Let’s talk about tariffs, a subject of which the current President of the United States demonstrates time and time again that he has no basic understanding.
Tariffs are, in effect, a tax on imported merchandise. When it is determined that it is in the best interests of the United States, for whatever reason, to, in effect, raise the price of a particular good from a particular country as it is being imported into the United States, a tariff can be placed on that good from that country by the United States.
This is what the current president did quite recently with the tariffs placed on a whole host of imported goods including steel from various countries including China. Sounds reasonable, right?
However, I did say the president possesses a total lack of understanding of the concept of tariffs so let me explain.
The president recently stated that “billions are pouring into the U.S. coffers” from the tariffs placed on China. To better understand how seriously the president misunderstands tariffs it is essential to understand who pays the tariffs.
A product is manufactured in what is referred to as the country of manufacture. From there it is exported to an importing country, also referred to as the country of final destination. For our purposes, we are concerned with imports entering into the United States upon which tariffs, or import duties, will be due.
At times, that journey can take a rather circuitous route and enter into the commerce of other countries before reaching the United States, but for our purposes, the key factor is who ultimately pays the tariff once the merchandise enters into the commerce of the United States.
The answer to that question is you, the ultimate consumer of the imported product.
Accordingly, when the president claims that the tariffs on Chinese merchandise are resulting in our “coffers being filled,” it is entirely possible that he is technically correct. Revenue may indeed be generated with the collection of the higher duty rates.
However, it is not the Chinese manufacturer who is paying that tariff. Nor is it the importer of record in the United States who is paying that tariff. Neither is it the retailer in the United States who ultimately sells that product to the consumer. Since all import costs are factored into the final selling price, those coffers are filled by the American consumer who purchases that product at Walmart, Target, Amazon or any other outlet. Add to this cost placed on the American consumer the value of a trade war on American producers. When the United States makes the products of another country more difficult to be sold in the United States by raising the price of the imported good, guess what?
The other country retaliates by making it more difficult for U.S. producers to sell their goods in that country. What we now have has all of the makings of a trade war, something that Senior Economic Adviser Larry Kudlow denies every time I ask him if we have entered into a trade war yet.
The evidence of a trade war started with the imposition of tariffs by the United States, however, cannot really be denied or ignored. As a matter of fact, the more than $12 billion needed to bail out U.S. farmers, especially those who raise and export soybeans, is clear evidence of the dire effects of the trade war in which we currently find ourselves.
Who will pay for that $12 billion bailout? Not Mexico. It will be the American taxpayer so you can add that cost to the costs already borne by the American taxpayer as a result of the Trump-initiated trade war.
Speaking of Mexico, specifically as it relates to tariffs, anyone wonder how Trump envisioned Mexico paying for that boondoggle of a wall? My guess is through increased tariffs since he has already demonstrated his blatant misunderstanding that tariffs are paid for by the country from which the merchandise is exported.
Clearly, this is not how it works, and any expectation that Mexico would pay for that wall through the imposition of tariffs on Mexican-produced goods was doomed from the start.
Yet, just recently, Trump stated again that Mexico would pay for that wall, if not directly, then “indirectly.” Indirectly?
My guess is, once again, that by indirectly he is thinking tariffs. Maybe he is thinking that the “New NAFTA”, or the United States Mexico Canada Agreement (USMCA), as he likes to call it, will result in financial benefit to the United States through tariffs on Mexican made goods entering the United States that he can claim can be used to pay for that wall.
A couple of problems with this line of thinking, however. First of all, that is not how the appropriations process works. Even if the new trade agreement with Mexico and Canada did generate, somehow, revenue for the United States, that money would go into the general fund from which it would have to be appropriated by Congress for specific programs and expenses. Unless that wall receives particular funding from Congress, that wall will not see any funding from Mexico including tariffs.
Lastly, and maybe even more revealing about the Trump misunderstanding of tariffs, is that NAFTA, whether new or old and whether you rename it as the United States Canada Mexico Agreement or not, is about free trade. Remember it is the North American FREE Trade Agreement. Free trade means no tariffs; no tariffs on those products included in the agreement. Hard for that wall to be paid for with tariffs on Mexican made goods purchased by Americans in the United States and paid for by Americans in The United States when the Mexican-made merchandise is tariff-free.