About Tariffs

A tariff is a tax placed on goods imported from one country into another. 

The purpose is to raise the cost of the imported goods.

Countries do this to protect domestic businesses from foreign competition.  By making foreign products more expensive, the domestic product can match or even beat the price of the imported product.

In economic theory, all other things being equal, the product with the lowest price is the one that consumers will buy.

Here is how it works…

Let’s say India has invented a new medical device.  Each of these devices takes hundreds of labor hours to be put together.  India can build one of these devices for $1,000.  The United States wants to get in the market of building this device.  The problem is that the cost of labor in the United States is far higher than that in India so when we build the product, it costs us $1,500.  In other words, our product costs 50% more than the identical product built in India.

In the U.S., the decision is made to impose a 50% tariff on the Indian product.  This means that when the product is imported from India, the company that imported it, probably a local retailer, will have to pay an additional 50% just for the privilege of importing it. 

The importing company will then pass this new cost along to the end user (consumer).  So now, you can find both the product from the United States and the product from India sitting side-by-side on a shelf; both selling for $1,500. 

Trump calls this 50% tariff a windfall.  He implies that India is paying the U.S. government a tax when it fact, they are not.  The importer pays the higher amount but in the end, even he is not paying the tax.  The “tax” is paid when the consumer, who used to by the product for $1,000 now pays, $1,500.  No one other than the consumer paid this tax.

Trump says we will get so much money from Tariffs that he will be able to eliminate income tax.  Theoretically this is true.  If tariffs raise the cost of consumer goods so much that the income from tariffs, which is paid by the consumer, can cover all income needed from income tax, then you could eliminate income tax. 

Another way of saying this is that if you pay $20,000 more a year for goods because of tariffs, you should see your income tax bill go down by $20,000.  Do you really care?  $20,000 is $20,000 no matter how the government collects it.

So, why does Trump not tell you the whole story?

I have two theories.  The first is that he thinks you are too dumb to understand how tariffs work. 

The second theory is that he is too dumb to understand how tariffs work.

I’ll leave you with this thought…

Late Professor William T. Kelley taught Marketing at Wharton School of Business and Finance, University of Pennsylvania, for 31 years, ending with his retirement in 1982.  Dr. Kelley, who also had vast experience as a business consultant, was the author of a then-widely used textbook called Marketing Intelligence — The Management of Marketing Information (originally published by P. Staples, London, 1968).  Dr. Kelley taught marketing management to both undergraduate and graduate students at Wharton. 

Professor Kelley said  “Donald Trump was the dumbest goddam student I ever had.”

Just sayin…