What Is The True Cost of Tariffs For Americans?

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There are a lot of downsides to the hyper-partisanship that marks the current political environment in the U.S., but perhaps the greatest of them is that truth has become subjective. There seems to be two alternate realities in every situation, based on which side of the divide you favor.

In some cases, that is understandable as there is room for interpretation, but most of the time both views are incorrect, and the truth lies somewhere between the two extreme positions.

The effects of tariffs and who pays the associated costs are a good example of that.

Donald Trump has declared himself a “Tariff Man,” and now seems to hand them out like Oprah giving away cars: ”You get a tariff, and you get a tariff!”

They are seen by this administration as a tool to punish and alter the behavior of other countries and, most importantly one that has no political downside. Polls indicate that his supporters like the idea of punishing other countries for slights, real or perceived, and the more he does it, the more fervent their support.

The love of tariffs, however, can only be maintained if you believe that they won’t hurt you, and that the costs fall on others. Trump has, on multiple occasions, said how wonderful it is that China is paying all these taxes into the U.S. Government’s coffers, but that view of who pays these tariffs, to be charitable, is somewhat naïve.

There is no lack of naiveté on the other side either.

As the multitude of Democratic candidates for President compete to see who can espouse the most left-wing positions, a clear narrative about the effects of tariffs has emerged. They are, we are told, simply a tax on the “hard-working American families” so beloved by politicians, as if there were no effect whatsoever on the exporting country.

If that is the case though, why are the Chinese, and now the Mexicans, negotiating and making concessions to end them?

The positions being staked out here seem confusing, but are informative for rational people. They point to the absurdity of political parties and the politicians that lead them. It is not that long ago that Republicans were the party of free trade and Democrats, urged on by labor unions, were in favor of imposing tariffs to “protect” American jobs.

The fact that those positions are now reversed tells you all you need to know about the intellectual honesty and consistency of politicians.

However, the problem for investors is that it is hard to cut through all the rhetoric and assess the probable impacts of tariffs on their portfolio. When you strip away the spin, logic dictates that tariffs cannot be good in that regard. To understand why, you must have a more nuanced understanding of who pays the tax that the Treasury is collecting.

In theory, the tax is paid entirely by the exporter. If the Chinese company that makes widgets for the U.S. market is forced to pay, say, $5 per widget to send their products to America, they are the ones that write the check. But that doesn’t always mean that they bear the cost.

They could, and probably would initially, but then they usually increase the price they charge to the importer to wholly or partially cover the tax.

That importer then faces the same dilemma: should they decrease their margins or pass the cost on? That decision happens all along the supply chain, right up to the consumer.

Most opt to bear some of the cost and pass some on. That is why the notion that imposing tariffs on imports will benefit domestic industry is so misleading: It may lead to small increases in the price of imported goods and make American made products slightly more competitive, but what it really does is decrease the profitability of multiple American companies.

There are no winners in a trade war. Both the exporting and importing countries get hurt economically. However, it takes time for that to be felt. The continued strength of the U.S. economy, at least relative to China, makes it seem that there is no damage done by tariffs, but that isn’t true.

The damage is just not yet visible.

Companies who see their margins squeezed hire less and invest less. The consumers, facing price increases, buy less. The whole economy slows down.

The good news for investors is that there are others factors that support stocks. The U.S. is conducting this war from a strong starting position, and while it may slow growth, there is a chance that it won’t stall it completely. Low interest rates are also driving equity returns, and as any potential weakness becomes apparent, another rate cut looks more and more likely. That is why, despite the obvious risks, stocks remain buoyant.

It has been said that the first casualty of war is truth, and that is definitely true when it comes to this trade war. Partisans would have you believe that all the costs of protectionism are either borne by foreigners, or that they are all borne by “hard-working Americans.”

Neither is really true: the costs of tariffs are widespread and felt by all. That doesn’t mean that a complete collapse is imminent, but the longer they remain, the more chance there is that they will derail the longest recovery in modern American history. That is the truth.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Politics , Economy , Stocks , US Markets , World Markets

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