Tariff time? President Trump’s thorny international trade dilemma
WASHINGTON, January 24, 2018: President Trump just imposed a new tariff on those solar panels and washing machines made outside of the U.S. and imported to sell here in the U.S. market. Why did he do this? Is this a good idea? What is the effect of tariffs on American jobs? And how about the American consumer?
Tariffs, which are special taxes placed on imported goods, are generally imposed on products that are produced at a lower cost in a foreign country and sold at a lower price in the U.S. If the lower U.S. price for a given product is deemed to be either the result of a foreign government subsidizing a given product, or of a foreign company selling products in the U.S. below their true production cost, a tariff is one way to level the playing field.
If, for instance, China subsidizes their solar panel industry, a U.S. tariff on Chinese solar panels reverses the effects of the subsidizing. If a Chinese manufacturer sells their panels in the U.S. at a price below their cost – a practice known as dumping – the tariff brings the price up to parity with American-manufactured panels.
A Chinese company might decide to “dump” its solar panels in the U.S. so that the low product price drives American solar manufacturers out of business. Once that happens, the Chinese company will raise its price to a profitable level and there will be little or no American competition left to challenge the higher price.
What will be the likely effect of new tariffs?
Trump’s imposition of each tariff was to save American jobs and protect the domestic solar panel and washing machine industries. Because of each tariff, the cheaper foreign made goods will now cost roughly the same as corresponding goods made in the U.S. The intended result: U.S. manufacturers will now compete on a level playing field and stay in business. That, in turn, protects their employees’ jobs.
The problem with imposing a tariff is that the consumer will likely have to pay a higher price for solar panels, which means they are likely to purchase less of this product. According to the Solar Energy Industries Association, higher prices for panels will result in a 9% drop in sales. That, in turn, will mean up to an estimated 23,000 installers will lose their jobs.
Trump’s tariffs will likely save some American manufacturing jobs. But they will result in a loss of installers’ jobs.
What are the economic outcomes that Trump expects by imposing a tariff?
The President hopes that the imposition of a tariff on anti-competitively underpriced goods will encourage foreign firms to manufacture here in the U.S. to avoid the tariff. Trump also believes that the lower U.S. corporate tax rate – a major result of the recently-passed GOP tax legislation – will give further incentive to foreign firms to relocate some manufacturing facilities to the U.S.
That could very well happen if the targeted solar panels and washing machines are produced in highly-automated factories. In that case, the labor involved would be best performed by workers that are highly skilled.
What could also happen, however, is that the Chinese and Korean companies targeted by each tariff could move manufacturing to other countries like Vietnam or Thailand where no tariffs have been imposed. In that case, there would still be no benefit to American manufacturers.
Will a tariff regime harm American consumers?
American consumers will pay more for the products when tariffs are imposed on them. Again, the purpose of a tariff is to raise the price of foreign-made goods so American manufacturers can compete on a level playing field. Yet when tariffs result in across the board price hikes, consumers will be harmed.
Some economists argue that if a foreign manufacturer wants to sell products below cost, let them do it. The result is that consumers pay less for products. Similarly, if a foreign government wants to subsidize an industry so that firms in that industry can sell at a lower price, let them do that, too. In effect, they are subsidizing the American consumer.
This is a very tricky situation. Trump wants manufacturing jobs that have left the U.S. to return to this country. At the same time, he wants American consumers to get the best value for their hard-earned dollars. He hopes the newly lowered corporate tax rate here, combined with the tariffs he’s just imposed, will help him to reach his ambitious economic goals.
The danger of this policy is that tariff targeted foreign countries may retaliate by imposing tariffs on U.S. goods sold in those countries. It is true that some countries, like China, do impose some tariffs or quotas on U.S.made goods already. But Trump’s recent actions could start a trade war where essentially everyone loses something.
So far, all of the actions Trump has taken to improve the American economy have worked. Reducing regulations, instilling confidence in all sectors of the economy and increasing household wealth, have all accelerated domestic economic growth. Once the GOP tax cut fully kicks in, economic growth will accelerate even more. Let’s hope President Trump’s recent, limited tariff actions work as well.