Are tariffs good or bad for the economy? Research says they can be bad for the supply chain
America, it seems, can't quit tariffs. Like corduroy and round glasses, these short-term taxes sometimes fall out of fashion. But before you know it, they're back in style—a quick fix deployed whenever foreign competitors seize a competitive advantage.
Tariffs have experienced a major renaissance over the last five years, at home and abroad. In the U.S., where the political divide seems to widen by the hour, something of a consensus has formed on this traditionally divisive issue. President Joe Biden has extended many of the levies, though not all, imposed during President Donald Trump's administration while also authorizing new tariffs.
If re-elected, Trump plans to implement a 10% tariff on all imported goods, 60% on goods from China. On the campaign trail, Vice-President Kamala Harris has said the proposed Trump tariffs would act as a "sales tax" on American families. However, she has not specified whether she would extend the Biden tariffs if elected president. On her campaign website, she vows to continue supporting "American leadership in semiconductors, clean energy, AI, and other cutting-edge industries of the future," while addressing "unfair trade practices from China or any competitor that undermines American workers."
In the study titled "Protect Me Not: the effects of tariffs on U.S. supply networks," Sina Golara, assistant professor of supply chain and operations management at Georgia State University's Robinson College of Business, and co-authors from Colorado State University, Arizona State University, and Kuwait University, urge politicians to exercise caution when it comes to tariffs.
The paper is published in the Journal of Purchasing and Supply Management.
Golara and co-authors acknowledge the levies can produce temporary benefits but assert that the long-term impact on the global flow of products is often overlooked and regularly misunderstood.
Rationales vary for the recent spate of tariffs, the study found, from protecting intellectual property proactively to responding in retaliatory ways against rogue actors like Russia, subject to bans on oil imports and exports ever since its invasion of Ukraine.
"While tariffs can provide some protection to certain industries, they can also create inefficiencies for the industries they were designed to protect, as well as for their supply chain partners," the study concluded.
Focusing on the implementation of tariffs by the U.S. in 2018, Golara and his colleagues traced "an overall negative impact" on firm value that led to a decrease in the value of domestic producers within the protected industries. The financial impact on firms in their supplier and customer industries was mixed.
"These findings demonstrate the ripple effect of unintended consequences that tariffs can lead to throughout supply chains, motivating further theoretical development and informing trade policy," the study asserts.
While tariffs may provide short-term relief, and perhaps a psychological lift to the public, they prevent companies from addressing the problems that led to market inequities in the first place, Golara said. Innovation suffers.
"A painkiller doesn't address the problem," he said. "It's just a temporary solution."
Economists have grown increasingly cool to tariffs. If carefully implemented, they occasionally yield positive results for vulnerable domestic industries, Golara acknowledged.
But most view tariffs as ineffective and outdated tools to correct a country's growing trade imbalance. This has led some to warn that tariffs typically end up harming the exporting country but also consumers and businesses from the importing nation.
Two recent tariffs, imposed in the pre-Trump era, support those findings.
In 2002, President George W. Bush raised tariffs on selected steel products in hopes of saving the U.S. steel industry. The move backfired. Longtime trading partners were outraged and threatened to retaliate against American-made goods. More jobs were lost than saved.
"We found there were 10 times as many people in steel-using industries as there were in steel-producing industries," former U.S. Sen. Lamar Alexander (R-Tenn.) told Politico in a 2018 interview. "They lost more jobs than exist in the steel industry."
Seven years after the steel tariff was imposed, President Barack Obama slapped a 35% levy on Chinese tires. The president would later boast the tariff saved 1,200 U.S. tire jobs and spurred a rise in U.S. tire production after a protracted decline.
But a 2012 review by the Peterson Institute of International Economics found that as a result of the tariffs, Americans ended up paying more for tires. The cost of Chinese-made tires rose 26%, and with less competition from China, domestic tire makers raised prices 3.2%.
Altogether, the increase in prices from the tire tariff cost Americans an extra $1.1 billion, which translated to an estimated 3,731 retail jobs lost, the Peterson study determined.
Golara said such unintended consequences typically accompany tariffs. Protecting one industry can cause ripple effects on other industries that supply or purchase their goods.
Golara and his associates focused on China, which has endured restrictions, funded by the politically popular CHIPS Act, on the integration of Chinese suppliers in semiconductor development. The 2018 tariffs were intended to protect America's manufacturing base. But did they?
Golara said the effects of the levies are much more complicated than those in power may have you believe.
"Their effectiveness is still up for debate," Golara said.
Tariffs are cyclical, Golara said, and there have been successful implementations that have yielded lasting benefits. "Protect Me Not" notes the 1964 "chicken tax" that insulated U.S. heavy truck manufacturers from significant foreign competition for over 50 years also helped the Ford F-150 truck to become the best-selling automobile in the U.S.
But the risks have become more pervasive, the study found. They can lead to an "increased political risk, supply uncertainty, a threat of retaliatory tariffs and the inability of politicians to optimally select a tariff rate and maintain it."
The 2018 tariffs, Golara and his colleagues found, increased costs by $51 billion per year, a burden carried primarily by U.S. companies and consumers.
"With such a high price tag, it is crucial for policymakers to understand the total impact of tariffs and whether they achieve their intended goals, and what their overall impact on supply chains can be," the researchers wrote.
The issue is further complicated by the interconnectivity between the U.S. and Chinese economies. Engaging in a trade war with your top trade partner, as China has been for much of the 21st century, is as counterproductive as it sounds, Golara said.
"In addition to hurting firms in the protected industries, retaliatory Chinese counter-tariffs also hurt non-protected U.S. firms, particularly those in the agricultural industry," the study found.
Hard questions must be asked going forward, said Golara.
If tariffs are adopted at all, an optimal tariff rate needs to be accurately calculated and "skillfully administered," temporarily until the industry can address its underlying shortcomings, Golara and colleagues concluded. The uncertainty that accompanied the 2018 tariff rollout, which saw rates abruptly increase from 10 to 25 percent, can't be repeated.
Will that happen?
"To be honest, all I see are partisan approaches," Golara said. "We have to move beyond that if we're going to continue deploying tariffs."
More information: Zachary S. Rogers et al, Protect me not: The effect of tariffs on U.S. supply networks, Journal of Purchasing and Supply Management (2024). DOI: 10.1016/j.pursup.2024.100897
Provided by Georgia State University US finalizes sharp tariff hikes on Chinese EVs, other goods
Washington Post
16 Oct, 2024
“To me, the most beautiful word in the dictionary is tariff. And it’s my favourite,” Trump said in Chicago on Tuesday. Photo / Getty Images
Former president Donald Trump is campaigning on the most significant increase in tariffs in close to a century, preparing an attack on the international trade order that would likely raise prices, hurt the stock market and spark economic feuds with much of the world.
Trump’s trade plans, a staple of his stump speeches, have fluctuated, but he consistently calls for steep duties to discourage imports and promote domestic production. The former president has floated “automatic” tariffs of 10 percent to 20 percent on every US trading partner, 60 percent levies on goods from China, and rates as high as 100, 200 or even 1,000 percent in other circumstances.
These proposals would go far beyond the disruptive trade wars of his first term even if they are only partially implemented. They would wrench the nation out of the system of global interdependence that arose in recent decades, making the US economy much more isolated and autonomous, like it was in the late 19th century. (Trump last week falsely claimed that the United States was never richer than in the 1890s, when it had high trade barriers.)
“To me, the most beautiful word in the dictionary is tariff. And it’s my favourite,” Trump said in Chicago on Tuesday. “I’m a believer in tariffs.”
The consequences would be far-reaching: Americans would be hit by higher prices for grocery staples from abroad, such as fruit, vegetables and coffee. Domestic firms dependent on imports would need to either figure out new supply chains or raise costs for consumers. US manufacturers would almost certainly see sharp declines in orders from abroad as foreign nations impose retaliatory tariffs.
“We are talking about a plan of historic significance: It would be enormous, and the blowback would be even more enormous,” said Douglas A. Irwin, an economist at Dartmouth College who authored a 2017 book on the history of US trade policy. “This would stand way off the charts.”
Companies and governments around the world have begun preparing contingency plans for the potential Trump tariffs. Diplomats and business leaders from Latin America, Europe, Asia and even Canada have in recent weeks asked their US counterparts about Trump’s intentions and authorities, according to interviews with several domestic and international economic advisers, some of whom spoke on the condition of anonymity to reflect private planning.
