Tariffs

People have been generally supportive of the news that the aluminum and steel tariffs have been lifted and generally enthused about the pending ratification of the revamped NAFTA accord. I get that.

But commentators on CBC News went over the top today on the subject of tariffs. One person said, “if you support tariffs then you haven’t passed grade two.” Another said, “I can’t think of anything good to say about them, actually.”

I can think of one, right off the top: tariffs are a tax. They raise money for the public treasury. They thus make it possible to have public services and improve social welfare.

I’m sure the commentators weren’t thinking of that when they spoke about tariffs. They were most likely comparing tariffs only with other forms of taxation, such as income tax,  sales tax, user fees and subscriptions.

The general tenor of the opposition to tariffs is that they increase prices to consumers. But is this true? Not exactly.

First, consumers rarely pay directly for tariffs. Few consumers import or export goods. Tariffs raise prices only if they are passed on to the consumer by producers. Now it’s true that this usually happens. But not always.

The price consumers pay isn’t directly related to the cost of production. It is based on their willingness and ability to pay. And in a marketplace, typically prices are set to the highest rate that consumers are willing to pay. So you can’t simply raise prices – consumers will stop buying.

And that’s the real reason the commentators say there’s nothing good about tariffs. They may mean higher prices, but they mostly mean lower demand.

In fact, the whole idea of a tariff is to lower demand to the point where the consumer makes an alternative selection. Instead of buying imported pineapples they buy local pears. Instead of buying imported iPhones they buy domestic Blackberries. Overall, they purchase less, what what they do purchase has a higher price.

Tariffs, however, also have the unfortunate effect of plunging the economy into recession. Increased prices leads to inflation and higher interests rates, which makes it more difficult to buy goods and make investments. As well, the overall reduction in demand (both domestically, and from exports) results in increased layoffs and higher unemployment, which in turn depresses wages.

Tariffs point to the fact that our economy depends on maximum consumption and minimum price. And they point to hold these have over us: deviate from these, and you get recession.

However, these are also the causes of the greatest social ills. Maximum consumption is harmful. As Kalle Lasn says, productivity is killing the planet. And low prices also means low wages. And this has over the last 40 years led to increasing inequality between the rich and the poor. And – note well – a one-time increase in price wouldn’t matter if people were paid more, and received better social services.

No, the commentators oppose tariffs not because they hurt consumers, but because they hurt producers. They increase costs to producers, and reduce demand for their product, which means they need to become more efficient in order to compete.

(Ironically, the opponents of tariffs use the inverse argument, saying that lowering tariffs force local industry to increase productivity, because of lower costs from exports. This would be true – except that these lower costs are usually produced by lower wages, poor labour laws, less taxation, and environmental degradation.)

In fact, tariffs can act as a governor on the world trade engine. World trade without restraint leads to exploitation and ruin. Tariffs can act as a push-back against this: a way to ensure countries respect the environment, treat labour fairly, and provide adequate social services. In conjunction with other measures, tariffs can lead to a gradual equalization of economies, allowing countries to selectively develop and nurture local industries.

We’ve seen what happens when the global trade engine runs without restraint – it simply extracts value from everything and dumps it into the pockets of the rich. We need mechanisms to extract value from this global trade engine to support the welfare of everyone else, and to keep the engine from ruining economies and environments.

Tariffs aren’t the only tool. They should not be applied bluntly and without thought. Too much application of tariffs can be ruinous. And they make poor weapons of war. So there’s a lot to say against them.

But there are – contrary to the one-sided commentary I heard today – things that could be said in their favour as well.

trade

 

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