When a government imposes tariffs, ITS OWN PEOPLE PAY!
Trump's Tariffs
WHAT ABOUT TARIFFS?
By Professor Gilbert Morris
Nassau, NP, The Bahamas
One of our young princes - the artist Sheldon Saint - asked me to explain about tariffs. And whilst it’s a pleasure to answer one of my beautiful sons of Grand Bahama, it turns out that it’s my job, as my title is “National Public Reader of The Bahamas”; which means in times of crisis, I am to explain the crisis to my fellow Bahamians.Well, what a silly little ditty this “Liberation Day” has been; a veritable cult of nonsense, on the US imposition of tariffs, even in geographic areas with no people; although birds do fly!
LET’S GET AT THE TECHNICALS:
So, the administration actually thinks it’s some sort of equation:
1. To create a rate based on each country’s US trade surplus
2. Divided by their US exports!
DC ECONOMICS - a think tank - provided a good basic example:
a. US trade deficit with Indonesia is $17.9 billion
b. Indonesia’s exports to US is $28 billion
c. So: $17.9/$28 = 64%, which Trump claims is the tariff rate Indonesia charges the U.S.
So the Trump administration is using a nation's trade deficit with the U.S., divided by the nation's exports to the U.S.
But that’s not a trade equation…as such the Trump tariff rates are arbitrary and will lead to economic convulsions for Americans as I will show below!
THERE’s ONE MORE TECHNICAL POINT:
1. The Trump administration claims to have assessed tariff and non tariff barriers in calibration to determine the effective tariff rates.
2. That would mean Trump divided the US trade deficit with a country using imports and then multiplied by half; judging by the rates.
3. Part of the reason this is NOT a trade formula is no homogeneous elasticity for those countries on whom 10% across the board has been imposed, instance.
4. Simply, their calculations do not capture the reality of trade and it can’t with dozens of countries treated exactly the same or territories (French ones) treated as countries when their trade is counted already.
5. Moreover, to gain a clearer perspective, they would need some sort of elasticity/time passthrough that dovetails to 1 as a baseline.
6. Nothing in Trump’s calculus captures the elasticity of trade or the range of U.S. dependencies, like potash from Canada.
NOW LET’S GO TO GENERAL EXPLANATIONS:
There are some unimpeachable basics:
1. The imposer of tariffs pays. For example: In Trump’s previous administration, he had to subsidise the agricultural industry by $34 billion to offset their loses from his bizarre tariff regime.
So let’s be clear:
1. If Americans import an auto from China which costs $50,000 and
2. There is a 50% tariff on that auto…
3. Then the American pays China $50,000 dollars (the cost of the automobile),
4. Then the auto is shipped to America,
5. Then the American must pay the 50% tariff on $50,000 which is $25,000 to the US government.
When a government imposes tariffs, ITS OWN PEOPLE PAY!
Yes it’s like customs’ duty that we - The Bahamas, Jamaica and Barbados (which has one of every tax known to humankind), pay on items;
EXCEPT
A tariff is a penalty and customs duty is a tax.
That is, we aren’t trying to force another country to behave a certain way by using customs duty.
It’s just a lazy unimaginative way to tax citizens.
That’s what we do!
2. Whilst the imposer of tariffs pays (raising domestic costs, engendering unemployment, collapsing small businesses), those upon whom tariffs are imposed may lose market share or share of sales in whatever products are affected; unless they can diversify demand.
So, in our China example above: when an American buys a product from China and the U.S. imposes a tariff, that item becomes more expensive for Americans or in America.
So imagine you own Dollar Rent-a-Car and you were paying just the $50,000 for each auto to China. Then the US government adds the 50% tariff, that means for no reason, your cost for each automobile just increased.
10 automobiles would have cost you $500,000 at $50,000 each. Now suddenly without warning the exact same automobiles cost you $75,000 each or $750,000!
If you are a company - FedEx or rental cars, or limousine service or taxi company - your government just drove your costs upward for no benefit to you!
Now imagine appliances companies, clothing companies, furniture, technology, medical equipment, building supplies…all these companies would experience higher costs, which they must now add to their retail prices and so customers pay the higher costs.
Additionally, if companies can’t pay it, they let employees go so they can stay in business. This is how tariffs lead to unemployment. And remember, 70% of all jobs in America are small businesses.
LET’S GET A BIG PICTURE PERSPECTIVE:
3. The US - 4% of world population but 34% of global consumption - which means that’s hard to replace. But U.S. borrows 80% of global savings.
Therefore - if you can believe it - it’s placing tariffs on those who finance its consumption!
This is a more complex point:
US debt is over $30 trillion.
So where do they get the money to consume?
They borrow it.
Where from?
From you!
Alright - lil gapseed here - you need to stop lying. We know you’re not supposed to have US bank accounts without Bahamas Central Bank approval…but we know your lil corruption at Bank of America. But it turns out 80% of global savers think their money is safe in the United States…as you do!
So the U.S. uses your savings as borrowed money to finance their consumerism. (It’s more complex than that…but that’s the basics).
The point is: why impose tariffs against countries whose citizens are financing US debt through savings in America?
It shows how interdependent America is and how delusional are these polices. Because you have those savings owing to more competitive productive environment - Mexico, Vietnam, China, etc - in your country rather than in the U.S... but when you’re paid, you hold your savings there, giving them access to cheap loans.
So what happens to China or Mexico or Vietnam when the tariffs hit their economies?
Well, as I said, they pay nothing.
Americans pay.
But Americans may decide not to buy that Chinese auto because they don’t want to pay $75.000 for an auto that cost them $50,000 yesterday. That means sales in China, Mexico, Vietnam etc may slow down. And obviously, if sales slow down, they earn less money.
But this is complex: so for instance, there are some items on which the U.S. can’t hold tariffs for too long or it would destroy industries in America; such as steel and aluminium from Canada or potash also from Canada. There are critical tech components of life saving medical equipment from China, Vietnam and textiles from Indonesia. So what will happen is whilst talking loudly, the U.S. would relax tariffs on those items…because US hospitals and national security firms will demand that the US government change the policy to avoid disastrous impacts.
Also, China, Mexico and others could find new customers in other countries; which is the easiest option…whilst waiting out the U.S.!
But, they could also reduce their currency values buy some share the tariff amount. So if the tariff is 10%, they could reduce their currency value by 5%. This would absorb the tariff to some degree and make that automobile I mentioned closer to the original $50,000 price and so the tariff would have less of an impact, at least theoretically.
4. For Caribbeans: just yawn. This is a piffle. We should ignore these tariffs: The Bahamas exports around half a billion in goods, some bonded…so about 5% to 7% of GDP.
But since we sell so little to the U.S., you see how stupid it is putting tariffs on us. In my economics classes, I teach that we are a “loop economy”: that means no matter how much money we earn from the U.S., we go right back and save or spend it in the U.S. So it’s stupid to put any hurdle on The Bahamas and we are the only country in the world (with Turks and Caicos) where this is so.
For Jamaica and to some degree Guyana, the matter is more complex as they export higher shares of GDP to the U.S. But even they can offset tariffs quietly and expertly.
The truth is: We do more to damage our economic prospects than Trump’s tariffs can!
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