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Tariffs and Trade Wars: Why Should You Care?

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Trade wars. Tariffs. These topics (and more) have filled the news cycle in recent months. For example, President Trump is considering new tariffs on $200 billion worth of goods from China. The European Union (EU) is signaling concessions from the threat of tariffs, in what appears to be a trade victory for the United States. To aid American farmers hurt by US tariffs, the Trump administration has announced that it would provide up to $12 billion in emergency relief for American.

With all the noise and activities bidding for one’s time and mental capacity, why should one care? We’ll seek to answer this question in this article. We’ll review some historical instances of tariffs, explain a number of key economic concepts, and suggest possible outcomes of the administration’s current trade policy.

Countries impose tariffs with the intention of protecting local industry from international competition and raising national tax revenues.

Tariffs through History

We see at least two instances of tariffs mentioned in the Bible—in the books of Ezra and Matthew. During the reign of Cyrus the Great, in Ezra 4:13 a letter directed to King Artaxerxes said the following: “May the king be further advised that if this city is rebuilt and its walls erected, its citizens will refuse to pay tributes, taxes, and tariffs, [emphasis added] thereby restricting royal revenues.”

Later, in Matthew 17:25, Jesus mentions kings collecting tariffs in a conversation with his disciples. “Yes, he said. When he went into the house, Jesus spoke to him first, ‘What do you think, Simon? Who do earthly kings collect tariffs [emphasis added] or taxes from? From their sons or from strangers?’”

Centuries after biblical times, on December 31, 1600, Queen Elizabeth I officially chartered the East India Company (EIC) to acquire and trade spices from the Far East. To assist them on this journey, the British government suspended tariffs on goods acquired during the first four expeditions. The EIC evolved from a private company into a quasi-government organization, and eventually into an arm of the British government. At its peak, the EIC would account for a large swath of the world’s international trade.[1]

Tariffs were used throughout the Bible and the history of the EIC, but what exactly are tariffs? Simply, tariffs are taxes on imported goods[2]. Countries impose tariffs with the intention of protecting local industry from international competition and raising national tax revenues. Four economic concepts that help us better understand tariffs are: comparative advantage, opportunity cost, trade-off and unintended consequences. We will tackle them in pairs.  

Comparative Advantage and Opportunity Cost

Simply because the British, during the era of the EIC, were better at producing a given output didn’t mean they wouldn’t trade for the same product from the Mughal (Indian) Empire. The Mughal Empire held the comparative advantage on certain goods. In 1817, David Ricardo defined comparative advantage as the ability to produce a good or service at a lower opportunity cost than another producer.[3]

So, what then is opportunity cost? Opportunity cost represents what you give up when you choose to perform one task over another. By profession, I am a technology consultant. I can make more money writing computer code and consulting than driving for Uber. If I drive for Uber, the opportunity cost of that action is the difference in income between working for Uber versus consulting.

Trade-Offs and Unintended Consequences

Trade, regulation and taxes often have unintended consequences. For example, as tariffs increase, the incentive for smuggling (as a method to evade tariffs) will also increase. As smuggling increases, so will the need for protective services against criminal activity. Since companies understandably insist on making a financial profit, it is the end consumer who ultimately pays the price for the increased law enforcement or the tariffs that increase the cost of consumer goods.

In addition to the unintended consequences, these mechanisms also have trade-offs. For example, if an individual is going to focus on one task, he must neglect the other, because time is a limited resource. In the words of Stanford economist Thomas Sowell:[4]

At any given time, a protective tariff for other import restrictions may provide immediate relief to a particular industry and thus gain the financial and political support of corporations and labor unions in that industry. But, like many political benefits, it comes at the expense of others who may not be as organized as visible, or as vocal.

When a government enacts a tariff or subsidizes an industry, it prompts unintended consequences and enables local business owners to sell or produce their goods at an artificially lower price. This gives them the advantage over competition. Government policy makers are aware of the plight this causes their citizens when it happens on an international level and they develop mechanisms to combat the disadvantage — they enact tariffs or subsidies of their own.

We should encourage our lawmakers to manage our nation’s finances in a responsible manner.

Tariffs Today

The majority of economists agree that tariffs are a net loss for America. They are taxes that burden the end consumer. Tariffs decrease consumer demand by increasing prices. This is an interpretation held by prominent American economists such as Milton Friedman,[5] Thomas Sowell[6] and many others. If tariffs are such a bad deal for Americans, then why is our country engaging in an apparent tit-for-tat retaliation?

If current headlines are true, this economic retaliation is brewing under the direct guidance of the White House. It is hard to believe that the consensus of economists — the inarguable reality that tariffs are a net loss — is being ignored for the minority opinion. Hopefully, our policy makers are using tariffs and other trade barriers as leverage to rectify perceived injustices against the United States.

Perhaps, as seems to be the case with the EU, our temporary reliance on tariffs will serve as leverage to modify international trade policy to the United States’ advantage. But, if tariffs are being used for misguided agendas, it is possible the current administration’s policies will end up hurting the American consumer.

A Christian’s economic incentive is ultimately not in this world. This, however, should not prevent believers from being wise stewards of our gifts, talents and abilities. These gifts reflect God to the watching world. We should wisely follow proven strategies as we manage our personal finances and encourage our lawmakers to manage our nation’s finances in a responsible manner. Self-interest is not necessarily ungodly when we acknowledge that all our resources are God-given. We all use God-given logic and rationale when we negotiate and accept the higher paying job offer. In the chess-game of international trade wars, we should expect our government to win.

[1] Ian Barrow, The East India Company (Indiana, Hackett Publishing Company, Inc., 2017), xxvii.

[2] Federic S. Mishkin, The Economics of Money, Banking, and Financial Markets: Fourth Edition (New York: Pearson Education, Inc., 2016), 474.

[3] N. Gregory Mankiw, Principles of Economics (Ohio: South-Western Cenage Learning, 2009), 55.

[4] Thomas Sowell, Basic Economics (New York, Basic Books, 2015), 491.

[5] Milton Friedman, Free to Choose (California, Harcourt, 1980).

[6] Thomas Sowell, Basic Economics (New York, Basic Books, 2015), 491.

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Logan Smith

Logan Smith holds a Bachelor’s of Science from Virginia Tech and a Masters of the Arts from the College at Southeastern. He is currently a senior consultant at a large firm in Washington D.C. Follow him on Twitter at @logansmith86.

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