While some business leaders and congressional Republicans remain optimistic that the former president is engaged in election-year posturing, Trump has repeatedly insisted that tariffs represent an unmitigated positive for the US economy, recently calling them “the greatest thing ever invented.” Tariffs have been a constant bedrock of his economic agenda since he first ran in 2016, along with lower taxes, increased energy production and deregulation.
Trump says his plan would force other countries to back off what he has claimed are abusive trade practices. And while high tariffs could force many firms to move jobs and production to the United States to access the world’s largest market, doing so would come at a high, disruptive cost.
“The world economies are now so interwoven with each other - to rip and pull that apart would be incredibly disruptive to the US,” Irwin said. “It would really ripple through the economy in ways that are very hard to predict.”
Brian Hughes, a Trump campaign senior adviser, dismissed the nonpartisan and Wall Street assessments of the tariffs’ likely effects.
“Just like 2016, Wall Street and so-called expert forecasts said that Trump policies would result in lower growth and higher inflation, the media took these forecasts at face value, and the record was never corrected when actual growth and job gains widely outperformed these opinions,” Hughes said in a statement. “These Wall Street elites would be wise to review the record and acknowledge the shortcomings of their past work if they’d like their new forecasts to be seen as credible.”
‘We’re not talking about caviar’
Trump and his running mate, Sen. JD Vance (Ohio), have defended higher tariffs as good for the working class, arguing they will bring back jobs to the United States that had moved abroad.
Trump’s plan would automatically apply a minimum tariff rate on imports from every country that trades with the United States, known as a universal tariff. The Coalition for a Prosperous America, which supports higher tariffs, has projected that a 10 percent universal tariff would generate 3 million additional jobs and lead to a surge in US manufacturing output. It would also bring in trillions in revenue to the federal coffers. Even as the economy overall has grown, US manufacturing has dramatically declined since the 1950s as a share of the workforce. Trump has said tariffs will bring those kinds of jobs back to the United States.
On Tuesday, however, Trump said that 10 percent tariffs would be insufficient for bringing jobs back and that the rate would have to be closer to 50 percent.
“When they have to pay tariffs to come in, but they have incentive to build here, they’re going to come roaring back,” Trump said in Georgia last month.
More than half of registered voters said they would be more likely to back a candidate who supported imposing both a 10 percent tariff on all imports and a 60 percent tariff on imports from China, according to a mid-September Reuters-Ipsos poll. Republicans were more than twice as likely as Democrats to support higher tariffs, but 56 percent of independents also endorsed Trump’s plan.
However, the most immediate impact of Trump’s plans might be to raise costs for US consumers, in a way likely to prove particularly painful for low-income Americans.
During his first term, Trump imposed tariffs on roughly US$360 billion in Chinese imports, as well as on steel and aluminum imports, washing machines and solar panels. The Biden administration has largely maintained those policies, but Trump is now eyeing a more than ninefold increase in the volume of affected imports, which economists say would lead to widespread price hikes.
The US imports more than US$1 trillion worth of goods annually used directly by consumers: inexpensive electronics from China; food from Latin America and Canada; pharmaceuticals produced in India and Mexico. Tariffs of 20 percent on all imports could amount to a more than US$4 trillion tax hike over the next decade, according to the Committee for a Responsible Federal Budget, a nonpartisan think tank. (Trump has insisted that tariffs raise costs only for foreign nations, though economists say the duties, usually paid by importers to the government, are typically passed on to consumers in the form of higher prices.)
Gas prices would increase by as much as 75 cents per gallon in the Midwest, where most refined products come from Canada, according to Patrick De Haan, an analyst at GasBuddy. Overall, the Peterson Institute for International Economics said Trump’s tariffs would cost the typical household US$2,600 per year; the Yale Budget Lab said in an estimate released Wednesday that the annual cost could be as high as US$7,600 for a typical household. As a share of their income, the poorest Americans would pay 6 percent more with 20 percent tariffs, compared with 1.4 percent more for the richest 1 percent, according to the Institute on Taxation and Economic Policy, a left-leaning think tank.
“We’re not talking about caviar - these are things that people have to buy. They’re essentials,” said Neil Saunders, a managing director at the analytics company GlobalData.
