Tariffs, Explained

May 15, 2019 4:56 pm

Derek M. Amey

Partner & Portfolio Manager

Those who cannot remember the past are condemned to repeat it”
-George Santayana, Famed philosopher and poet

Last Friday President Trump announced he would hike tariffs on another $200 Billion of Chinese goods.  For months, the stock market seems to rally and then selloff based on anonymous sources talking about the progress of finding a resolution to the tariffs. As I think about tariffs and their impact on Americans, I can’t help but think a lot about George’s quote above. The recent news about the tariffs’ impact on our spending should not come as a surprise, given US economic history.

The current imposed tariffs are extremely complex, and applications are wide-ranging. Which goods are affected, and to what degree varies from one industry to the next. Today I want to focus on one specific item: washing machines.

As I’ve told many of my own clients during the past year, my wife and I had to replace a broken washing machine in 2018. As I priced out a new machine and did some research online, I started to get the sense I was going to end up paying more for a new washer & dryer than in previous years. Some recent news has confirmed my suspicions- my wife and I paid more than we would have in previous years for a similar model, due to tariffs.

Tariffs explained
There are a lot of misconceptions about tariffs, especially about who pays them and where those funds go, so let’s address these issues first. When a US company imports my new washing machine from a foreign company, the US company needs to know what taxes and tariffs need to be paid on that washing machine. The company that imports my new washer is then responsible for paying the taxes and tariffs to the federal government. As President Trump has increased tariffs on specific goods (including washing machines), the total price for those goods increases, and the importing company must pay more to bring them into the country. In short, tariffs are nothing more than a tax that importing companies must pay.

Most of the confusion around tariffs is about the question, “Well who really pays for that increased cost?” There are really only a few different options:

  • The importer pays for the higher tariff, and if they don’t change the price of the washing machine that they sell to me, the importer essentially pays for the tariff out of their profits.
  • The importer can ask the company making the washing machine to lower their prices to offset the higher tariff. If the importer is successful, then the exporting company would essentially be paying the tariff.
  • The importer can pay the higher tariff. But if they want to protect their profits, they can pass that increased cost on to me in the form of a higher price at the store. In this scenario, as the consumer I’m essentially paying for the higher tariff, as well as anyone else buying a washing machine.

It is this last scenario that I want to focus on, because after a year of higher tariffs on washing machines we’re starting to see confirmation that as consumers, every American is paying for these higher tariffs.

Where we are
In January 2018, President Trump imposed a tariff of 20% on all imported washing machines. It’s interesting to note that dryers were not and so far have not been impacted by any tariff increases (more on that in a moment).

Last month three economists released a paper which documented their findings on the cost impact following a full year of higher tariffs on washing machines. Their conclusion was “in response to the 2018 tariffs on nearly all source countries, the price of washers rose by nearly 12 percent; the price of dryers—a complementary good not subject to tariffs—increased by an equivalent amount.” So not only did I pay more for my washer to offset the higher tariffs than I would have in previous years, but I also paid more for the dryer that wasn’t even affected by tariffs! The increase in the price of the dryer means just more profits for everyone, at the expense of my wallet. These increases are trivial, by the way- according to their study they estimate that we’re all paying $86 more for the washer, and $92 more for the dryer for a combined total of $178. Source: https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_201961-1.pdf

I’m not arguing that the approach that President Trump is taking with these tariffs is right or wrong. It’s impossible to know if they are until a deal is reached and some analysis can be applied to the outcome. However, it is important to know that in the case of washing machines and dryers, every American consumer is paying these tariffs. This outcome, whereby American consumers end up paying the tariffs is not new. Recent history under Presidents Obama and Bush show the identical outcome.

President Obama passes higher tariffs
Back in 2009, following pressure from lobbyists, President Obama increased tariffs 35% on Chinese-made tires. This was not headline news back in 2009, and it certainly didn’t move the stock market. The primary reason it didn’t impact the economy or the market was that the administration at that time didn’t expand the tariffs to any other goods. In fact, by 2012 the tariff expired without much fanfare. Source: http://www.nbcnews.com/id/32808731/ns/business-world_business/t/obama-imposes-tariffs-chinese-tires/

Years later, an analysis was done to see what the economic impact of these tariffs were to the tire industry and consumers. The results concluded that consumers ended up paying more per tire than they would have in previous years. They also found that even the American manufacturers responded to the higher tariffs by increasing their own prices per tire. At the time there was a lot of debate about if these tariffs really did create or protect the jobs here in the US (and at what cost), but what isn’t debated is that the American consumer paid more for a similar good due to the tariffs. Source: https://piie.com/sites/default/files/publications/pb/pb12-9.pdf

President Bush passes higher tariffs
Back in March of 2002, President Bush passed tariffs on steel imports. President Bush increased the tariffs on imported steel from 1% to around 30%. By the end of 2003, President Bush lifted the tariffs because research at the time was showing that the tariffs were actually hurting the economy and employment in steel-related industries. Much like in previous examples, the analysis shows that the tariffs resulted in higher prices passed directly to the consumer. Source: https://en.wikipedia.org/wiki/2002_United_States_steel_tariff

Summary
I am not criticizing President Trump’s decision to impose tariffs on Chinese goods. Presidents from both parties have used tariffs in the past to try and negotiate new trade policies with China, although on much smaller scales. Until an agreement between the US and China is passed, we won’t know if this current policy move is the right one.

However, what we do know and what the history of previous tariffs has shown is that the consumer bears a large portion of the costs of these tariffs. This extra cost that the company importing the good incurs is passed on to American consumers. Those tariff dollars, that the government is taking in via the tariffs, are then ultimately dollars that can’t be spent on other goods and services. Tariffs are a tax to consumers, plain and simple, and as President Trump increases tariffs in both size and scope, every consumer is going to start to feel the pain… even if you aren’t buying a washing machine.

 

Derek Amey serves as Partner and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.