American Intelligence Test: Tariffs: When Used Are Their Own Economics Test

The economy is going to be a big terrain to explore. There are going to be any number of tests that delve into some valley or crevasse to explore the economic flora and fauna unique to that area, and there will be opportunities to climb to the summit of some financial peak to survey the broader economic landscape.

This AIT will look at the idea that the US will tariffs to deal with unfair trade situations and to deal with corporations out-sourcing of jobs to other nations. It should be noted that global trade arrangements and corporate jobs out-sourcing can sometimes be related, but there is no hard ‘laws of physics’ requirement linking the two in each and every case.

So with that said let’s proceed to examine if the use of tariffs as an economic policy to address and solve some of the nation’s problems.

Question A:   Select which of the following statements that are true regarding a US tariff.

(1). Tariffs are costs paid by companies that import products into the US.

(2). Tariffs are taxes.

(3). Tariffs are used to protect the products of US corporations/businesses from foreign competitors.

(4). Tariffs create more jobs in the US’s economy.

(5). Tariffs will reduce trade-imbalances between the US and foreign nations that tariffs are applied to.

(6). Tariffs improve the US’s competitive position in the global economy.

(7). Tariffs encourage innovation and competition in the US economy.

(8). Tariffs can be used by multi-national corporations to disadvantage US production (thus jobs)..

Answer - A:  2, 3, 8

Rationale -A:       2, 3 and 8 are true statements.

Tariffs are taxes, they generate revenue to the federal government. [Note: There as some variants of tariffs that are more a restraint of trade that stops or limits it.]

Tariffs are intended to protect domestic business(es) for any number of reasons which could have good consequences, bad consequences, or both. The intention is not a guarantee of results.

Multi-national corporations have a multifaceted relationship to tariffs. Since they are on both sides of the tariff boundary, these companies can use the tariff to their advantage on either or both sides.

Answers 4, 5, 6, and 7 are “maybes”. They may be true sometime and may not be true sometimes; it will depend upon other factors than just whether there is a tariff or not.

4 – Jobs may be created by imposing a tariff, or jobs may be lost, or it may not make any difference at all. It all depends upon the reaction of the consumers to the cost increase brought on by the tariff.
5 – Trade imbalance is determined by what is imported and what is exported and how the tariff affects both, plus any counter-reaction that the country(ies) might take to the tariff being imposed.
6 – Again the tariff creates a new condition which might promote actions that improve the US’s competitiveness, but there is also the possibility that the US’s competitive position could be damaged.
7 – This is a desirable objective but there is no guarantee that the imposition of a tariff will spur innovation or competition.

Answer 1 is incorrect. Tariffs are paid for by consumers. The consumer could be the end-users buying the product, or intermediaries who buy a product that becomes part of their product (like steel used to make a car). In the end, the cost of the tariff is paid for by the consumers (public). This is a basic economic ‘law of physics’ principle in that everything is paid for by consumers, since there isn’t any other entity that buys products.

Question B:   When a tariff is imposed by the US it must be applied to some entity’s product. Indicate if it would be appropriate to apply a tariff (A) or not (N) to the entity(ies) described in each of the following statements:

(1). A foreign company that is dumping products into the American market below the cost to produce the product.

(2). A country or group of countries producing a product that threatens US industries for the same/equivalent products.

(3). US multi-national businesses that use foreign facilities to produce their products.

(4). Foreign businesses that produce competitive products outside the US to those of US companies that produce those products in US-based facilities.

(5). US businesses that have to compete with products imported from other nations

(6). An alternative product made by a foreign company that disrupts the marketplace for products that are manufactured by US companies.

(7). US multi-national businesses that produce some products in US facilities and other products in foreign facilities that are imported to the US.

(8). A US start-up that is attempting to break into the marketplace supplied by imports from foreign companies.

Answer - B:  Appropriate choices: 1     [See ‘If and Only If’ for conditional A’s]
             Not appropriate choices: 2, 3, 4, 5, 6, 7, 8
              If and Only If, then these can be included as an A: 2, 3, 4, 8

Rationale -B:      
A – 1. Dumping is one of the conditions that warrants a tariff since it creates an actual unfair-trade situation to US industry.

N – 2, 3, 4, 5, 6, 7, 8. All these are instances of a competitive marketplace environment. Goods are made by domestic and international companies and they compete with each other. Some of the companies may be multi-nationals and so are both domestic and foreign in nature, if they compete with other domestic or multi-nationals in the US market then they are engaged in competition that exists to benefit the consumer.

Instance 6 is not only anti-competitive but is closer to protectionism to serve business interests than providing economic value to the US. If a US firm introduced the alternative (disruptive) product then it’s just business and the economy and consumers benefit.

If and Only If – 2, 3, 4, 8. These instances could fall into a tariff-able situation if they represented industries that were deem crucial to national security, economic stability, or maintaining a competitive global position.

Instance 7 is more complex. Applying a tariff to the foreign products may have consequences to the domestic products.

