If you are a regular reader of my blog posts, you've probably noticed that I haven't written a decent blog post in quite some time. I don't think I've written anything that I'm remotely proud of since my post about California more than a year ago. I can't really promise that the post I'm writing now is going to be any good either, but I can promise you it will be unique. The subject of this blog post is going to be uniquely boring. I'm about to write about tariffs.
That last sentence may have lost about half my readers, but if you are still reading this please stick around, because tariffs are pretty important. As you might have noticed, the stock market has been tanking since Trump announced his tariffs on steel and aluminum, and I wouldn't be surprised if the economy as a whole starts to slump as a result of these tariffs.
Before going on, I want to make it clear that my opposition to Trump's tariffs have nothing to do with my general opposition to Trump. I've always been opposed to tariffs of any kind. I've always been in favor of free trade, which puts me very much in opposition to many of my fellow liberals. While I've never voted for a Republican, I've generally been happy with the trade policies of Republicans prior to Trump. The fact that Trump is going against the typical Republican position on tariffs, and Bernie Sanders supported tariffs in the 2016 campaign lends credence to the idea that tariffs do not need to be a politically partisan issue. Whether you are a Trump-loving conservative or a WTO-hating liberal, I'm hoping this post will help convince you that Trump's tariffs are a terrible idea.
Just to make sure we are all on the same page, I'm going to start by defining what a tariff actually is. A tariff is a tax on the importer of a particular good needs to pay to the customs authority of the country imposing the tariff. However, it is also possible the importer and exporter can reach an agreement for the exporter to pay the tariff or part of the tariff via a Delivered Duty Paid agreement. Regardless of whether the importer or exporter pays the tariff the importer will general have to pay my money to procure a product a tariff is being imposed on. Let's say an exporter in a country outside the USA acquires rubber balls for the equivalent of 89 US cents and sells them to an American importer for 1 dollar in the absence of any tariff. If the USA were to impose a 10% tariff on rubber balls, the importer is likely to spend more than 1 dollar per ball going forward even if the exporter agrees to pay all of the tariff. If the exporter was making a 11 cents per ball profit before the tariff, it's unlikely that the exporter could afford to make only a 1 cent profit per ball after the paying the 10 cent tariff per ball. It's likely that the exporter will raise their price a bit to more than 1 dollar per ball, which would effectively make the importer absorb some of the price of the tariff even if the exporter is officially paying all of the tariff.
In any case, the bottom line is that tariffs on a given product will generally increase the amount of money an importer will have to spend to acquire a given amount of that product. If the importer needs to pay more for the product, retailers generally need to pay more for the product, and most people would argue that this mean the cost of a tariff is ultimately passed on to the consumer.
In fact, the argument that "tariffs are passed on the consumer" is the most common argument I've heard from people who are opposed to tariffs. However, while this is certainly an argument I would often make against tariffs, I don't want the make a blanket statement that the costs of tariffs are always passed down to the consumer, because I can think of scenarios where this might not be true. I say that because a retailer will not always respond to rising expenses by raising prices.
One of the most simple examples of this how the owners of sports teams set ticket prices. For years, I've heard sports fan blame the players for rising ticket prices. They'll say something like, "If those greedy players didn't demand such high salaries, ticket prices wouldn't be so high." However, that's simply not true. Consider what would happen if the the salaries of all baseball players, were magically reduced by 90%. Would the baseball owners cut ticket prices by 90%? Would the baseball owners cut ticket prices by even 1%. No, they wouldn't, because there would be no rational reason for the baseball owners to give up any revenue. Sports team set ticket prices to maximize revenue. They will try to maximize revenue regardless of how high or low their expenses are. More specifically, they try to set their ticket prices in such a way to maximizes the value of ticket revenue in the following formula ...
Ticket Revenue = (Average Ticket Price) x (Number of Tickets Sold)
Clearly, lowering the Average Ticket Price ( ATP ) will raise the Number of Tickets Sold ( NTS ) and raising the ATP will lower the NTS. So, teams simply can't raise ticket revenue by raising ticket prices. There are times that raising ticket prices might reduce ticket sales so much that ticket revenue would fall. Conversely, there are times that reducing ticket prices might boost ticket sales so much that ticket revenue would increase. My point here is that sports team probably employ groups of really smart people to figure out the optimal ticket prices to maximize revenue, and those people have no reason to take player salaries into account, because the process of maximizing ticket revenue has nothing to do with the expense of player salaries.
