Welcome back to Behind the Wall. This week we are going to be talking about a very topical issue. It was recently reported that the administration of the United States is imposing new and harsher tariffs on China. This is interesting to me because I seem to remember this same administration being very critical of tariffs on Chinese goods when the last administration initially imposed them. But hypocrisy goes hand in hand with politics so I won’t make a fuss.
Personally, I am in favor of trade protectionism and tariffs and subsidies have always been staples of protectionist policy. However, I was critical when the last administration initially imposed tariffs on China and I continue to be critical of the current administration for expanding them. I will use the next few minutes to explain why.
Before we begin I always think that it is important to define terms. Tariffs are taxes imposed on imported goods while subsidies are monies or other benefits given to a business or industry from the government. Protectionism or protectionist trade policy is a government policy that focuses on benefiting domestic industry at the expense of foreign industry usually accomplished by restricting imports and prioritizing exports. Free trade is a trade policy in conflict with protectionism that emphasizes minimum government restrictions on trade and focuses more on imports to lower costs.
I think that there are benefits to both protectionist policy as well as free trade. Free trade will generally result in cheaper products as goods can be manufactured at lower cost in many other countries. The downside of this is that cheap goods come at the expense of domestic industry. We have seen what has happened to former manufacturing hubs like Detroit that have suffered greatly from the decline of domestic manufacturing.
While subsidies can surely be used in both free trade and protectionist trade policies, they tend to crop up more in free trade. They are used to help bolster domestic industry by lowering prices, making domestic products more competitive with foreign imports, or guaranteeing profit for certain industries. A great example of a subsidy is the Dairy Price Support Program. This is government policy that guarantees that dairy farmers in the US can sell their excess product to the government at a predetermined price. The reason for this subsidy is that milk is produced at such a low prices in other countries that dairy farmers in the United States would be run out of business if not for the subsidy (this is the reason that the US has 1.4 billion pounds of cheese stored in caves around the country, I’m serious, google “US Cheese Caves”).
Free trade purists would be against subsidies because to them it doesn’t make sense to artificially raise the price of milk when it can be imported for less. So while a subsidy is used to protect domestic industry, they are more common under free trade policy because under this policy thousands of domestic jobs would be lost due to cheap imports if not for subsidies.
On the other side of the coin is protectionism where the focus is maintaining the health of domestic industry which usually leads to more expensive products for the end consumer. I tend to lean more toward this end of the trade policy spectrum because I believe that healthy domestic industry leads to a better economy and more jobs. But like most things in life the true solution is somewhere in the middle.
Tariffs fit into protectionist policy by essentially doing the opposite of subsidies. Instead of trying to make domestic products more competitive by lowering their price, tariffs attempt to make domestic products more competitive by increasing the cost of imported goods. Both tariffs and subsidies attempt to make domestic products more competitive with imports because in the United States, manufacturing is significantly more expensive mostly due to labor costs.
I can understand why many people prefer subsidies over tariffs because tariffs are more obviously increasing the cost of goods to consumers, but the net effect is generally the same. Again, it is understandable why the knee jerk reaction is to believe in free trade because it means the price you pay at the store is less expensive. The downsides of free trade are less obvious in the short term but as I mentioned above it will lead to mass job loss in certain industries, weaken the economy, and make the country more dependent on foreign nations.
Now that we understand the pros and cons of tariffs and subsidies I would like to touch briefly on why I am not a fan of the tariffs being levied on China by the current and former administrations. You see, tariffs generally only work if you have substitutes for the products that are being taxed. These can be similar domestic products or imports from other countries that you haven’t imposed tariffs on. If this is the case, then you can effectively stop consumers in the United States from buying Chinese products because the Chinese products would be more expensive than the substitutes.
However, we have become so dependent on Chinese imports that there are now many products that we do not have close substitutes for. A good example of this are rare earth elements that are necessary for semiconductor chips and other electronics. China has a virtual monopoly on many of these rare minerals. By imposing tariffs on these minerals, the government is essentially just contributing to inflation because the tariffs are simply passed along to consumers. Since businesses and consumers have no choice but to purchase these necessary materials from China, the tariffs do not stop Americans from purchasing these goods, they simply make them more expensive for the people that the government is trying to protect.
Many products that we rely on and take for granted in the United States are manufactured in China and there are very few substitutes for them. While I generally agree with protectionist policy and believe that tariffs work, in this specific case they do not. If anyone wants my opinion on what policy should be, I think that we need to focus on bringing industry, especially manufacturing back to the United States so that we have substitutes to foreign made products. Once we have another source of production, tariffs and subsidies become significantly more effective.
In a similar, yet slightly different way, the tariffs and sanctions that were put on Russian oil in the wake of the invasion of Ukraine were also ineffective. In this case the price of oil in the US increased because we were shrinking the supply of oil without changing the demand. Despite the sanctions, Russia was still able to sell its oil to other countries like India that didn’t impose any tariffs or sanctions. Like the tariffs on Chinese goods, these sanctions had a negative effect on consumers by hurting Americans’ wallets without actually punishing Russia.
In conclusion, I believe that tariffs on Chinese goods do very little to alter imports. The only tangible effect from these tariffs is that prices increase for Americans. If we want to become less dependent on China we need to bring manufacturing back to the US because only with substitutes will tariffs and subsidies be effective. This is a cautionary tale of what happens when we have unchecked free trade and we become too dependent on imports.
A big thanks to everyone reading, be sure to keep sending in your suggestions. See you next week.
Cheers!
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Now I need to find those cheese caves!