Tariffs

Tariffs Are NOT Inflationary

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There is one assumption about tariffs mentioned by most observers that is incorrect. That particular assumption has to do with the effect of tariffs on inflation.

Tariffs are NOT inflationary. Tariffs are taxes imposed by a government on imported goods. Tariffs are assessed at the port of entry and must be paid before the goods can be unloaded. Whoever (businesses, consumers, etc.) imports the goods pays the tariff(s) to U.S. Customs and Border Protection, a government agency. Subsequently, remittance is made to the U.S. Treasury.

The tariffs (taxes) assessed and their collection process have nothing to do with inflation.

WHY TARIFFS ARE NOT INFLATIONARY

Most people see the higher prices and assume that inflation is bad and will get worse. If you ask someone/anyone what causes inflation, their response will be something that points to higher prices as the culprit. In other words, “inflation is bad because prices are higher”. Why are prices higher? “Because of inflation.” In other words, “inflation causes inflation”.

Adding further confusion to the circular reasoning above is that there are supposedly an infinite variety of types of inflation; i.e., food inflation, fuel inflation, house inflation, rent inflation, etc. The impression is that each of the so-called types of inflation affect inflation independently and collectively. Now we have “tariff” inflation.

It is all BS, of course. Inflation IS the continuous expansion of the supply of money and credit by government and central banks. Over time, the inflation causes a loss of purchasing power in the currency/U.S. dollar which shows up as higher prices generally. The higher prices are NOT inflation; they are the effects of inflation and are unpredictable in timing and extent. In addition, the effects (more than just higher prices) of inflation are cumulative and volatile.

Not all higher prices are the result of inflation; only those which result from the loss of purchasing power in the dollar. An excellent example of this happened post-Covid with disruptions in the global supply chain(s). (see High Prices Are NOT Inflation)

The higher prices resulting from tariffs have nothing do with inflation. Tariffs are deflationary.

TARIFFS ARE DEFLATIONARY

Tariffs and taxes take money out of circulation and are a depressant to economic activity. Small businesses feel it the worst and the soonest. Eventually all of us feel the brunt of the new “tax” in several ways: supply chain disruption, alternative sourcing, shortages, lack of choice, inferior goods, longer wait times, and higher prices.

Businesses will have less money to operate and consumers will have less money to spend. This is especially true because of the current broad application of tariffs to most goods and services and most countries.

CONCLUSION

Regardless of expressed intent by their proponents, tariffs are destructive in nature. Tariffs are self-inflicted wounds that can fester, grow worse, and spread infection on contact. Tariffs lead to higher prices for consumers, reduced choice, and a less efficient economy. There is nothing good that anyone can say about tariffs.

The financial markets don’t seem to recognize how bad the situation is and how much worse it can get. Uncertainty is mentioned frequently, but there doesn’t seem to be a consensus which can accept the reality of ongoing negative activity and reports.

Hanging around waiting for a change of heart by President Trump is ill-advised. Expecting the Fed to intervene in some way that dampens the negative effects of tariffs is naive.

The economic effects of bad policy can only get worse at this time. Investors, in general, are unprepared and very vulnerable. (also see The Looming Threat of Credit Collapse And Deflation and A Comprehensive Overview Of Tariffs)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

A Comprehensive Overview of Tariffs

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WHAT IS A TARIFF?

At its core, a tariff is a tax levied by a government on goods and services imported into the country. The primary purpose of tariffs is to generate revenue for the government.  Tariffs are sometimes used with the intention to protect domestic industries from foreign competition by making imported goods more expensive. This protectionist strategy aims to encourage consumers to buy locally-produced products, ultimately bolstering the national economy.

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Prices To The Tariff Circus Continue To Rise

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In my article “Trade Tariffs – The Worst That Could Happen” this past December, I said the following:

“Tariffs are taxes imposed on imported goods, ostensibly to protect domestic industries or gain a competitive edge. They are usually recommended and promoted by those who think they have identified an “unfair advantage” existing between trade partners.

Trade tariffs harm small businesses and result in inefficient allocation of resources. Trade tariffs hinder productivity and economic growth; and, they can lead to trade wars. The end result is always higher costs for consumers. 

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Trump’s Tariffs – National Security?

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A long-time friend of mine, a staunch free-market and free-trade advocate, emailed me shortly after I posted the article Trump’s Tariffs – Just More Bad News. An excerpt from his commentary follows:

“…while I still believe in free trade as a basic tool for maximum prosperity, especially in a perfect world, I have changed my view, and now I believe that under many circumstances, tariffs and even subsidies are crucial to our national security. Free trade is fine when talking about sweaters, stuffed animals, plastic bowls, and maybe even automobiles. But do we want to depend on China , or even Japan, for our steel, ammunition and pharmaceuticals? I think not.”  

I agree in principal that there may be occasions where selective use of tariffs and “even subsidies” might serve a protective purpose in our national interests.

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Trump’s Tariffs – Just More Bad News

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TRUMP’S TARIFFS 

President Trump has now followed through on his earlier threats to impose tariffs on trade partners and neighbor countries, Canada and Mexico. In so doing, he has accomplished nothing that will result in anything positive or worthwhile.

Tariffs are never justified and never produce the presumed results. They are self-inflicted open wounds that continue to fester. The action immediately raises the prices of certain imported goods which Americans buy from those countries. That forces negative financial decisions by consumers that will result in harmful economic consequences.

In addition, the danger of retaliation is heightened in this case because Trump’s actions are in blatant disregard for the existing USMCA treaty ratified by Congress during his first term in office. Actions and reactions by the countries involved escalate into trade wars that affect not just the specific countries but the entire global supply chain. There are many variables, including which particular goods are taxed, how long the tariffs are in place, etc., but the effects are always negative.

CONCLUSION

After passage of the Smoot-Hawley Tariff in 1930, America’s trade partners responded with their own tariffs. The results were historically horrible. Global trade fell by 65% and the Great Depression worsened. Some say it contributed to the beginning of World War II.

Hopefully, things will not get that bad. Just remember that nothing good will come of Trump’s tariffs. (also see Trade Tariffs – The Worst Is Yet To Come and The Danger of Trade Tariffs)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED