This post will argue that tariffs are a tax on consumers if used improperly. It also details how tariffs lead to trade wars and ultimately economic hardships. The real world is much more complicated than the examples I provided, but the examples are simple to state how tariffs are supposed to work. Affirmatively, this post argues that tariffs should only be used properly or not at all.
Tariffs are used effectively if a country has expertise in a particular market or industry and they tariff foreign products to replace them with domestic products. For example, if the US puts tariffs on Chinese steel, it does so because it has the resources and labor to create a thriving steel industry that can replace Chinese steel to fill the US’s steel needs. This means US companies only get steel from US steel producers and they reduce imports from Chinese steel producers. If the tariff is successful, then one should expect Chinese steel imports to be reduced considerably and US steel to go up considerably. Thus, tariffs are designed only to reduce foreign imports. However, it doesn’t necessarily mean that a country’s exports are increased.
If the US can’t increase its steel production, then those tariffs will ultimately hurt US consumers because imports can’t be replaced by domestic production. For example, if the US steel production is very low, then the US must continue to get Chinese steel with the tariff in place. One might think that the tariff isn’t a concern for the US but only China, but that’s completely wrong. Since Chinese steel is tariffed, if US importers get Chinese steel, they have to pay additional cost on that steel. US importers will have to increase the cost of their products to make a profit and that cost will be passed down to consumers. This means products such as cars, boats or buildings are more expensive for consumers because of that tariff. Thus, when tariffs go wrong, they increase inflation because prices go up as a result of a country’s production not going up to replace a foreign country’s production that is being taxed or tariffed.
If used improperly, tariffs also decrease domestic production. What the tariff does is deter others from engaging in international trade. It causes what economists call a “deadweight loss”, where the government has an artificial tax that decreases the wealth a producer and a consumer can make. This means that production will either have to go down because costs are high and profits are lower or they don’t decrease despite the costs but are sold at a higher price. A loss in economic efficiency generally means workers get fired and businesses close. Prices go up and stay elevated. In a healthy economy, an increase in demand raises prices, but the tariff is the government entering into the market and artificially manipulating the market to achieve a certain end. That causes what economists call “stagflation” where a country has to deal with high unemployment and high inflation at the same time.
Now when a country retaliate with its tariffs, then this means US producers’ exports are taxed at the same or similar rate the US tariffed that country. US producers get hit with higher costs and now have to decide whether to sell their products at a higher cost and deal with lost profits or reduce production, fire workers and reduce capacity unless they get help from the government. This hurts US production with another blow from the tariff and job losses are inevitable. This is why you see Trump react strongly against this because he knows it ruins the US economy and puts US jobs at risk.
What happens is a trade war. Both countries tariff each other and both countries have to deal with mutual destruction together. No one wins in a trade war. It is a senseless way to do economics and it only leads to consumers getting hit the hardest. This is why economists all reject tariffs unless they are used properly.
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