The Retired Investor: Tariffs Rarely Work, So Why Use Them?

Tariffs are a form of tax applied on imports from other countries. The costs of these tariffs are mostly passed on to consumers in the form of higher prices for the targeted goods. In an inflationary environment, tariffs simply make things worse. Tell that to the candidates.

 

Historically, tariffs have been used to protect domestic industries like steel or aluminum manufacturers. They can and have often been used to strike back against other countries' unfair trade practices. They often lead to reduced trade, retaliation, and higher prices.

 

In today's political landscape, those economic findings have fallen on deaf ears. Both candidates for president are attempting to out-tariff each other. "Getting tough on China" seems to appeal to voters in swing states.

 

This week, President Biden said he plans to increase tariffs on Chinese EVs to 100 percent. He also doubled tariffs on Chinese-made solar cells and semiconductors to 50 percent. He also trebled existing tariffs on steel and aluminum products to 25 percent. Altogether, the new tariffs apply to $18 billion in Chinese products.

 

Donald Trump, the Republican candidate, who is credited with starting the tariff wars during his administration, fired back. "I will put a 200 percent tax on every car that comes from these plants," referring to Chinese vehicles that are attempting to find a back door for its exports by manufacturing in Mexico. Will we hear 300 percent by Robert F. Kennedy Jr.?

 

The rhetoric on Chinese electric vehicles is just that. China does not sell EVs in America. Their export markets are in Asia and Europe where consumers can buy a vehicle from China at affordable price (under $25,000). That is a far cry from the sticker prices offered by Tesla and the Big Three auto companies. The Biden tariffs in other areas are meant to protect U.S. green industry companies, as well as to support investment initiatives in domestic semiconductors.  

 

After World War II, tariffs had fallen out of favor given the negative economic impact of that practice. Trump resurrected the practice because it played well among his constituency. For most of Trump's presidency, the threat and actual levying of tariffs became a hallmark of his administration. Markets rode up and down with every utterance of the word tariff.

 

To bring a wide swath of factory jobs back to the U.S., Trump imposed $360 billion worth of tariffs on Chinese products. He also levied tariffs on several export products from the European Union and other countries. By the end of his term, none of those manufacturing jobs appeared. Consumers ended up paying more for a whole lot of goods and farmers were decimated to the point where the government had to give billions in handouts to keep many from going under. In the end, the trade balance between China and the U.S. remained about the same.

 

This time around, never a man to choose facts over fiction, Trump has promised to redouble his efforts. He wants to erect barriers to investment between the U.S. and China along with complete bans on imports of steel, electronics, and pharmaceuticals. He has also proposed an additional 10 percent tariff on all imports to the U.S., not just those from China. Hello, higher inflation.

 

Don't look to Biden, however, for a more rational approach. Biden had initially promised to roll back Trump tariffs on China if elected. Instead, once in office, he kept those tariffs and imposed even more restrictions on trade between the two countries as well, effectively doubling down on what Trump started. While the White House spin is that their tariffs are more focused and targeted than Trump's efforts, I see little difference.

 

What I do see, however, is a country whose economy is becoming more and more like China's form of state capitalism. The myth of free-market capitalism where efficiency and profits determine the allocation of capital is fast disappearing in the United States. If they ever did, neither candidate believes in that concept today Maybe that is a good thing.

 

Both men have actively pulled all the levers of government, be it regulations, tariffs, taxes, subsidies, or rhetoric to force the U.S. economy to conform to their vision of national interest.

 

We have seen this in action. The banning or sale of TikTok, the refusal to allow U.S. Steel to be purchased by a Japanese company and giving away billions to companies like Intel to build semiconductor factories in the U.S., are just some of a long list of government interventions in the economy under Biden.

 

Trump did the same. He pressured companies to keep factories open here as opposed to going overseas. He defended Boeing by raising tariffs on Canadian competitor, Bombardier. Steel tariffs were imposed on foreign producers including our best trading partners to protect our industry. I could go on, but you get the picture.

 

Don't get me wrong, and don't confuse economics with a country's political system. U.S. state capitalism is not socialism and likely never will be. It does, however, change the playing field for companies and their management.

 

The expectations that the government is trying to change how business behaves has already had an impact in the boardroom. Pressuring investments for or against ESG, denying acquisitions, launching investigations, browbeating and more are levers that are moving investment choices from maximum return to focusing on political expedience. It becomes more about who you know in the corridors of power. It is also an atmosphere where crony capitalism can thrive and grow.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.