Tariffs and Market Forces

Tariffs can be a very important tool on our belt when it comes to foreign trade

A country’s overall economic prosperity often hinges on its ability to produce domestically, and maintain independence in various markets. Buying too many foreign goods can often be very hazardous to our economy in ways that we don’t even realize. So, I appreciate those who buy American, or purchase foreign products largely produced in the United States because the non-American producer decided to set up shop in the United States to ease the burden of certain tariffs.

Tariffs can be a very important tool on our belt when it comes to foreign trade, and making sure that the playing field is tilted a little bit in our favor.

One of my neighbors whose livelihood is dependent upon the local timber industry told me recently that there’s an agreement that the Biden Administration has been working on with Canada that could destroy our lumber industry since Canadian lumber is so much cheaper. I looked into it, and it is connected to the North American Free Trade Agreement (NAFTA), but the Biden Administration, despite arguing about how dangerous Trump’s call for certain tariffs are, used tariffs to mitigate the damage a glut of Canadian lumber into the United States might cause. In August the Democrats backed off regarding the pending agreement and increased the lumber tariff that not only saved the U.S. lumber industry from certain destruction, but by November of 2024 the tariff was a part of contributing to an increase in the American output of lumber that has the United States poised to surpass Canada’s production.

The debate over the tariffs from China fails to take into account economic principles and market forces

Nonetheless, the Democrats, largely fueled by their desire to do anything to resist Trump and sour any opinion regarding his policies, have the politically leftward segment of America freaked out about tariffs, and specifically Trump’s threat of tariffs against countries like Mexico, Canada, and China.

I was privy, recently, to a conversation between two ladies who were discussing the tendency of one of them purchasing products from a website known to be owned by China. When we travel, in fact, this particular relative tells my wife and I that if we buy her a souvenir, it preferably needs to be locally made, but at least make sure it’s not made in China. I can appreciate such a sentiment. The not-so-conservative member of the two ladies then went on to explain to the other that her ability to buy from the Chinese-owned website was going to go away thanks to Trump. His tariffs were going to drive Chinese product prices up to ridiculous levels, and eventually those products will simply cease from being available to American consumers and inflation in the United States is going to skyrocket to unbelievable heights.

The debate over the tariffs from China, especially if one’s primary source of information is from the mainstream media, fails to take into account economic principles and market forces. Democratic Party talking heads and their Republican establishment allies have basically argued that any tariffs used are evil, and that Trump is going to tank the economy and send inflation wildly out of control if he uses them. They fail to verbalize that tariffs are a fact of life in a number of industries, such as the timber industry, and that they themselves support those particular tariffs. They also fail to communicate that every cause has an effect. Every happening has consequences, both good and bad. They assume with their words, and therefore convince the general public of the same, that China will simply raise their prices to accommodate the tariffs. Yet, somehow, they tell you the opposite is true when it comes to corporate taxes.

America, after all, is China’s primary customer, and their economy could be in big trouble if they are not moving product in the direction of the United States

Market forces are interesting to watch, and can be predictable if one watches long enough, and understands economics. There’s the whole supply and demand thing, and sometimes it goes even deeper than that.

In a free market the ultimate goal is to make a profit. Along the way there are various obstacles that includes the cost of doing business that include, but are not limited to, taxes, wages, transportation costs, and the cost of raw materials of certain products or the cost of the products when bought wholesale. When a fast food restaurant, for example, as we’ve seen in California, is faced with higher taxes, and increased minimum wage laws, either the business must raise prices, or reduce costs, or create a complex variation that includes both. Sometimes, the business will end up out of business, or wind up closing some (or all) of its California locations if it is a countrywide entity. To reduce costs the restaurant may reduce the hours available to its employees, or reduce the number of employees through various schemes that might include reduced operating hours or an increase of automation. In the end the people who think they are going to make more money wind up making less. If prices go up the company will probably sell less product, and the tax revenue will actually be reduced since in the face of a higher corporate tax percentage the company must reduce its tax burden through less output. Typically, in the end, higher minimum wage laws raise the unemployment rate, and higher corporate tax rates reduces tax revenue for the taxing agency.

