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Di Leo: The False Promise of Tariff-Driven Prosperity

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By John F. Di Leo - 

Tariffs are a wonderful idea, aren’t they?

A tariff – technically, a tax on an imported good, usually as a percentage of the good's value – sounds almost too good to be true.  A tariff raises money on imports, but encourages Americans to stop importing, and to buy local goods instead of foreign; it serves a foreign policy purpose by punishing our enemies, and it helps pay for seaports and border protection.  Quite a multifaceted, targeted tool.

It’s like one of those magical diet pills that helps you get thinner in the waist, broader in the shoulders and chest, make your hair thicker, give you more energy, and add twenty years to your life.  Of course, such magical diet pills always turn out to be fictional… and in many ways, so do the benefits of tariffs.

Now, that’s not to say that tariffs are objectively a bad thing.  Government has to raise revenue somehow, to pay for the military, the roads, the national parks, and ten times more services than the Constitution even allows. If we have to raise money somehow, we may as well do it with tariffs.  Objectively, they’re no more or less moral than sales taxes, social security taxes, income taxes and property taxes.

But the mere fact that they’re a legitimate tool doesn’t mean we should liberally expand them whenever we feel like it.  Like all taxes, tariffs are dangerous things, especially when they change suddenly.

Imagine if you were getting ready to retire, having paid off your home and planned your retirement budget around staying in this mortgage-less home, only to discover suddenly that your property taxes quintupled overnight.

Or imagine saving for years to send your children to college, based on a steady salary and a predictable income tax and education tax credit program, and the very year your kids headed off to college, your income tax tripled and the tax credit programs were cancelled.

What would it do to your family?  What effect would this have on your future, and the future of your children and grandchildren?

It’s the same thing for the business world.

The Filing Cabinet Manufacturer

Let’s say you’re in the office furniture business.  You make attractive wooden rolling office furniture, such as filing cabinets, which are made of a multitude of materials. The body of the cabinet is made from real oak, as is the front panel of each drawer… then the body of each drawer is made from sheet steel, cut, welded and fitted into shape as a drawer.  There are steel rods functioning as dividers, nuts and bolts holding everything together, wood stain and lacquer for the wood, powder coat for the steel, plastic gasket for the drawer closure, brass casters on the base, and brass handles on the front of each drawer.

Now, some of these raw materials are bought locally, in the United States…. Some are purchased from foreign vendors.  The lumber, stain, and powder coat will likely be local; the sheet steel will likely be Canadian.  The casters and drawer handles might be from China or Germany; the fasteners and gasket will probably all be South Korean or Taiwanese.

You’ve priced each purchased material carefully, so that you can keep your costs in check.  You have high end competition, made of wood throughout, both interior and exterior; you have to be a lot cheaper than their products.  And you have low end competition, which uses metal both inside and out, or perhaps artificial wood for the cabinet instead of the real thing, as you use.   You can be pricier than the latter, but not too much so. 

Price is everything in this economy, and probably always will be.

Now that you’ve bought these materials, your factory can get to work.  Five days a week, or maybe six; one shift a day, or maybe two, you employ fifty or a hundred employees, stamping and welding and painting the steel parts… cutting and assembling and staining and varnishing the wood cabinets… assembling these parts together into a finished product, adding the casters and drawer pulls at the end. 

That’s a lot of labor.  You employ a lot of people – not only the workers on the line, but also the buyers who order the materials, the carriers who pick them up and deliver them to you, the engineers who design them, the product managers and salesmen and customer service reps who sell them, the accounting, marketing  and upper management folks who handle the back office tasks, the warehouse and logistics personnel who store, ship, and receive it all.

And your purchases employ a lot of people, from the lumberyards and steel mills, chemical plants and injection molders who supply your materials, both in your country and abroad, to the people in your own factory who put them all together to create a new finished product.

You do this in America, and you pay taxes, and you employ people, and they pay taxes.  It’s a good thing, all round.

Tax Cuts and Regulatory Reform

Over the course of 2017, the Trump administration focused on regulatory reform – lowering the costs of doing business in many industries, and reducing some costs across the board by taking the jack boot of the leviathan off the neck of industries critical to us all.  Reductions in the red tape and fees of the energy sector have reduced energy rates; the cost of production of many specific products has gone down, and more will follow as the Trump administration’s upper staff finds more regulations to trim in the years to come.

Also in 2017, Congress passed – and the President signed – a huge tax cut.  This tax cut focused on business more than the individual, on the theory that a stronger employer is more important than cutting the tax rate of an employee who could find himself unemployed any day!

