First of a two-part series on the effects of tariffs.
The presidential elections are over, and Donald Trump will be returning to the Oval Office in January. There is widespread speculation about how or if he will translate his campaign slogans on issues such as immigration, deportations, energy, and diplomatic relations into realistic programs. One such area that Trump emphatically espoused was his intention to implement tariffs on foreign goods entering the country.
First, let’s understand the three major tariffs. The most popular is an import tariff placed on goods entering the domestic market. This type of tariff is used for a country to generate revenue for federal and local programs. It is also routinely used when a government suspects that imports from foreign countries are endangering the health and survival of national companies. Countries such as China have used government subsidies to make many of its products cheaper to produce and cheaper to sell in foreign markets. This “cut-throat” pricing can wipe out an importing country’s industries and subject the country to dangerous influence by the exporting country. Finally, import tariffs can be used in a purely punitive manner to send a message to another country about its policies or actions. Punitive import tariffs are currently being applied against Russia in protest against its invasion of Ukraine.
The last two major types of tariffs are export and transit tariffs. Export tariffs, which are less applied than import tariffs, are tariffs imposed on a domestic exporter’s goods that are destined for a foreign market. One reason this tariff would be used is to restrict another country’s access to critical products or supplies. For example, the U.S. might want to restrict the amount of a particular high-tech equipment or strategic raw material that another country has access to. This might be based on national security concerns or trade considerations. A second reason would be to make sure that the domestic market has an ample supply of the product, especially if foreign markets are paying more than domestic buyers. Let’s say that Saudi Arabia is willing to pay more money for an advanced petroleum-tech equipment than local petroleum producers. The U.S. government would certainly want to make sure that plenty of this equipment is available to local petroleum companies by making the export of too much of this equipment expensive by using an export tariff.
A transit tariff is a tariff charged by a third-party country through which goods pass to reach their final destination. This is a cheap way for a country that is not ultimately receiving the goods to pick up a little cash. Let’s say that a U.S. exporter is shipping products to Nepal, a land-locked country, by sea via an Indian port of entry. The merchandise is unloaded from the ship and sent by truck to Nepal. India could charge a transit tariff on the products destined for Nepal simply for the fact that they have to pass through India.
Concerning Trump’s campaign promise to impose import tariffs on products from foreign countries, several outcomes concerning foreign companies could occur. First, companies from foreign countries whose products might be slapped with tariffs during the Trump Administration could play a-cat-and mouse game. They could circumvent the tariffs by setting up production in a country whose products have a little or not such a severe U.S. import tariff. Chinese solar panel manufacturers have become experts at moving production to countries whose products are not subject to U.S. tariffs, or if tariffs exist, they are manageable. These Chinese manufacturers who have seen their products subject to stiff U.S. import taxes have quietly moved production to other countries such as Indonesia and Laos. If the U.S. slaps import tariffs on these two countries, the Chinese company will find another country in which to produce, that is not subject to prohibitive U.S. tariffs.
Increased U.S. import tariffs could also lead to foreign companies avoiding tariffs by locating their production in the U.S. The U.S.-China trade war, which started during the first Trump Administration, caused not only some Chinese companies, but also companies from Taiwan to move production from Asia to North America. Taiwanese companies usually get established in Taiwan, but they have tended to scale up production in China where labor is plentiful and government support strong. Even though they are Taiwanese companies, they are still producing in China, and their products are subject to U.S. import tariffs placed on Chinese imports.
However, for many companies, it is extremely difficult to pick up established production, with reliable suppliers and a logistics chain, and move to another country. Once a company establishes operations, it can be extremely expensive to make a move. Leaving behind a trained and experienced workforce is particularly challenging. A company has to carefully weigh the costs of moving. However, these decisions might need to be made in the near future.
Next month: The likely effects of proposed tariffs.
