Tariffs Harm U.S. Importers, Consumers

In his recent inaugural address, Donald Trump made the following statement:

Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens. For this purpose, we are establishing the External Revenue Service to collect all tariffs, duties and revenues. It will be massive amounts of money pouring into our treasury, coming from foreign countries.

This sounds wonderful. The ideal tax is always one that is paid by somebody else!

Unfortunately, tariffs on goods imported from foreign countries are not paid by the countries from which they came; they are collected from the American importers. They are a cost of the importing business, and like all business costs, they are added to the prices American consumers pay for those goods.

Imagine that an American company imports computers made in China. If the Chinese firm charges $400 for each computer, and our tariff is 25%, the American company will pay $100 (25% of $400 ) to the American government, making its total cost for the computer $500.

The American company is not in business for its health, so all its costs including the tariff will be passed along to Americans who buy its computers.

No money will pour in from foreign countries. But a lot will pour in from Americans. Tariffs are an internal tax.

Chinese producers will be hurt by American tariffs even though they are not paying the tariffs. This is a simple consequence of the laws of supply and demand — when the price goes up, the quantity demanded goes down.

It is the decrease in sales to Americans caused by the higher prices that will hurt Chinese producers. So the Chinese government will impose retaliatory tariffs on American products coming into China.

The American tariffs will therefore hurt Americans in three ways:

1. They will increase the cost of things made in China.
2. The reduced competition from Chinese producers will allow American producers of the same things to increase their prices to American consumers.
3. And demand for workers producing goods exported to China will be reduced by the tariffs imposed by China.

The so-called "External Revenue Service" is a totally misleading term, since we will be collecting no revenue from external sources. Zilch! Nada!

A few added notes:

If a governmental body is established under the proposed name, it would be all too reminiscent of the hugely misleading name for the leading newspaper of the Soviet Union, Правда (Pravda), Russian for "truth." But we expected that kind of thing over there.

It would also resemble in real life the four government agencies George Orwell ironically named in his dystopian novel, 1984:

1. The Department of Truth, whose slogans were "War is Peace," "Freedom is Slavery," and "Ignorance is Strength."
2. The Department of Peace, which conducted perennial wars.
3. The Department of Love, which ran the secret police and could imprison or execute people for thought crimes.
4. The Department of Plenty, which was in charge of the horribly poor economy.

Orwell's fictional country was a terrible place. As noted in his chilling novel:

The thing he was about to do was to open a diary. This was not illegal (nothing was illegal, since there were no longer any laws), but if detected it was reasonably certain that it would be punished by death, or at least by twenty-five years in a forced-labor camp.

One wonders why a new government agency would be needed under Mr. Trump's proposal since tariffs are already being collected in American ports of entry by existing government agencies. I thought the president wanted to get rid of bureaucratic agencies, not multiply them.

In any event, establishing the new government agency would require an act of Congress. Hopefully, Congress will not choose to emulate the Soviet Union or Orwell's dystopia even in a small way by creating an "External Revenue Service" whose very name is a lie.

Paul F. deLespinasse is Professor Emeritus of Political Science and Computer Science at Adrian College. Read Professor Paul F. deLespinasse's Reports — More Here.