Economists say it would take several painful years for alternative domestic producers to emerge for many goods. For instance, almost all shoes and 90 percent of tomatoes sold in the country are imported, according to the Peterson Institute. And the United States does not even have the climate necessary to produce many food items - such as coffee, bananas, avocados, to say nothing of Chilean sea bass - at the necessary scale to meet domestic demand, said Joseph Politano, an economic analyst who has written on the subject on his Substack.
‘Higher interest rates, slower growth, higher inflation’
Trump’s tariffs would also reverberate through Wall Street and global markets, inviting turmoil that would affect investors and companies worldwide. Those effects would probably be felt quickly.
During Trump’s first term, stocks fell on nine of 11 days in 2018 and 2019 that the United States or China announced new tariffs, according to a study this year by economists with the Federal Reserve and Columbia University. Comprehensive tariffs would cause a swift one-time jump in prices before reducing economic growth about six months later, according to economist David Page, head of macro research for AXA Investment Managers in London.
Many analysts are hopeful that a stock market panic would dissuade or prevent Trump from carrying out his plans. The investment bank UBS projected that a 10 percent universal tariff could lead to a 10 percent contraction in the stock market. US multinationals are heavily dependent on foreign subsidiaries, and retailers, auto manufacturers and other industrial sectors would be hit the hardest, according to UBS. Chris McNally, an analyst at Evercore, said Trump’s 10 percent tariff plan could cause a more than 20 percent decline in General Motors’ earnings, with slightly smaller declines for Ford and Stellantis.
Stephen Miran, who served in the Treasury Department during Trump’s administration, said he expects Trump to gradually phase in the tariffs, mitigating any stock market volatility. Miran echoed Trump’s comments that dozens of countries have higher import tariffs on the United States than it has on those countries - and sees the former president’s proposals as a first step toward fairer trade agreements.
But other nations may not agree to more US-friendly trade deals. And if that happens, the new tariffs would depress global merchandise trade and disrupt the corresponding financial flows among the United States, China and Europe, experts say.
As the United States bought fewer goods from China and Europe, they, in turn, could buy fewer Treasury bonds. That would cause yields to increase on long-term US government debt; American consumers would feel the impact with higher mortgage rates.
Trump has spoken of finding ways to lower the value of the dollar to make US exports more attractive to foreign customers. But global tariffs would undermine that goal, pushing the dollar higher. In 2018, as Trump implemented the first several rounds of tariff hikes, the dollar rose more than 10 percent against the Chinese yuan.
“We’d be facing higher interest rates, slower growth, higher inflation - that stagflation scenario that people talk about,” said Marc Chandler, managing director of Bannockburn Global Forex, referring to a combination of high inflation and anemic growth.
‘Every capital around the world’ may respond
Trump and his advisers express confidence that tariffs can be an effective tool to cajole other countries into complying with his demands. But many may respond by imposing trade restrictions of their own on US exports.
During Trump’s first term, the European Union imposed retaliatory tariffs on everything from US corn to Harley-Davidson motorcycles. China reduced purchases of food products made in the Midwest, leading the Trump administration to approve a US$30 billion bailout for farmers. That preceded a China-US trade deal, but there is no guarantee a similar resolution could be reached again.
While the discussions are preliminary, officials in Canada, the European Union, China, India and elsewhere are already working through options to respond to another potential Trump trade war. The retaliation could be harsher this time: Canada, for instance, could cut off access to lumber, aluminum and steel. Boeing aircraft and US vehicle exports could be threatened. Some analysts believe China could devastate US farming exports.
“They’re thinking through their leverage points, and I’m sure every capital around the world is doing the same,” said one person in touch with senior Canadian officials preparing potential responses, speaking on the condition of anonymity to discuss private conversations.
A new universal tariff would violate US commitments to the World Trading Organization. Other nations would almost certainly file WTO complaints. But experts said trade partners would not wait for that cumbersome judicial process, which can take years to yield a conclusion.
“Day one, if there’s a 10 percent tariff put in place, day two, there’s going to be retaliatory tariffs from all of our trading partners,” said John Veroneau, a trade attorney with Covington & Burling, who served as deputy US trade representative under President George W. Bush.
Written by: Jeff Stein, David J. Lynch
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