China’s reality of facing higher tariffs creates a similar scenario. For China, a tariff is an increase in the cost of doing business. So, while raising prices and reducing how much product is imported into the United States by China is one possible scenario, the likelihood is that China will pursue other avenues. America, after all, is China’s primary customer, and their economy could be in big trouble if they are not moving product in the direction of the United States.

The rhetoric about the dangerous Trump tariffs is political hyperbole

They may, with the desire to continue a profitable relationship with the United States, begin to metaphorically kiss Trump’s butt to convince him to reduce the tariff to what they consider a manageable level. They may reduce their price to accommodate that increase caused by the tariff. Or, they may seek to reduce some of the costs involved with doing business like the restaurants in California. In economics there are always responses to actions, and if a leader is skilled enough they will use tariffs to not only level the playing field, but possibly encourage more domestic output, or perhaps even enable domestic manufacturing of foreign products which is good for American workers, and acceptable to most foreign producers who are seeking to reduce the cost of doing business when it comes to the cost imposed by a tariff.

The rhetoric about the dangerous Trump tariffs is political hyperbole, for the most part. More than likely, to keep our business, China will do what it can to either convince Trump to reduce the tariff, or to reduce their costs elsewhere if they can. And, if prices go up a little bit on Chinese produced products, that also is good because it opens the door for American manufacturing to be able to compete.

The interesting thing is that the argument about the dangers of tariffs goes all the way back to the beginning of the twentieth century. Before the ratification (one might say “alleged ratification”) of the Sixteenth Amendment in 1913, the primary sources for funding the federal government were an income tax on the States (based on population as determined by the census) and tariffs. So, as a part of the argument designed to defend the new individual direct tax on citizens tariffs were framed as being a bad thing for the economy. The debate against tariffs worsened when the Great Depression emerged, with the Democrats claiming that the Smoot-Hawley Act (large tariff on foreign goods) was the cause of the Great Depression. 

The mere threat of tariffs now has Canada and Mexico more willing to play ball when it comes to the invasion of illegal aliens

Despite the fact that the Great Depression began prior to the Smoot-Hawley Act, people believed the rhetoric, and the evils of tariffs in the minds of the American People was further solidified. The argument was necessary from the point of view of the purveyors of the Federal Reserve – they dared not reveal that the true cause of the Great Depression was the Federal Reserve which flooded the monetary system with fiat currency and then reaped the benefits through a gain of assets as creditors seized property due to failures by borrowers to maintain the payments of their loans. In short, the Great Depression was the greatest asset seizure by bankers in the history of the world.

Since the “tariffs are evil” argument has been in the Democratic Party arsenal for over a century, of course they leaped on tariffs being evil when Trump began to talk about using tariffs to gain some control over foreign affairs and encourage domestic production.

Tariffs, of course, are just like anything, however, and need to be used wisely and in some kind of moderation. Too much use of heavy tariffs can ultimately damage relationships with trading partners. However, the opposite extreme is not good, either. True “free trade” allows our trading partners to skew the playing field in their favor, and tariffs can be used to tilt that field back in our favor, or at lease closer to being level so that nobody is being taken advantage of as excessively as we’ve seen prior to the emergence of President Trump.

Trump understands the delicate balance related to the use of tariffs, and he understands how valuable tariffs can be as tools for economic fairness, and even convincing countries to work with you on non-economic related issues. After all, the mere threat of tariffs now has Canada and Mexico more willing to play ball when it comes to the invasion of illegal aliens coming across the border. And in the end, as with their defense of the income tax and Federal Reserve, Democrats are screaming “danger, danger, danger” about tariffs for their own nefarious reasons, not truly because tariffs may do any of the negative things to our economy as they have been claiming.