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Blaise Wyant

January 03, 2025

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Market Commentary, January 3, 2025

Does the Trade War Debate have you Tariffied?

 

“If you don’t read the newspaper you are uninformed. If you read the newspaper you are misinformed. “- Mark Twain

 

Do the opposing views on Tariffs have you confused? If so, you are far from being alone.

I earned an Economics degree from the University of Toronto so long ago that my Econ101 Professor, Lorie Tarshis, was a former student of John Maynard Keynes. Professor Tarshis was a great teacher. (and an excellent squash player well into his ‘60s) The lessons I learned from him in 1977 are every much as valid and probably more relevant today. He not only studied the economic aspects of the Great Depression, he lived it.

In 1930 the US Government passed the “Smoot-Hawley Act “. The political expedients of protecting American jobs and increasing Government revenues gave rise to this act. It only invited retaliation, collapsed world trade and, oh yeah, exacerbated the Great Depression.

Proponents of Tariffs posit that they bring in substantial new revenues and protect jobs for the country imposing them. You have the exporting country help you reduce your deficit.

Say, that sounds attractive. It sounds like a popular policy to campaign on.

But and there always is a but isn’t there? Beware of simple soloutions to complex problems.

A tariff is neither an economic good nor bad. How tariffs are used can be good or bad. An example of a tariff being helpful is when it is used strategically as in the case of an exporting country “Dumping” goods. Dumping is the policy of exporting goods at a lower price than those goods are priced at in their home market. An attempt to destroy an industry in the importing country. A tariff in this case will protect jobs in the importing country from unfair trade practices. Tariffs can also be appropriate for imported goods that have National Security implications.

However, a flat 25 % tariff on all goods being imported is simply a tax on importers and consumers. It supports a minority of manufacturing jobs at the expense of the majority of consumers. The Government imposing the tariffs indeed does take in more revenue, but it seems like an inefficient way of raising taxes. (I recognize that consumers and importers don’t pay for 100% of the tariff as the exporters may have to bear some of the expense but the evidence from past tariff policies suggests consumers would pay more for imports) *1.  This, by definition, is inflationary and leads to other unintended consequences like higher interest rates.

An importing country with significantly higher domestic wages than the exporting country cannot Tariff their way to protecting their way of life. Much longer-term planning must be done in areas such as workforce development, increased innovation, and entrepreneurship as well as immigration. Research shows that non-native citizens are twice as likely to create new businesses as their native-born counterparts. *2.

It is getting more and more difficult to hear the signal of current events above all the noise of today’s opinionated journalism. I find it best to beware of easy answers from people with short term agendas.

 

*1. Erica York, Senior Economist & Research Director the Cato Institute

*2. Rich Barlow Boston University, BU Today Dec.12/2024

 

 

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