A country imposes a tariff to increase the cost of imports of similar goods which are being produced at home due to higher local costs such as higher wages, higher rentals, and higher quality such as tighter QC. Tariff gives the local industry a chance to survive or grow.
The country on whose exports tariffs have been imposed may want to retaliate by imposing tariffs on imports from the first tariff-imposing country. It is not likely that it will be on the same products but probably products which are competing locally or even not.
The end result is that prices of goods and services will rise in both countries on all things with tariffs imposed. There are other consequences. Tariffs are usually imposed with times are tough for local industries. This means higher prices with probably slowly growing demand. These tariffs suck up purchasing power from the local economy into government coffers and this comes in handy as governments are suffering huge deficits around the world. The net impact is smaller quantities consumed and hence production cut.
Economic recession is inevitable, even if tariffs were originally imposed to restructure global economic balance.
Economic restructuring usually means some industries will die and new ones come up.
The current global economic problem is something that is waiting to happen and we were not so sure how that was going to happen. This round of tariff imposition among trading countries is surprising but anything could have happened to trigger a global adjustment. For sure, this also means that the US is unlikely to print more money and so we should see a sharp drop in global liquidity and a massive contraction around the world, hitting real estates and banks.
What is happening is something we have been expecting - a massive adjustment in the global economy. A slowdown and recession will take place in the next few years, and it will be sad to see the economic adjustment and deterioration descending into military warfare.
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One expects when a country becomes advanced and rich, its peoples will become more educated and move out of manufacturing into services. Any drop in manufacturing will then be naturally ascribed to domestic automation and imported substitutes.
However, in some cases, the politically ambitious will make it their campaign voice to promote a revisionist narrative that the hollowing of their rust-belts must be due to foreign caprice. Like foreigners buying up unused agricultural land to grow crops to feed millions, what was willing seller willing buyer to outsource manufacturing for higher capitalist profit and less union headaches has given way to grievances that xenophobically demands reciprocity to be paid by the said foreign bogeymen, whether they be allies, rivals or penguins.
Today, tariffs make for such a reciprocal but blunt instrument. By definition, tariffs are consumer taxes on importers who will then add that tax paid to the government into the selling price to their customers, both local. The only way to say a tariff is assuredly paid by the foreign exporter is to ascribe some distortive effect on the exchange rate of the exporter that somehow rewards the importer, forgetting there's no free lunch and the exporter who manufactures still has to net-margin; meaning he has already hedged.
So what's a tariff for? To inshore jobs and increase manufacturing, and/or earn the government more revenue. This however may be mutually exclusively. If tariffs inshore jobs, then their success in doing so will reduce the imports and thus their tariffing hence reducing government revenue collections. Conversely, if tariffs increase government revenue, then that means more importing of foreign goods, thus less local manufacturing of substitutes. In fact, the first tariffing of steel and iron caused 75 downstream US jobs to be lost for every 1 US steel plant job saved.
Since tariffs no longer help increase local jobs, the only way left to still keep the herds interested in the narrative is to promise them a reduction of their income tax. But where can any government mired in debts find money needed to cover overheads if it foregoes much income tax? Thus, collecting tax revenue from citizens by saying it's just tariffs on foreigners. It's been estimated the present tariffs in say the US will take USD3,800/US household which is more than the household's savings from any income tax cut. Moreover, tariffs are regressive, falling on the middle-income groups who are already hit badly by the yoyo gyrations of the stock markets on their savings and investments.
Tariffs not only negatively affect consumers especially the lower half of the income brackets who have to face higher daily prices when before they had a menu of price-sensitive choices in the open market. The tariffs also affect local manufacturers who need to buy cheaper parts and equipment from overseas in order to keep their own export prices within the means of buyers and on a global scale so that they can expand production.
In the case of the US, one must not forget it remains the world's second biggest manufacturer so it seems when it loses on efficiency, it declares everyone else as unfair, furthermore on claims its national security is being threatened. Lastly, industries protected won’t be too altruistic not to up their local prices to earn more if they see no competition.
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In the past and because of the Covid pandemic, these manufacturers could not get those inputs on time but that was only because of lockdowns throughout the world, not because of some diabolic foreign threat to national security. If the present tariffing of others by the US is really to serve its national security, why was it on-off, back-forth, delayed, bespoke-able, negotiable even, as all can bear witness?
High tariffs have other effects. They invite retaliations from countries whose goods are tariffed. In the case of the US which hides the fact it runs a services surplus, those countries can start boycotting its multinationals like banks, insurers, professionals, big-seven tech companies, education, tourism, airlines, entertainment, software or they may get tardy paying IPs.
Despite all these factors, the US has tariffed everyone, including countries like Australia, Singapore and S. Korea. In the case of the first two, it has trade surplus and free trade agreements. Even small Malaysia gets hit 24% despite her trade surplus with the US being on account of making sub-parts or only being end-assembler for US multinationals parked in the country in which the US is the biggest investor.
Moreover, the arithmetic used to compute tariffs is superfluous as an attempt to cover other impediments to US exports. The present US tariffing method is to divide its trade deficit by import value; that's then halved to give some semblance of being 'hege-maniacally' charitable. But aren’t trade deficits are the result of savings being less than investments?
Cheaper imports fight inflation but reduce savings so that dollar-denominated purchases are paid in dollars to foreign exporters who because they are thrifty savers invest back the dollars into the US stock bond real estate markets thus tilting the trade balance towards deficit for the US but buoying its economy from year to year.
While high tariffs increase import costs, reduce purchases, increase savings, and thus increase value of the dollar, a stronger dollar increases prices foreigners must pay for US exports, reducing international competitiveness of US goods, aside from the retaliatory sentiments. Hence, the likely near-term pressure that other countries make their currency rates stronger but these are the countries which the US will at the same time impose punitive secondary sanctions upon.
Lastly, the recent trillion-dollar sized nosedives in the US stock markets are a manifestation of investment sentiments shaken geoeconomically. Perhaps the US wanted to reduce its debt overhang and so used tariff announcements to rattle its own stock markets, thus causing investors such as hedge funders to abandon equity for bonds; this increased yields which technically should force the US FRB to cut interest rate and thus reduce the size of the debt and its interest payments.
However, the US failed to account for Japan shedding its US bonds instead, hence the 90-day reprieve from firing the full tariff bazooka on all countries.
Or, it could be a case of insider trading, buying on short down when the tariffs were announced and short up just a day back. In fact the US president tweeted a full three hours before the tariffs were stayed that it was a good time to buy.
This could be true since insider traders like Pelosi are still on the loose, and he fears retaliation if she goes down and asks why the double standard. These days, even terms like ‘double standard’ have double meanings.
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