Yellen Says Calls for High Tariffs Are ‘Deeply Misguided’
“Calls for walling America off with high tariffs on friends and competitors alike or by treating even our closest allies as transactional partners are deeply misguided,” US Treasury Secretary Janet Yellen warns during a speech at the Council on Foreign Relations.
Bloomberg
The other day, I was scrolling through social media when I came across a heated debate about international trade. One commenter passionately argued for higher tariffs to “protect American jobs and make foreign companies pay their fair share.”
At face value, this popular sentiment makes sense. It seems logical that by making it expensive for foreign firms to sell to us, we’ll buy more American-made goods that support American jobs.
The simplicity of this argument is so seductive that it makes a predictable resurgence during the election cycle. It is also dead wrong.
Here’s what many people get wrong: they assume that tariffs primarily hurt foreign companies. In reality, U.S. consumers bear the brunt of tariffs.
Let’s unpack tariffs and how they impact our pocketbooks, jobs and the economy.
What is a tariff?
What exactly is a tariff? Simply put, a tariff is an added tax on imported goods.
When the U.S. government places a tariff on, say, foreign-made steel, it means that the U.S. companies importing steel must pay an extra fee to bring it into the country.
The added tariff cost is then passed on to the U.S. manufacturers, who pass it to consumers through higher prices of products that contain steel, such as cars, washing machines, outdoor grills and other consumer goods.
After the U.S. imposed a 25% tariff on steel imports in 2018, the cost of U.S.-built cars increased by about $400 per vehicle, an average single-family home construction cost increased by about $7,000, and kitchen appliances saw a cost increase of up to 7%.
The added cost of tariffs came out of our pockets — yours and mine.
The increase in the cost of steel also had an indirect effect. Businesses purchasing equipment, construction companies and government projects funded by taxpayer dollars faced higher costs due to tariffs. A typical John Deer farm tractor saw a price increase of about $1,800 per unit, and steel kegs used by the U.S. craft beer industry saw a 26% cost increase due to the steel tariffs.
The increase in the cost of raw materials has a ripple effect throughout the economy: it puts a strain on our farmers and manufacturers, makes our companies less competitive globally, and leads to higher prices for U.S. consumers.
What do tariffs do to imported goods?
What about a tariff on imported goods?
Don’t tariffs make domestically produced goods cheaper by comparison?
A tariff raises the price of imported goods. But here’s the kicker – it also allows domestic producers to raise their prices without fear of being undercut by foreign competition. The result? Higher prices across the board, whether you’re buying imported or American-made products.
In 2018, the U.S. imposed a 25% tariff on imported washing machines. Within months, the price of washing machines – both imported and domestic – rose by about 12%. That extra cost came straight out of American consumers’ pockets.
Here is an uncomfortable truth: tariffs are essentially a tax on U.S. consumers.
When you buy a product affected by tariffs, you’re not sticking it to foreign companies — you’re paying an extra tax to the government.
Who is impacted by tariffs?
Tariffs disproportionately affect lower-income households.
Everyday essential items often face higher tariff rates than luxury goods, further burdening lower-income consumers. Some imported dairy products face a tariff of over 20%, while kitchenware tariffs are as high as 38%, clothing as much as 32%, and bed linens have a 21% tariff. The U.S. has some of the highest tariffs on shoes in the world, with rates varying from 8.5% for leather dress shoes to 37.5% for “canvas shoes with rubber soles” and rain boots.
Tariffs take a larger percentage of income from low-income households than high-income earners. Think about it – a $86 price hike on a washing machine might be a minor inconvenience for a wealthy family, but it could be a significant burden for a family living paycheck to paycheck.
Let me illustrate how tariffs on everyday goods might affect two very different consumers, using shoes as an example.
Imagine Sarah, a single mother of three school-age children living on a tight budget. Just before the start of a new school year, Sarah is doing back-to-school shopping with a total budget of $150.