Just like rising player salaries don't lead to high ticket prices, tariffs that lead to higher costs for retailers won't always lead to higher prices for consumers. However, they usually will, because retailer need to focus on the total profit they make from sales rather than the total revenue. For example, let's say a New York store owner sells 100 Mets caps a month at a price of $10. Well, in this case, the store makes $1000 in revenue from Mets caps each month. Let's say the owner is aware of market research that suggest that the store could sell 200 Mets caps a month if the price dropped to $7.50 per cat. While dropping the price of the cap to $7.50 would raise the revenue to $1500 a month, it may not be a good idea. If it cost the store owner $8 to get each Mets cap, then dropping the retail price of the cap to $7.50 would obviously be a terrible idea, because the store owner would be losing 50 cents for each hat sold. So while owner of sports teams try to set prices in a way that will maximize revenue, retailers try to set prices to maximize profit made for each product is a given amount of time. In other words, a retailer tries to maximize Profit from Product in the formula below ....
Profit from Product =
( (Retail Price of Product) - (Cost of Product to Retailer) ) * ( Units of Product Sold )
A tariff on a product will almost always increase the "Cost of Product to Retailer" for a given product. In the absence of any change in the retail price of the product, an increase in the cost of he product to the retailer will decrease the profit for the retailer. In most cases, the retailer will increase the retail price in order to get back some of the lost profit, but this won't always be the case. It's possible that the consumers of the product might be very sensitive to any price change. It's possible that even a tiny increase in the price of the product might push consumers to by a similar yet cheaper product. In that case, the retailer might not have any choice but to keep the price of the product the same and accept the lower profits. Conversely, it might be the case that the product is something that consumers find essential and many would be willing to pay more for. In that case, retailers could increase the retail price of a product after a tariff is imposed on it and make more profit than they would have made by keeping the retail price of the product static.
In any case, I'm not quite sure why I spent all this time writing about why tariffs won't necessarly lead to higher prices for consumers ( aside from the fact that I've always been annoyed by people who blame high-paid athletes for high ticket prices, and I wanted to prove them wrong ) because I'm undermining my position that tariffs will usually lead to higher prices. It will usually make sense for a retailer to raise prices after a tariff raises their costs, because when profit margins are low ( which they often are in retail ), the profit-per-unit gained by raising prices after a tariff will outweigh the profits lost by losing sales. For example, consider the example of the Mets cap I brought up earlier. If the 100 caps are sold a month at a price of $10 and each cap cost the store 8 dollars to acquire, the store would be making $200 a month of profit on the Mets caps. If a tariff is placed on Mets caps ( I know that's a stretch, but if Rudy Giuliani's campaign for president has been successful 10 years ago, and I guarantee you there would have been tariffs on Mets everything, regardless of whether the items were imported or not. ) and the cost of Mets caps for retailers becomes $9 after a tariff, the store owner's profits on Mets caps would drop to $100 a month if the retail price of the Mets cap was not changed. In this case, I think the owner could expect profits to go up if the retail price of the Mets cap was raise from $10 to $11, because raising the price to $11 dollars would double the per-cap profit from $1 to $2, and it is unlikely that sales of the cap would drop more than 50% if the retail price was raised from $10 to $11. Even if raising the price of the Mets cap from $10 to $11 dollars made sales go down by 40%, the store owner would make $120 dollars a month on Mets caps ( $2 profit/cap x 60 caps/month ) verses the $100 a month on Mets cap ( $1 profit/cap x 100 caps/month ) the store owner would have made if the retail price of the caps had remained at $10.
Still a profit of $120 a month isn't as good as the pre-tariff profit of $200 a month ( nor would a profit of $198 a month be as good as $200 a month if sales of Mets caps caps had only fallen to 99 caps a month after the retail price of the cap was raised to $11. I think it reasonable to expect some loss in sales for any price increase, so the store owner would not be able to recoup lost profit simply by trying to pass the entire cost of the tariff on the consumer ). The store owner would definitely be worse off after the tariff was imposed, as would the consumers who would now be paying $11 for Mets caps rather than $10. And that brings me to the main point I'm trying to make; tariffs hurt almost everybody. They hurt both retails and consumers, not to mention anyone in the import/export business. They only people who are helped by tariffs are the people in the USA who make the product a tariff is being imposed on. However, I would content a lot more people are hurt than are helped by tariffs. Take Trump's steel tariffs for instance. According to Moody's Investor's Services, there are 6.5 millions Americans who work in industries that consume steel, and only 140,000 Americans who work in the steel industry. Not only will these tariffs on steel and aluminum hurt a lot more workers than they will help, but they go against some of basic principals of capitalism the President Trump's party is supposed to be in favor of. Republicans have historically believed that the government should leave private businesses alone, but tariffs do the opposite of that. When a government imposes a tariff, it is picking winners and losers in the economy instead of letting the invisible hand of the market choose winners and losers. Trump's steel and aluminum tariffs are making winners out pf American steel and aluminum companies, and making losers out of the auto industry, beverage companies, and all other American industries that benefit by getting imported steel and aluminum at low prices. For that reason, I'm sure Ayn Rand's long-lost grandson Paul Ryan hates the idea of these steel and aluminum tariffs, but he'll ultimately cave-in and support Trump's tariff policies, because like almost all Republicans he'd rather abandon his principles to support a terrible Trump policy than face the wrath of Trump-loving voters in a Republican primary.