Question C:   Can a tariff on one product/industry have detrimental impacts on other domestic products/industries?         Yes  |  No

Answer - C:  Yes

Rationale -C:       Tariffs attempt to protect the product/industry it is defined to serve, but there are costs. The only reason a product/industry needs protection is that its foreign competitor(s) are selling their product cheaper. The tariff raises the price in the domestic market to remove that advantage. If demand for the product remains unchanged then there is less money available for other products in the US’s marketplace. This means that revenues going to other products are reduced with impairs the economy to whatever extent this operates recursively from product to product. If the overall demand for the protected product/industry is reduced because its price is higher the benefit(s) i.e., like jobs, that was anticipated is lowered.

The truth about tariffs is that there is no guarantee that in the short-term it will be good for the economy or that in the long-term it will be good for the economy; nor is there a guarantee that it will be bad. Hopefully there is someone who benefits at least for some period of time. But in the end, it’s a choice that a nation/government makes for some set of reasons. If the reasons are sound, prudent and rational; and if the consequences are as well understood as they need to be then hopefully the right choices are made to impose or not impose a tariff.

Question D:   If tariffs increase jobs and are thus good for the economy, then what would that logic indicate the US should do?
Indicate which statements follow from the logic of the statement being true.

(1). Tariffs should only be used when there is significant underemployment.

(2). Tariffs should be used whenever the economy isn’t growing fast enough.

(3). Tariffs should be used on all products for which there are US companies engaged in that business.

(4). Every product imported into the US should have a tariff on it.

(5). Tariffs should only be used to protect key industries.

(6). Tariffs should only be used when US imports exceed US exports.

Answer - D:  3

Rationale -D:       3 - If tariffs are always good for the economy, then they should be used in every case that they can be. Clearly the truth is that tariffs are not ipso facto good, there are conditional requirements that must be met to even give them a chance of being beneficial.

Some Conditional Requirements: Items 1 and 5 are instances that might warrant a tariff. But even these are only factors that might be used to determine if there are sufficient benefits to that will off-set the costs.

Item 4 is just a more extreme concept than 3 is, and the logic that would justify 4 is even less tenuous than that which invalidates 3. Just because ‘stupid’ isn’t fatal every time, doesn’t mean that ‘more stupid’ is safe.

Items 2 and 6 are already stated as conditional reasons to apply a tariff, so they self-violate the original premise. Plus you need to agree on what it means for the economy not to be growing ‘fast’ enough, and if the import/export trade imbalance is always a problem that impairs the US’s economy.

Question E:    Since other countries also impose tariffs on US products does that increase or decrease jobs in the US?    Increase   |   Decrease

Answer - E:  Decrease

Rationale -E:       This assumes that the logic of tariffs is a ‘fundamental’ economic force that is universal, i.e., it applies everywhere. If we agree that tariffs are a tit-for-tat situation, then other nations can and will apply ‘retribution’ tariffs which would have some impact on the US economic and jobs environments. As tariffs are basically a regressive action the net of tariff causes tariff (or worse a recursive: causes … causes …) is to reduce jobs ever where. Like any ‘curative’ agent, tariffs may provide some benefit at a cost that is worth the price, if the cost is limited and the benefits can eventually out-pace the cumulative costs. Unlike the people who make the decisions to use a tariff or not, the tariffs are indifferent to desired outcome and wishful thinking. Tariffs are just another step in the chain of ‘cause and effect’ that feeds into the economy.

Question F:    Tariffs have historically been directed at specific items or category of items. What reasons would be appropriate for determining that a product, goods, or service should be protected with a tariff?

(1). When they are essential to maintaining a core infrastructure necessary to sustaining minimal capabilities to support national security and defense needs.

(2). Protecting infrastructure that the economy is dependent upon: power, food, finance, telecommunication/internet, water, …

(3). Employment – Jobs: when unemployment is creating a national issue/risk for which the federal, state and local governments cannot find a better solution.

(4). When the US needs to sanction another nation for some non-economic reason.

(5). Protect consumers from dangerous products that are imported into the country.

(6). Enable US companies that are struggling to enter into a competitive market that is supplied by imported items to gain a market-share with tariff-based price support.

Answer - F:  1, 2, 3, 4, 5, 6

Rationale -F:        All of these items (1 to 6) could be a reason to enact a tariff; and they would be appropriate if the assessed cost incurred from the tariff were judged to be worth the reason to do so.

Question G:   Who pays for a tariff?

(1). Foreign country

(2). Foreign company

(3). Federal government

(4). US Businesses

(5). Consumers

(6). You

Answer - G:  5 and 6

Rationale -G:       Item 5 (the consumer) is the aggregate term for 6 (You). In the abstract it’s everyone who buys things, but subjectively that’s you. Even if you don’t buy the item being tariffed directly, you pay for it if it is embedded in products that you do buy, or it impacts the cost of other products that you buy, or it reduces the income/profits from products that you get benefit from.

The other items may also be impacted because of a tariff but they ultimately translate into you for domestic instances and your foreign counter-parts for the foreign entity.