Tariffs – Protection or Hindrance

Tariffs – Protection or Hindrance

If you have been paying attention to the national debate regarding our current economic struggles, the same talking points come up over and over again.  “You should not raise taxes during a recession”…and… “We need to increase revenues in addition to cuts in spending”.  A majority of the budget battle can be summed up in those two very short statements.  So what is the solution?  Compromise of course, but what if compromise can not be reached due to ideological difference? You need new ideas, new tactics.  You need a plan that can increases revenue, with out raising tax rates.  Tax reform would be a great place to find those solutions, and tax reform talks have begun to happen in the media and on capital hill, so I don’t feel the need to “beat that drum” here but I would like to offer another instrument into the discussion which could help our struggling economy; it would leave tax rates at current levels, increases revenues to our Federal government to help balance the budget, and promote domestic manufacturing and job creation which everyone both democrat and republican can agree is sorely needed – The tool is tariffs.  

So what is a tariff? A tariff is a tax placed on imports or exports. In this case I would propose a tariff tax of imports. This tariff tax would increase the price of imported goods, which would lower the demand of imported goods, which raises demand for domestic goods. Raising demand of domestic goods increase businesses revenue which SHOULD lead to economic improvement, I say SHOULD because although US companies have had record profits since 2009 the economic recovery has been “marginal” at best. Another factor at play is the world is getting smaller.  It is much easier today to get goods and products around the globe than it was 50-75 years ago.  Planes, boats, trains and automobiles have increased the volume and speed that products can be shipped to anywhere in the world.  The cheaper it is to move a product the more freedom companies have to become national, multinational and globe entities.  Add this to the availability on the Internet and the ability to conduct business over great distances while still being aware of events affecting your business… and the world is getting smaller every day. 

In the United States tariffs were first introduced back in 1789 when then President George Washington signed the Tariff Act after recommendation from then Treasure Secretary Alexander Hamilton, who presented tariffs as a way to pay for the operating expenses of the government.  Over the years however with the introduction of income taxes, payroll taxes, sales taxes, property taxes, states tax and a slue of other taxes I am probably leaving out, needless to say, the Federal government has found other ways of paying its bills.  Like taxes, there are a variety of different types of tariffs each with it own purpose.  Thanks to Wikipedia for the list provided below:

·         A specific tariff is a tariff of a specific amount of money that does not vary with the price of the good. These tariffs are vulnerable to changes in the market or inflation unless updated periodically.

·         A revenue tariff is a set of rates designed primarily to raise money for the government. A tariff on coffee imports imposed by countries where coffee cannot be grown, for example, raises a steady flow of revenue.

·         A prohibitive tariff is one so high that nearly no one imports any of that item.

·         A protective tariff is intended to artificially inflate prices of imports and protect domestic industries from foreign competition especially from competitors whose host nations allow them to operate under conditions that are illegal in the protected nation, or who subsidize their exports.

·         An environmental tariff, similar to a 'protective' tariff, is also known as a 'green' tariff or 'eco-tariff', and is placed on products being imported from, and also being sent to countries with substandard environmental pollution controls.

·         A retaliatory tariff is one placed against a country who already charges tariffs against the country charging the retaliatory tariff (e.g. If the United States were to charge tariffs on Chinese goods, China would probably charge a tariff on American goods, also). These are usually used in an attempt to get other tariffs rescinded.

When I review this list of tariffs, a few things jump out at me right away.  First the negative, prohibitive tariffs are off the table right away because it places, in my opinion, too much control over the free market. Now, other people may have other “lines in the sand” perhaps for some any tariff is too much power over the free market, for me prohibitive tariffs are a NO-GO. On the other hand, when I see protective and environmental tariffs, I immediately think China and India. Allow me to explain, one main problem I continue to hear from all sides of the political spectrum is the loss of jobs to overseas competition. So what does that have to do with a Protective and/or Environmental tariff? China and India can simply manufacture products cheaper than we can. Why? For a lot a reasons, a couple of those reasons being US labor law and environmental law. Both labor laws and environmental laws are huge discussions of themselves but I will attempt to break this down to a very basic level.

