Tariffs

What is a tariff? Simply stated, a tariff is a tax that a nation places on specific imports.

Usually the purpose of a tariff is to protect domestic producers. For example, American widgets retail at $10/dozen. On the other hand, Panamanian widgets retail at $7/dozen. Labor costs in Panama are lower, or perhaps Panama is subsidizing Panamanian widget manufacturers. If quality is comparable, American consumers of widgets will purchase Panamanian widgets. This will cause American widgets makers to lose business, perhaps closing widget plants and the widget workers losing their jobs. If the U.S. places a $5/dozen tariff on Panama-made widgets, then Panamanian widgets become more expensive than American widgets. There are several possibilities for what happens next.

All American widget purchasers could now switch to American suppliers, saving $2/dozen. The Panamanian widget companies would need to find another market for their widgets. If this happens, there is every possibility that the price of American widgets will increase, since the pressure of lower-priced Panama-sourced widgets has been eliminated. American widget purchasers, as well as anyone who purchases a product that contains widgets, will be paying higher prices. There is also the possibility that American widget producers won't have the capacity to replace the Panamanian production. In this case, Americans will be paying the higher price of the Panamanian widgets that now include the tariff. The government will certainly be collecting the tax from the Panama widget companies, but who is really paying? The consumer, of course. There is no scenario where the widgets, whether domestic or imported will decrease in price.

Then there's the specter of retaliatory tariffs. Panama will undoubtedly be issuing tariffs of their own, say, on fleegles. American fleegle producers will likely see the demand for their exports to Panama go down, as Panamanian fleegle buyers find cheaper alternatives.

Tariffs can be warranted in the case of a domestic industry competing with imports that are being sold below cost (kind of like the Walmart strategy!), or for propping up a fledgling industry. Rarely do  across-the-board tariffs make any sense.

What tariffs aren't good for is providing an inflow of "billions of dollars" from the country on whom tariffs are imposed. They cause chaos and confusion and are a blunt instrument for international trade relations.

Unfortunately we have a President who doesn't understand in the slightest how tariffs work.