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Tuesday, May 3, 2016

Why Tariffs are Harmful

In the current Presidential campaign, much attention has been given to the trade with China or Mexico. Many have complained regarding the trade deficit and how it has impacted jobs. "We need jobs!", says the politician.  So, the proposal to "get jobs back" is to raise tariffs on China. Will this work? Answer: No.

A simple example: Inventory

Suppose that you owned a store. And, you sold only one good. That good was green beans. Your price of your green beans is based on many factors, one of which is the amount of green beans you had in your inventory to sell. In your process of doing business, the farmers that produce green beans discovered some sort of fungi that was destroying the green beans or making them unsuitable to eat. What happens next? In this case, the total inventory of green beans is shrunk, causing the prices of green beans to rise, with the demand remaining constant. 

Tariffs act as the fungi in trade, using our example. It simply is a tax that shrinks the overall inventory of that good, thus making the price if this good higher. Politicians assume, to wit, falsely assume, that they will raise more tax revenue by employing higher tariffs. While this seems workable on paper, in reality, humans will re adjust their purchasing preferences, due to the increased prices. The revenue generated from the tariffs will decrease. This action is tantamount to raising taxes to increase revenue. 

Raising Tariffs: It does not create Jobs

Job growth is spawned from proper capital investment and expansion. This comes from a pooling of savings. Employing or raising Tariffs is no different that raising taxes. This action simply taxes the original factors of production: land, labor and capital. Since it shrinks the inventory, it "taxes" the business owner. The business owner can not pass the tariff forward to the consumer. The consumer, over time, will seek alternatives, forcing the business owner to lose revenue. 

Conclusion

This brief article only shows a small negative impact of tariffs. The impact can be wide ranging, as the total inventory of a good is based on the global supply. Tariffs simply shrink the overall global inventory of that good, this driving prices 

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