OK, everybody, back to school here for another look tariffs. We travelled this road once, with the disastrous Smoot Hawley Tariffs of the 1930s, but the old maxim is that history forgotten is bound to be repeated. And look out! Here she comes again. The problem is all tangled up in politics, economics, nationalism, and some fundamental issues of government. Let’s untangle the morass and examine the elements one at a time.
The fundamental principle of economics is to understand that tariffs are a tax usually imposed singularly, precisely, and punitively to either drive a foreign product from the market completely or equalize its cost to the consumer to counter some unfair element the imported item would otherwise enjoy in competition with local suppliers in the U.S.
The imposition of a tariff must be weighed against the cost to the U.S. consumer in the form of increased prices, and/or being unable to acquire foreign made good at reduced cost. It is essential to understand that the cost of tariffs always fall upon the consumer or importer; tariffs are not imposed upon or paid by the foreign manufacturer or exporter.
For example, if production of an essential item in a foreign country is subsidized by the government there, and the producer of that item wishes to sell it in the United States, where private producers also market the items but without any government help, the government subsidy might give the producer there an unfair advantage over producers here. A targeted, precise tariff to eliminate the advantage of the government subsidy might be employed to equalize the market and protect the un-subsidized U.S. producer. A similarly targeted but substantial tariff might be used to block the targeted product from the market entirely.
It is essential to bear in mind that the ultimate cost of the tariff will be imposed upon the U.S. buyer, not the foreign manufacturer. This means that the government must weigh the value of protecting the price level to domestic suppliers against the benefits to domestic consumers of reduced prices in deciding whether to impose a tariff at all, or if imposed, how much it should be.
Although tariffs are ultimately a tax paid by consumer, raising money on a sustaining basis from tariffs is not an objective; the objective of the tariff in in all cases is to block or reduce the foreign product from coming into the U.S. market. This objective is reached absolutely when the receipts from the tariff reach zero, meaning no foreign products are reaching U.S. markets at all.
The announcement of punitive tariffs on foreign products by Trump is unlikely to generate substantial revenue from international sources. Instead, it will likely raise the cost of goods for U.S. consumers and, as previously mentioned, potentially create significant disruptions across various sectors of U.S. markets.
For example, Trump announced that a significant tariff would be imposed on the importation of steel, with the intention of returning steel production to the U.S. But it would take anywhere from three to five years to re-open steel manufacturing facilities in the U.S., at significant capital costs to the manufacturers if they actually chose to do so. In the meantime, U.S. manufacturers using steel would have to pay significantly increased prices for foreign steel, dramatically increasing the cost of the final product. The increased cost gets passed into the consumer price, resulting in significant increases in many, many areas.
American cars, for example, might be assembled in the United States, but every one of them include significant parts and add-ons manufactured in foreign countries. In some instances, it has been estimated that some vehicles assembled in Detroit or elsewhere in the U.S. are comprised of more than 75% of parts and attachments that are foreign made, either in whole or in part. Predictions are that the cost to the consumer of automobiles in the U.S. could double or triple because of the punitive tariffs Trump has proposed to be imposed on steel.
This means that the upheaval in the market will impact the domestic manufacturers and suppliers, as well as dealers, transport companies, and automotive financiers. Uncertainties in the markets abound. Trump’s vacillations on whether, when and how much to impose in foreign tariffs have resulted in significant swings in costs throughout all affected markets. Transporation facilities are stalled or shutting down, shipping is at a standstill, dealers are all over the place in orders, and suppliers are rolling up the welcome mats to wait out the problem. All this means that retailers like grocery stores are seeing major shortages and shoppers are seeing empty shelves everywhere.
Every level of the economy is affected, but the lowest rungs are hurt the most, as in the lowest levels, more earnings are consumed on essentials every month. It is estimated that Trump’s tariffs if adopted as proposed so far, would increase the costs of essentials required for a family of four by over $4000 per month.
The problems discussed here are only the direct result of U.S. tariffs on imports. I do not even begin to touch the problems that will result to U.S. exporters when the retaliatory tariffs begin to appear from the foreign governments affected by U.S. tariffs.
General tariffs of this level were attempted one time in recent history – the Smoot Hawley Tariffs imposed by Congress in the early 1930s. They proved to be an economic nightmare for all the reasons stated here. As retaliatory tariffs were imposed against the U.S. by essentially all foreign governments, it has been estimated that these tariffs lengthened any substantial recovery from the Great Depression by several years. The disastrous results of the Smoot Hawley Tariffs have been sufficient for Congress to wave off any consideration of general tariffs for over 80 years.
This means that all the tariffs that have been imposed for the last 80 years or so have been limited tariffs specifically targeted at specific market problems or imposed for clearly political purposes, such as one imposed in political retaliation. Nothing Trump has said about his planned tariffs come even close to any of these legitimate political or practical concerns.
So, fasten your seat belts everybody, nobody knows exactly where Trump is headed, but from all appearances today, it’s going to be a bumpy ride.
What are we to make of the demonstrations currently underway in Los Angeles?
Donald 
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