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Tarrifs: why long-term effects are more harmful than expected (1/2)
Studies across the last two decades show that tariffs rarely deliver the benefits policymakers promise. While they may offer short-term relief, they typically increase prices, fuel inflation and create a cascade of unintended economic consequences for the very countries that impose them. By George R. Pilcher, The ChemQuest Group.
Multiple studies of the long-term effects of tariffs in the 20th and into the 21st centuries indicate that, with only a few exceptions, tariffs do more harm than good. Though they may provide short-term relief and often give the public a psychological “high,” tariffs typically act as painkillers – and like painkillers, they just give temporary relief.
Tariffs only enrich the General Fund of the government that levies them — consumers are typically not given a portion of the tariff to help offset higher prices. And prices will be higher. Example: If a country hits China with a 10% tariff on coffee makers, its government will collect 10% on all Chinese coffee makers sold to consumers in that country. But, before you can say “consumer savings,” the Chinese manufacturers will raise the price of coffee makers that it exports, and the retailers in the country that is imposing the tariff will raise the price of coffee makers by 10%, so it is the consumer who actually pays the cost of the tariff, not the Chinese manufacturers. AND increasing consumer prices automatically causes inflation that cannot easily be checked by central bank fund controls.
The long-term costs of tariff policies
Thus, the current preoccupation of the U.S. Government with the imposition of tariffs presents the global community with a puzzling geopolitical reality that admits of no certain conclusions.
While there are many differing opinions on the value of tariffs, history clearly shows that, while short-term tariffs may be used to bring about strategic changes in relationships among nations, long-term tariffs are always damaging to the nation that imposes them. In the U.S., for example:
› Tariffs reduce the demand for foreign goods, which has historically led to the strengthening of the dollar, resulting in less global demand for American goods.
› The 2002 tariff increases on selected steel products backfired – U.S. Senator Lamar Alexander (R-Tennessee) observed that since “there were 10 times as many people in steel-using industries as there were in steel-producing industries… [steel-using industries] lost more jobs than exist in the steel industry.”
› A group of supply chain and operations management experts from Georgia State University, Colorado State University, Arizona State University, and Kuwait University found that the tariffs enacted in 2018 had a ripple effect of unintended consequences that negatively affected global supply chains. The group concluded that these tariffs had “an overall negative impact” on firm value that led to a decrease in the value of domestic producers within the protected industries.
› The 2018 U.S. tariffs increased costs by EUR 43.4 billion/year — a burden shouldered principally by U.S. companies and consumers. (NB: Per the Federal Reserve, while 1,000 jobs were added to the steel industry, 75,000 jobs were lost among industries using steel.)
› Tariffs of the permanent, rather than tactical/semi-strategic, type run afoul of the “Law of Unintended Consequences.”
Supply managers have been warned for years that it is difficult to manage supply chain risk when buying products from (1) manufacturers a world away and (2) potential adversaries, says Timothy R. Fiore, CPSM, C.P.M., chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee. “Supply managers should be prepared for this,” he says. “In actuality, we likely are not.” No matter which side of the political aisle one feels most comfortable occupying, tariffs always hurt the country imposing them.