This isn’t only good for you, as the furniture maker.  These reductions of red tape and income taxes have not just cut your costs of doing business; they’ve done the same for your domestic US vendors. 

This doesn’t mean that you’ll be able to switch to solely sourcing your raw materials in the USA tomorrow… but it does mean that more and more USA manufacturers will be able to be more aggressive with pricing when answering this year’s bids, and next year’s bids, and next year’s bids.   As their costs go down, so will their prices, and you be able to “insource” (to switch from foreign vendors back to domestic, after years and years of gradual outsourcing), more and more every year.

This tax cut and these regulatory reforms will keep our furniture factory from closing down, or from having to move overseas.   They help not only us, but our vendors too. We are on the right track.

The Punitive Steel and Aluminum Tariffs of 2018

The President is calling for additional tariffs on steel and aluminum, as new presidents so often do.  The political power of the steel and aluminum lobbies is substantial; they whine that they are losing business to foreign competition, and plead with government to “help” them.

A President is likely to be open to their argument, because it’s undeniably important, not only for employment reasons, but also for national security purposes, to have robust steel and aluminum industries of our own, here at home.  If there’s a way to keep our steel and aluminum industries, and to pull back some of the business that we’ve lost to other countries over the years, that would be a very good thing indeed.  

And we were on the way to that end, weren’t we?  The tax cuts and regulatory reforms already in place help all our industries… our vendors are getting healthier by the day.

But then the President announced new tariffs on imported goods.  Imported products that were duty-free, or carried a low duty, will now increase in price by 10 to 25 percent… possibly at the drop of a hat.

Now, perhaps the duty rate was too low before; a case can certainly be made for adjusting the entire American tariff program, as we have a duty range from duty-free to twenty or thirty percent, depending on the product.  There seems to be no rhyme or reason to the variances.

But ANY tax increase is disruptive, so government must be cautious when implementing such changes.

Think of our furniture company.  Can we afford an increase of 25% in the cost of our second biggest component?  (Now’s the time to thank our lucky stars we aren’t in the all-metal furniture business; then our entire product line would be going up 25% in cost!).

The government hopes, as all protectionists always do, that this 25% tariff on our imported steel will cause us to stop buying our steel from Canada, Mexico, or China, and we will instead switch at a moment’s notice to a domestic vendor.  But will we?

Domestic vendors are cheaper and easier to work with, by far. Transportation is quicker and more dependable, quality tends to be high and customer support tends to be wonderful. If we could use domestic sources, we probably already would have.

So what choice does that leave us?  We may find that we need to close down… or we may try to raise prices to account for the cost increase, and see if we survive… or we may do what companies have been doing for decades: pull up stakes and move production to a third world country ourselves.

We don’t want to do this.  Nobody wants to move production away from the home they love, to do their manufacturing in a foreign country an ocean away.  But at a certain point, it has to happen.  The manufacture eventually decides he can’t take the beating from his government anymore, and he moves away.

This process is exactly what we had turned around in 2017.  Our tax cuts and regulatory reform were stopping companies from running away, and instead, these reforms were causing companies to bring back production lines that they had exported to other “low cost countries” years ago!

The administration dreams that steel and aluminum tariffs are different, that they will create more business for the domestic steel and aluminum industry by forcing American companies to in-source those materials.  

But they won’t.

They are still a tax, and the laws of economics will always apply.  “Tax something and you get less of it.”

By raising the cost of manufacturing, with such universally-needed materials as steel and aluminum, the government is flirting with rendering all the advances of 2017 moot.

If our furniture factory could afford 25% more expensive steel, they would already have been buying US steel and aluminum.  They can’t afford it.   They will have to switch to plastic, or cut corners some other way (goodbye, company-provided healthcare to the employees; goodbye, company sponsored health club memberships; goodbye, planned factory expansion or new office).

And if the cost differential is too great, we'll have to flee, shutting the place down and moving to China or some other country more welcoming to a manufacturing plant.  And then it's not only our employees who'll lose their jobs; it's also the domestic lumber mills and powder coat and stain and lacquer companies who used to be our vendors.  They're losing their customer now, all those orders will disappear, and the jobs of those who had supported them too.

You just can’t tax a company into buying your product; all you can do is tax him into running away.

Steel and aluminum executives and union shop stewards are in ecstasy at these new taxes; they are sure this attack on their foreign competitors will solve their every problem.

They are wrong.

