Are tariffs a good idea?
Look at Supply and Demand to Decide
In a previous post, we looked at the laws of supply and demand. Use those laws to think about tariffs.
Do tariffs help produce any goods? No. In fact, tariffs are designed to keep foreign goods out of the country.
Do tariffs affect demand for the goods? Yes. We know that as prices increase demand decreases. Demand for those goods will be reduced because tariffs increase prices.
What about the idea of protecting American business? Aren’t tariffs helping that? Businesses that are helped by tariffs don’t have to innovate and become more productive, because they are protected. Competition usually results in better goods at a lower cost. Tariffs can make that process unnecessary. Businesses that are protected might actually fall behind other businesses. They keep their prices high and fail to innovate.
Other countries have tariffs on American goods. Shouldn’t we put tariffs on their goods? That is an interesting idea. Can we use tariffs to get other countries to drop their tariffs and improve competition around the world? Perhaps. Watch to see if that is what happens.
American businesses are regulated more than businesses in other countries. Their costs are higher because of that regulation. Should we impose tariffs to protect businesses from our regulation? That is an interesting idea. It like placing the cost of our regulation on foreign businesses through tariffs. Problem is few, if any, regulators consider the impact of tariffs/regulation on the consumer that wants to buy.
Imagine a president wanting to clean up the environment by Executive Orders using regulation to make it prohibitively expensive for polluting producers to be in business. The businesses would go to countries where the regulations were not so onerous. The president could then point to America with pride and point to the polluting nations as not doing their part - all while Americans buy products from the dirty foreign businesses. If tariffs were placed on those goods, Americans (at least many Americans) might not be able to afford them and foreign business would dry up due to lack of demand. Is that good policy? Should we limit American’s choices?
What about using tariffs to boost the national treasury? That one is tricky. The tariff has to be enough to increase the treasury and not so much that it reduces demand so that nobody is paying the tariffs.
There is a lot to think about when it comes to tariffs. Sound bites might sound great but think about what is happening. It might not be a good idea.