, it makes sense for the importing business to continue to import rather than pay the extra cost for it to be made in the US.
US wages are far higher than in many countries from which so much stuff is bought. This is a fact.
Where does the revenue from tariffs go?
They are taxes. In the case of the United States they are taxes imposed by the US Government. They go directly to the US treasury. Which means that the US government is taking a vast amount of extra tax from American businesses who are importing into the US.
US importing businesses are not in any way benefitting from Trump’s tariffs because they are paying them directly to the US government Immediately upon the import arriving in the US. The US citizen is not in any way benefiting from Trump’s tariffs because they are paying a higher price for everything they buy that has been imported. That’s a vast amount of what they buy.
Bottom line: the US citizen is paying Trump’s tariffs.
To buy stuff that is more expensive US citizens will need higher incomes. So wages will have to rise resulting in it being more expensive for US businesses to employ people. The consequence of which will be fewer jobs for Americans. Which is exactly the opposite of what Trump has promised.
But where has all the dosh from the tariffs gone? It’s gone directly into the US treasury. As we observed earlier, tariffs are front door taxes: they go directly through the front door of the US Customs border into the US treasury.
Every time anyone in the US buys anything imported they will pay a hefty additional tax. Everything with any imported component will be more expensive.
Trump’s government will be richer; the American people will not. All who voted for him – and all who did not – will be poorer because so much of what they buy will be more expensive.
Final score: Trump administration plus $$$; American people minus $$$.
So what will Trump do with the treasury windfall from tariffs? My guess is that he will use it to fund the deportation of those he deems to be illegal immigrants. His most loathed of all US inhabitants. Those who also happen to be the cheapest source of labour for US businesses. And thus labour costs will rise ever higher and the cost of stuff that people buy will rise ever higher too. And so inflation will also rise.
And no one will like that. No one ever likes a government that causes inflation because inflation has the direct effect of lowering living standards.
Through the imposition of tariffs Trump will burn his boats. It may be the planet that suffers sooner. All we can do is hope that Trump will be evicted by the electorate before the planet evicts Trump’s electorate along with the rest of us.