What profit is it really, if you manage to gain all the steel and aluminum purchases made by an empty factory, a shuttered warehouse, a plant set for demolition, because the previous occupants moved to China or went out of business?

He who wins all the orders from a bankrupt customer inherits the wind.

It’s only been two months since the tax cut was passed.  Can’t we just give it a chance to work???

Copyright 2018 John F. Di Leo

John F Di Leo is a Chicagoland-based Customs broker and trade compliance trainer.  His columns are found regularly in Illinois Review.   Permission is hereby granted to forward freely, provided it is uncut and the IR URL and byline are included.

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8 COMMENTS

  1. Everything must be viewed in perspective and policies enacted upon common sense and reality.
    For far too long we have imported far too many goods (and impoverished people) while exporting jobs.
    And far too often the balance of trade among many countries has been wildly distorted and distorted against the U.S.
    The one world open borders crowd, and too often that includes a number of people in both parties – Hillary Clinton and Bush are not that far apart on these issues) has been destroying American for decades.

  2. Did anyone get the impression from my column that I’m happy that we’ve exported so many jobs over the years?
    Did anyone get the impression that I’m happy that we’ve lost so much of our steel and aluminum industry?
    The point of my column is that I agree with the GOAL of bringing back our aluminum and steel… .and ALL manufacturing …. to America.
    My point is that the method proposed is counterproductive. A huge steel tariff, hiking the cost of key raw materials by 25%, doesn’t help the domestic industry as much as it HURTS domestic industry.
    This could create a small amount of new business for Ryerson, Werner, ALCOA, and a few others, while killing hundreds of companies and thousands of jobs in all the industries that USE steel and aluminum.
    We were on the right track before: cut taxes, cut regs, and our domestic raw materials makers will be able to be competitive again.
    But now, rather than waiting for that to work, we’re slamming a wrecking ball into domestic manufacturing.
    A steel maker isn’t objectively more important to the economy than the hundreds of companies that USE his steel.
    Let’s help both groups, not one at the expense of the other!
    JFD

  3. Liberals have the perpetual war on poverty that has failed for over fifty years but liberaltarians have their “free trade” fantasy that never fails, too. When we tax income instead of goods, we get less investment and pay higher good prices in the long run. That’s why our nation grew so much quicker when we had those evil tariffs which did not bring on the Great Depression. The hiking of tariffs of Smoot Hawley was small change compared to tripling the tax rates by Hoover, the massive regulation expansion and the Federal Reserve strangling the money supply.
    We have had 50 years of stagnant wages and a debt mountain that overwhelms the world in a no tariff world. Not only is our national sovereignty compromised by Nafta, our national security has been outsourced to CHINA. We can’t be competitive with a world that steals our intellectual property and subsidizes their trade (as Europe does by having their VAT tax not apply to exports) with impunity. We have to charge something for infrastructure that we pay for but foreign nations don’t.
    We must defend ourselves from this onslaught. Regulation and tax cuts aren’t enough—the same crony capitalists that love “free trade” fight like hell to stop any changes that would open up competition like deregulation and true tax relief (like getting rid of the income tax totally). They love to have slave labor monopolies like we face in CHINA. We do no favors to the Chinese people or ourselves by letting this “free trade” farce go on.
    I am as tired of appeasement on trade as I was with the appeasers of communism of the past. It’s a fantasy that trade is what brings peace. It was the end of detente that brought the fall of the Soviets and if we want to end the tyranny we see elsewhere, we need to stop subsidizing it through one sided trade that only benefits our enemies, foreign and domestic.

  4. Di Leo wrote:
    “A steel maker isn’t objectively more important to the economy than the hundreds of companies that USE his steel.”
    How, Prithee, in the event of a war with an increasingly belligerent communist China, would the hundreds of companies that use steel, to build tanks and warships and small arms, obtain it – in the absence of a powerful US steel industry?
    The “aresenals of Democracy” in 2 world wars, were driven by America’s unrivalled steel production capacity.
    People on Wall St. and those dealing in international trade, such as DiLeo, are either tragically shortsighted, or so enmeshed in their pursuit of personal profit, that they just don’t care.

  5. Mr Westwood, why do you assume I oppose a strong US steel industry?
    I have said, repeatedly, that I favor improving American manufacturing, for both economic and foreign policy reasons.
    I oppose the sudden-tariff approach because it won’t WORK to bring about the result we both desire.
    If what we really want is a robust American manufacturing climate, then we have to do things that help domestic manufacturing, not things that destroy it.