Frank Conway is a qualified financial adviser and the founder of MoneyWhizz. He has worked in the personal finance industry for 30 years, in the US and Ireland. He has a particular interest in the impact of inflation on the financial wellbeing of families.
With the inauguration of Donald Trump as President in the US this week, there has been a lot of talk about tariffs.
For anyone that buys a TV, computer, car or even groceries at the local Tesco, most of those are imported into Ireland. And let’s say for a second that Ireland was not a member of the EU. With most of the goods sold here being imported, a tariff is a form of tax the Government could impose to make imports more expensive to help local manufacturers.
The new US administration is preparing to impose tariffs up to 25% on goods from Canada, Mexico, China and the EU in a few days’ time.
Tariffs have historically been a tool for governments to collect revenues, and to protect domestic producers. As such, they result in higher prices.
Historical use
During the 17th and 18th Centuries, tariffs were much more popular. Across Europe and other parts of the world, nations looking to protect local manufacturers imposed tariffs. As such, there was less global trade. Industries could be more expensive and less innovative with little consequence. Without real competition, local producers had little incentive to change.
Understanding Tariffs
Across the world today, most products purchased by consumers contain parts manufactured somewhere else. A TV manufactured in Turkey may contain components that were produced in the USA, Germany, China and Vietnam. It’s called the supply chain, and it has become the backbone of how goods are usually manufactured today. As a result, tariffs can also affect the cost of products made in the home country that introduced the tariffs in the first place.
The difficulty that arises with the imposition of tariffs is they can create market disruptions. A circuit board manufactured in Mexico used in a TV produced in South Carolina pushed up prices. So while US consumers may feel that tariffs will protect them, in today’s world, that is very difficult to do. What is certain is tariffs almost always lead to inflation, a scourge on the financial system that has taken several years to bring back under control.
But an even greater problem with tariffs is what happens when one country does a solo run imposing them. What almost always happens is other countries follow suit, with tit-for-tat tariffs, and more price inflation for families.
This is called a trade war, where costs rise, trade falls and families are left to cope with rising costs.
Big banks say “just get over it” to price rises.
This week, the new US administration was cheered on with its threat of tariffs by Jamie Damon of JP Morgan who predicted the “prices will rise” but people should “just get over it”. Such comments are not a surprise. JP Morgan just announced a record bonus for Mr. Damon on the back of the greatest profits made by a US bank, EVER!!!
Big banks make money by lending more money to families at a profit. As inflation rises and savings fall, big banks step in with various loan options, including credit cards. JP Morgan and Mr. Damon clearly see more lending opportunities, and more profits to be generated in the years ahead.
A short history of tariffs
There is mixed feeling on the purpose and benefits of tariffs. On one hand, economists argue they are generally bad for trade. But there is also a view that trade for the sake of trade has not been entirely beneficial for families either. The loss of local manufacturing to less expensive competition from China has not benefited everyone equally. In the US, while corporate profits have surged, the impact on families across much of the old manufacturing hubs of Pennsylvania, West Virginia, Ohio and Michigan have been brutal. Many communities, suffered. For them, free trade was a disaster.
Similar situations unfolded across Europe. In the UK, competition from abroad resulted in the destruction of English manufacturing.
But the introduction of tariffs are not a remedy for failed trade policies. Tariffs will not bring back manufacturing overnight. This is where active government policy that supports new industry needs to play a major part. An example of this is the Biden era Inflation Reduction Act, which was starting to show positive results in many of those worst-hit former manufacturing hubs. The new Trump administration has vowed to end it and effectively hand back power to Chinese rivals.
Some people argue that during the Great Depression, the imposition of tariffs under the Smooth-Hawley Act prolonged the economic misery. Under the Act, US congress introduced a series of tariffs to protect farming and manufactured goods. But other nations quickly followed suit with their own tariffs on American goods. As a result, American farmers and manufacturers sold less and less of their goods. Global trade ground to a halt and everybody suffered.
Since then, policymakers realised that tariffs were a blunt instrument that needed to be used sparingly. As a result, the shift towards open and freer trade was considered far superior to an economy shielding behind tariffs. The US has not imposed tariffs of any great significance on trading partners since the 1930’s so the recent announcements by the US administration are regressive. Claims that tariffs would help blue-collar workers are without evidence. On the contrary, the introduction of tariffs is highly likely to have a disproportionate and negative impact on working families across the US for years to come. They are likely to see costs rise, and the value of their money fall due to price rises, broader inflation and, in many cases, the loss of employment.
How Tariffs Work
Tariffs being proposed by the US are being discussed in the context of trade restriction and equalisation. In the context of the EU, the US is linking the purchase of more US energy, oil and gas as the price to avoid tariffs.
There are two types of tariffs that could be put in force:
A specific tariff on goods and services such as fixed fee. On a car, it might be US$5,000 added to the recommended sales price.
An ad valorem tariff based on the items value, such as 25% on the value of the vehicle. This is the most mentioned tariff by the new US administration.
Tariffs can also be used by governments to raise revenue, but this is more of a last-ditch effort to balance the domestic books, not trade deficits. But governments also use tariffs to protect new industries, to nurture domestic production and to shield those start-ups from foreign competition. Or, tariffs are used to protect established industries, such as what the EU has just done with Chinese car imports.