This is unfortunate, because if enough Republicans in Congress found the political courage to do so, they could team up with Democrats to take Trump's power to impose tariffs away I should emphasize that if Congress did take action to reduce the power of the president to impose tariff, it would not just affect President Trump, but all future presidents. This would be a good thing, because something that could affect as American lives as tariffs should not be in the hands of a single person. I know that very few ( if any ) Republicans read my blog posts on a regular basis, but if you are a Republican or are a constituent of a Republican member of the House or Senate, please considering letting that congressperson know you believe Trump's tariffs are a terrible idea for our country. I know it probably won't any difference at all, but there's zero chance these tariffs will be stopped if Republicans don't speak out against it. C'mon, there are probably more Republicans who believe in free trade than Democrats who do, so if these tariffs are going to be stopped, its the Republicans who are going to have to do it.
Rich
In any case, the bottom line is that tariffs on a given product will generally increase the amount of money an importer will have to spend to acquire a given amount of that product. If the importer needs to pay more for the product, retailers generally need to pay more for the product, and most people would argue that this mean the cost of a tariff is ultimately passed on to the consumer.
In fact, the argument that "tariffs are passed on the consumer" is the most common argument I've heard from people who are opposed to tariffs. However, while this is certainly an argument I would often make against tariffs, I don't want the make a blanket statement that the costs of tariffs are always passed down to the consumer, because I can think of scenarios where this might not be true. I say that because a retailer will not always respond to rising expenses by raising prices.
One of the most simple examples of this how the owners of sports teams set ticket prices. For years, I've heard sports fan blame the players for rising ticket prices. They'll say something like, "If those greedy players didn't demand such high salaries, ticket prices wouldn't be so high." However, that's simply not true. Consider what would happen if the the salaries of all baseball players, were magically reduced by 90%. Would the baseball owners cut ticket prices by 90%? Would the baseball owners cut ticket prices by even 1%. No, they wouldn't, because there would be no rational reason for the baseball owners to give up any revenue. Sports team set ticket prices to maximize revenue. They will try to maximize revenue regardless of how high or low their expenses are. More specifically, they try to set their ticket prices in such a way to maximizes the value of ticket revenue in the following formula ...
Ticket Revenue = (Average Ticket Price) x (Number of Tickets Sold)
Clearly, lowering the Average Ticket Price ( ATP ) will raise the Number of Tickets Sold ( NTS ) and raising the ATP will lower the NTS. So, teams simply can't raise ticket revenue by raising ticket prices. There are times that raising ticket prices might reduce ticket sales so much that ticket revenue would fall. Conversely, there are times that reducing ticket prices might boost ticket sales so much that ticket revenue would increase. My point here is that sports team probably employ groups of really smart people to figure out the optimal ticket prices to maximize revenue, and those people have no reason to take player salaries into account, because the process of maximizing ticket revenue has nothing to do with the expense of player salaries.
Just like rising player salaries don't lead to high ticket prices, tariffs that lead to higher costs for retailers won't always lead to higher prices for consumers. However, they usually will, because retailer need to focus on the total profit they make from sales rather than the total revenue. For example, let's say a New York store owner sells 100 Mets caps a month at a price of $10. Well, in this case, the store makes $1000 in revenue from Mets caps each month. Let's say the owner is aware of market research that suggest that the store could sell 200 Mets caps a month if the price dropped to $7.50 per cat. While dropping the price of the cap to $7.50 would raise the revenue to $1500 a month, it may not be a good idea. If it cost the store owner $8 to get each Mets cap, then dropping the retail price of the cap to $7.50 would obviously be a terrible idea, because the store owner would be losing 50 cents for each hat sold. So while owner of sports teams try to set prices in a way that will maximize revenue, retailers try to set prices to maximize profit made for each product is a given amount of time. In other words, a retailer tries to maximize Profit from Product in the formula below ....
Profit from Product =
( (Retail Price of Product) - (Cost of Product to Retailer) ) * ( Units of Product Sold )
A tariff on a product will almost always increase the "Cost of Product to Retailer" for a given product. In the absence of any change in the retail price of the product, an increase in the cost of he product to the retailer will decrease the profit for the retailer. In most cases, the retailer will increase the retail price in order to get back some of the lost profit, but this won't always be the case. It's possible that the consumers of the product might be very sensitive to any price change. It's possible that even a tiny increase in the price of the product might push consumers to by a similar yet cheaper product. In that case, the retailer might not have any choice but to keep the price of the product the same and accept the lower profits. Conversely, it might be the case that the product is something that consumers find essential and many would be willing to pay more for. In that case, retailers could increase the retail price of a product after a tariff is imposed on it and make more profit than they would have made by keeping the retail price of the product static.