·         First labor law, America has established laws over the last 200 years to protect its citizens in the work place.  Safety standards, minimum wage, age requirements, anti-discrimination…etc.  These regulations do make it more expensive to operate a business here in the US than it would in China or India, where safe working conditions are not enforced or workers earn $10/per day instead of $7.25/per hour which is the federal minimum wage.  Now the current Republican solution to this problem is to DE-regulate, remove some of the oversight and protections which makes it more expensive for business to operate.  The huge glaring problem with this idea of DE-regulation is, not too long ago (2008), the economic collapse occurred in large part due to the LACK of proper regulation.  So while some DE-regulation is possible with carefully evaluation, we should never attempt to compete with China and India in levels of DE-regulation.  America has established many of these labor laws with just cause; and we should not eliminate them, putting workers at risk, to save the bottom line. 

·         Second Environmental law, the sheer volume of environmental law which is on the books in America would stagger you if you are not already familiar.  Now that does NOT mean that these laws are unnecessary, these laws protect our wildlife, land, water and air.  I do not know about you but in light of recent events (BP oil spill and Yellowstone River oil spill) those things sound pretty important.  Now these laws DO interfere with business often. Regulation controls how many pollutants that a business can put into the air and water, how they have to dispose of waste (ensuring it’s done responsibly), protecting wildlife and endangered species and a long list of other things which businesses must follow or face government action. Now I have to acknowledge that the EPA (Environmental Protection Agency) does on occasion, even in my opinion, over regulate and create undue hardships for businesses. However climate change is NOT fiction and environmental responsibility must be taken in consideration even at the expense of the bottom line. These regulations do cost businesses in America money, regulations that much of the time are not concerns in other countries like China and India but we should not lower our standards what is environmental responsible to compete when China or India.  The United States and other countries in Europe are setting the standard for what China and India should be working towards in regards to Environmentalism not the other way around. 

These labor and environmental laws while fundamentally “good” for America as whole puts American businesses at a disadvantage in the expense it takes to operate a business; the “playing field” is not equal to countries like China and India. So why could raising tariff taxes benefit the American economy? Besides creating additional revenue, implementing a Protective/Environmental tariff would help American business compete with overseas manufactures that can bring their products into the US at reduced manufacturing cost.  A Protective/Environmental tariff would also reward businesses that stay here in the US because they would not incur the tariff. Basically this tariff promotes American products made by Americans in America.  Sounds great right? Well it’s not a magic bullet and there are reasons to oppose tariffs. Remember just a few paragraphs ago when I said…

…“This tariff tax would increase the price of imported goods”…

Well it would do just that, increase the price of imported goods.  This means consumers have to pay more for goods, not exactly a great selling point for a struggling economy, however protecting our American businesses from losing out to foreign competition IS. We would be taking a risk that jobs would be created by American companies when the increase demand for American products presents.  If job creation does not happen tariffs would hurt our economy because Americans would be left with more expensive products on the shelves and no increased purchasing power to buy them.  Another problem with any tariffs is “retaliatory tariffs” these are exactly what they sound like and the definition listed above describes it perfectly.  Countries that have tariffs put on them may respond with tariffs of their own.  My only defense against “retaliatory tariffs” or the chance of a “trade war” is, America still does one thing better than any one else on Earth… We CONSUME stuff!  The best place for goods to be bought and sold is here in America.  We buy stuff we don’t need with money we don’t even have.  Seriously though as a country America is best destination for products in the world, which gives us an advantage over any other country that would try and place retaliatory tariffs on us. 

Check out this video: http://youtu.be/dSQTbd2iJtY  (It wont let me embed the video)

So should a tariffs on imports be apart of our national budget debate?