The EU has argued Chinese cars receive unfair state subsidies which offer an unfair advantage against EU car manufacturers. Such tariffs are used to protect domestic jobs and industries that may be reskilling and retooling to switch from internal combustion engine to electric vehicle production.
Tariffs can also be used as a foreign policy weapon where one Government can use them to exert pressure on another to amend their policies. The US says it wants the EU to buy more cars and energy plus amend various consumer, free speech and child protection laws for the benefit of big tech. Big US banks are also likely to see an opportunity for their services being made more broadly available across the EU. Many are likely to push for weaker consumer and environmental protections.
But tariffs are not a one-way street. In most cases, they usually have unintended consequences. Canada is already promising to put targeted tariffs in place on certain goods and services it sends to the US. The US imports a lot of cheap oil from Canadian producers. And this is where things can get messy and tricky and have unintended consequences. The farming industry is one example. Most major farming communities voted for President Trump and may now see a raft of price increases for feed, fuel, machinery and much more. With profit margins already under severe pressure, the situation is about to get a lot worse for them.
The Chinese are also threatening to use targeted tariffs. This already happened earlier this year for US drone manufacturers where some export controls and tariffs crippled deliveries of orders to US law enforcement agencies. This was because US authorities voted to end the purchase of Chinese manufactured drones and shift to the few US producers. But with so much supply-chain reliance on China, US manufacturing was not as independent as legislators understood. US manufacturers were suddenly unable to source critical components, and their production collapsed. The fallout is continuing.
What is also significant, and less understood by voters, and many legislators is that all tariffs are paid by consumers, not the country hit with the tariffs.
Families are the ultimate victims
Tariffs comes in many different forms and shapes.
They always, disproportionally affect lower-income families the hardest. This is because any tariff pushes up costs. People with limited financial means must spend more to buy the same product. The impact of tariffs leaks into all sectors on an economy. It’s not just the impact they have on the cost of a car, or a TV. Even with domestic production, prices can rise. If the cost of an ingredient from the EU or Canada to product some food items rise by 25%, then to maintain profit margins, US manufacturers always pass the costs to families by way of higher prices.
Small businesses are also impacted. Many rely on imported goods and are likely to see their costs rise. A road race organisation operating in New England that imports its prizes, participant medals, t-shirts from China will have to either absorb higher costs or pass those costs along to participants.
Companies affected by tariffs essentially have three options: absorb the extra expense, increase prices, or move production to another country. The last of the three is easier said than done if components for manufacturing, sales, distribution are produced in a particular country. For example, while the US is hoping to block the export of certain computer chips to China and other countries, the Dutch company ASML is by far and away the leader in the technology that produces advanced chips. Were it to happen, crippling tariffs on the EU may cause disruptions in supply of the very computer chips the US administration depends on for its recently announced Stargate A.I. project.
Real-World Example of Tariffs
During the first Trump administration, a raft of tariffs on aluminum, washing machines and steel were introduced at various levels and stages. However, with hindsight, most experts agree those were a resounding failure when it came to protecting domestic US industry. Some even argue that they caused price inflation which then surged as President Biden came to power.
In response, the EU slapped tariffs on a range of goods from Harley-Davidson to bourbon whiskey. Those were targeted to so-called red states, where a majority of voters voted for the Trump administration. The idea was to remind voters in those states that tariffs have a cost and a direct impact on their day-to-day lives. In fact, in a sign of how concerned some new faces in the Trump administration are about the fallout from their tariff actions, Brooke Rollins, the nominee for the Department of Agriculture has been at pains to say the Federal Government will “do all it can to support farming communities through a difficult time and understands the potential devastating impact to our farmers and our ranchers”, it’s an admission that the years ahead for farmers is about to get a lot harder.
When all was said and done, a CNBC study discovered that Trump’s tariffs hurt consumers greatly and equaled one of the largest U.S. tax increases in decades. Researchers found that the Trump tariffs lowered the real income of American workers and their families.
What Is an Example of a Tariff?
An example of a tariff could be a tariff on an electric car. This means that any car imported from another country would incur a tariff—for example, 100% of the value of the car – paid by the individual or business importing the goods.
Who Are the Primary Beneficiaries of Tariffs?
The country putting the tariffs in place usually benefits from the tariff. But it’s not always clear cut. For example, if a component needed to produce a car is forced to pay more for that component part, then the domestic producer, and buyers of that finished product are also impacted. So, tariffs can have an unintended boomerang effect that lawmakers may not have intended.
How Do Tariffs Hurt Families?
Tariffs cause prices to rise. This is called inflation. This means that families on the lowest incomes are impacted the most but at the same time, everybody is impacted too. This is what happened with inflation is 2022, everybody was impacted but the most vulnerable were hit the hardest.
How Will You Be Impacted by Tariffs? In today’s world of global trade and global supply-chains, no single country is fully self-sufficient. Regardless of whether you live and work in Dublin, Duluth, Delhi or Dubai, the food you eat, the car you drive, the TV you use, all are produced somewhere else, or parts of them are produced in dozens of places. A milk producer in Galway probably uses equipment that was produced in another country. The software used to track production somewhere else. The truck or factory that collects the milk, cools the milk, treats it, and even converts it into butter, whey or something else. All are facilitated by suppliers and manufacturers somewhere else. Tariffs impact all of that. They add cost, raise prices and drain the personal finances of families and small businesses everywhere.
Follow us
Bluesky – moneywhizz.bsky.social
Comments are closed.