In any case, I'm not quite sure why I spent all this time writing about why tariffs won't necessarly lead to higher prices for consumers ( aside from the fact that I've always been annoyed by people who blame high-paid athletes for high ticket prices, and I wanted to prove them wrong ) because I'm undermining my position that tariffs will usually lead to higher prices. It will usually make sense for a retailer to raise prices after a tariff raises their costs, because when profit margins are low ( which they often are in retail ), the profit-per-unit gained by raising prices after a tariff will outweigh the profits lost by losing sales. For example, consider the example of the Mets cap I brought up earlier. If the 100 caps are sold a month at a price of $10 and each cap cost the store 8 dollars to acquire, the store would be making $200 a month of profit on the Mets caps. If a tariff is placed on Mets caps ( I know that's a stretch, but if Rudy Giuliani's campaign for president has been successful 10 years ago, and I guarantee you there would have been tariffs on Mets everything, regardless of whether the items were imported or not. ) and the cost of Mets caps for retailers becomes $9 after a tariff, the store owner's profits on Mets caps would drop to $100 a month if the retail price of the Mets cap was not changed. In this case, I think the owner could expect profits to go up if the retail price of the Mets cap was raise from $10 to $11, because raising the price to $11 dollars would double the per-cap profit from $1 to $2, and it is unlikely that sales of the cap would drop more than 50% if the retail price was raised from $10 to $11. Even if raising the price of the Mets cap from $10 to $11 dollars made sales go down by 40%, the store owner would make $120 dollars a month on Mets caps ( $2 profit/cap x 60 caps/month ) verses the $100 a month on Mets cap ( $1 profit/cap x 100 caps/month ) the store owner would have made if the retail price of the caps had remained at $10.
Still a profit of $120 a month isn't as good as the pre-tariff profit of $200 a month ( nor would a profit of $198 a month be as good as $200 a month if sales of Mets caps caps had only fallen to 99 caps a month after the retail price of the cap was raised to $11. I think it reasonable to expect some loss in sales for any price increase, so the store owner would not be able to recoup lost profit simply by trying to pass the entire cost of the tariff on the consumer ). The store owner would definitely be worse off after the tariff was imposed, as would the consumers who would now be paying $11 for Mets caps rather than $10. And that brings me to the main point I'm trying to make; tariffs hurt almost everybody. They hurt both retails and consumers, not to mention anyone in the import/export business. They only people who are helped by tariffs are the people in the USA who make the product a tariff is being imposed on. However, I would content a lot more people are hurt than are helped by tariffs. Take Trump's steel tariffs for instance. According to Moody's Investor's Services, there are 6.5 millions Americans who work in industries that consume steel, and only 140,000 Americans who work in the steel industry. Not only will these tariffs on steel and aluminum hurt a lot more workers than they will help, but they go against some of basic principals of capitalism the President Trump's party is supposed to be in favor of. Republicans have historically believed that the government should leave private businesses alone, but tariffs do the opposite of that. When a government imposes a tariff, it is picking winners and losers in the economy instead of letting the invisible hand of the market choose winners and losers. Trump's steel and aluminum tariffs are making winners out pf American steel and aluminum companies, and making losers out of the auto industry, beverage companies, and all other American industries that benefit by getting imported steel and aluminum at low prices. For that reason, I'm sure Ayn Rand's long-lost grandson Paul Ryan hates the idea of these steel and aluminum tariffs, but he'll ultimately cave-in and support Trump's tariff policies, because like almost all Republicans he'd rather abandon his principles to support a terrible Trump policy than face the wrath of Trump-loving voters in a Republican primary.
This is unfortunate, because if enough Republicans in Congress found the political courage to do so, they could team up with Democrats to take Trump's power to impose tariffs away I should emphasize that if Congress did take action to reduce the power of the president to impose tariff, it would not just affect President Trump, but all future presidents. This would be a good thing, because something that could affect as American lives as tariffs should not be in the hands of a single person. I know that very few ( if any ) Republicans read my blog posts on a regular basis, but if you are a Republican or are a constituent of a Republican member of the House or Senate, please considering letting that congressperson know you believe Trump's tariffs are a terrible idea for our country. I know it probably won't any difference at all, but there's zero chance these tariffs will be stopped if Republicans don't speak out against it. C'mon, there are probably more Republicans who believe in free trade than Democrats who do, so if these tariffs are going to be stopped, its the Republicans who are going to have to do it.
Rich