Without tariffs, she might find decent quality sneakers for about $40 a pair, totaling $120 for all three children.
However, with the 20% tariff on sneakers, the price of each pair increases to $48. Now, the total cost for three pairs is $144, leaving Sarah with just $6 in her budget – hardly enough for even a cheap pair of socks for each kid.
Sarah might be forced to buy lower quality shoes that won’t last as long, cut back on other necessary expenses to afford the shoes and supplies her children need, or forgo buying new shoes entirely.
The $24 increase in Sarah’s total shoe cost ($8 per pair) represents a significant chunk of her shopping budget.
Now consider Michael, a successful Wall Street banker, shopping for high-end Italian leather dress shoes. He’s eyeing a pair priced at $500. With the 8.5% tariff on leather dress shoes, the price increases to $542.50.
For Michael, this $42.50 increase is hardly noticeable. The tariff won’t affect his decision to buy the shoes, nor will it make a dent in his overall budget. Michael might not even be aware that he’s paying a tariff.
What if Sarah bought American-made sneakers instead?
Since domestic sneakers don’t have a tariff, they should be cheaper, right?
Tariffs result in higher prices for all goods – imported and manufactured domestically.
American shoe manufacturers, protected from foreign competition by the tariffs, can also raise their prices. Even if Sarah opted for American-made sneakers, she’d likely still face higher prices as a result of the tariffs.
Would tariffs protect U.S. jobs?
You might be thinking, “But don’t tariffs protect American jobs?”
It’s a common argument, but the reality is complicated.
Yes, tariffs can preserve some jobs in industries protected from foreign competition. However, the job gains are usually minor, and the cost of saving these jobs is often staggering.
For instance, one case study shows that tariffs on foreign-made tires saved about 1,200 American jobs. Sounds good, right?
Here’s the catch — each of those saved jobs cost U.S. consumers $900,000. In other words, American shoppers collectively paid an extra $1.1 billion in higher tire prices to save 1,200 jobs.
Jobs “saved” in one industry often come at the expense of jobs in other sectors. When we impose tariffs, other countries often retaliate with their own tariffs on U.S. goods.
Trade wars hurt our export industries, potentially leading to job losses that offset any gains from the original tariffs.
We saw this play out recently when China imposed retaliatory tariffs on U.S. soybeans, causing significant losses for American farmers. Similarly, when the EU retaliated against U.S. steel tariffs by targeting American bourbon, it put pressure on distilleries in Kentucky and Tennessee.
Over time, tariffs lead to even bigger job losses as large companies shift their production to countries without tariffs.
The U.S. sugar industry has been protected by tariffs for decades. While this protectionist policy has maintained U.S. sugar production, it has also kept sugar prices in the U.S. artificially high. As a result, many candy manufacturers have moved operations to countries with lower sugar prices, ironically leading to job losses in the confectionery industry.
New Jersey, with its strategic location and robust infrastructure, is deeply integrated into the global economy and would stand to lose a great deal in a trade war. In 2023, the state exported over $43 billion and imported over $155 billion worth of goods. Over 1.2 million New Jersey jobs are directly related to trade, including manufacturing, transportation, logistics and warehousing.
Tariffs and trade disputes can significantly impact our state’s economy, affecting industries ranging from pharmaceuticals to agriculture.
Are tariffs ever a good idea?
Tariffs can be useful in protecting new industries by artificially leveling the playing field and buying them time to develop and become internationally competitive.
National security can also be an important consideration: tariffs can help maintain domestic production of critically important goods.
However, economists generally agree that there are better ways to achieve these goals, such as subsidies and tax incentives.
So, the next time you hear someone arguing for higher tariffs, remember this: while the intention might be to protect American industries and jobs, the reality is often quite different. In the end, tariffs are just a hidden tax on consumers — a tax that usually hits hardest those who can least afford it.
Marina Vitalin is a business education teacher at Monroe Township High School and a resident of Jackson.
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Publish date : 2024-10-31 01:39:00
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