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Tariffs: Effects on Businesses and Consumers

October 18, 2019

Tariffs and trade talks continue to dominate the news cycle – how will these developments affect the economy? Tune in to this week's TrendsTalk to learn how businesses and consumers are impacted.

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ITR Economics Divider


Transcript by Rev

Alex Chausovsky:
Hello everyone. My name is Alex Chausovsky, and this is the latest episode of TrendsTalk with ITR Economics. Today I wanted to take a few minutes to talk to you about tariffs. Boy, the world around us is sure changing at a breakneck pace. Right now, there is the latest round of negotiations happening in Washington. The president has tweeted some very positive messaging about the way that the trade talks are going, and the stock market is up 400 points as a result.

I wanted to take a look at the actual details of what's going on in the tariffs situation, and give you a concrete example of why we here at ITR Economics are Austrian-leading economists, and why we really focus on specialization and competition as the driver of market performance, and less so focused on the words "fair trade", which get thrown out quite a bit. We recognize that there will be winners and losers on both sides when we come to talk about tariff.

The example I wanted to give you today is really meant to illustrate some of the unintended consequences of tariffs. We've got a lot of different tariffs in place right now. About $250 billion worth of imports from China are currently under a 25% tariff. We're potentially looking to raise that by 5% to 30% on October 15th if this latest round of trade talks doesn't go very well. We also have another round of tariffs to look forward to potentially in mid-December that are going to be largely focused on consumer electronics products like iPads and iPhones, and really hit the pocketbooks of individuals.

Beyond that, we're still considering more tariffs on automotive-related imports to the tune of about $350 billion worth of products. Really, the question is, where do we stop? How long does this go? Is it effective at the end of the day? The example I want to provide to you today has to do with tariffs on washing machines. Because of some lobbying on the part of Whirlpool, which is an American washing machine manufacturer, the administration passed tariffs in 2018 on about $1.8 billion worth of washing machines coming into the United States made by largely Korean manufacturers like Samsung and LG.

As a result of the 20% tariff that was later in the year increased to 50%, we basically saw an increase in the average price of a washing machine by about 12% over the course of the year. That certainly did bring in some funds into the US Treasury. In fact, over the course of 2018 the US Treasury recorded about $82 million worth of collections from the tariffs that were imposed on these products. The interesting part is that we saw an increase in the price of a washer by about $86.00 on average, which is to be expected because the tariff was in place on washing machines.

But the phenomenal thing in my mind is that we also saw an increase in the price of dryers to the tune of $92.00 per dryer, even though there was not a tariff placed on dryers as part of this protectionist policy. Unfortunately, the result was that over the same course of the year where the Treasury collected about $80 million in tariffs, the US consumer, the cost to the consumer, was more than $1.5 billion.

You could easily see that although certainly some costs were increased for the Korean manufacturers, and certainly the domestic companies also were able to see some positives as a result of the higher prices in terms of profitability and in terms of job creation. We have to ask ourselves, at what cost are we achieving some of these objectives? Because what we did see was the domestic manufacturers like Whirlpool added about 1800 manufacturing jobs to produce these additional domestically-made washers and dryers that are now going to be costing more money to the consumer.

When we look at the overall cost of $1.5 billion versus the 1800 jobs that were added to the industry, the average cost per job is about $815,000.00. The question becomes, is it a sensible approach? Is it having the desired affect? We certainly see it benefited the manufacturer in this case. We also saw that the consumer is spending a lot more money. But the question is, how does that compare to typical job creation?

Well, it's very simple. When the US government goes to stimulate the economy, on average the cost of creating an additional job is about $30,000.00 per position. When we compare that $30,000.00 to the $815,000.00 rough cost of creating these additional manufacturing jobs in washers and dryers, you can clearly see that there's a huge discrepancy there.

At the end of the day, again, it's important to note that as with anything trade-related, there are going to be winners, such as Whirlpool in this particular case through improved profitability. There will also be losers. I think it's safe to say that because of the additional money that US consumers have to spend on both washers and dryers, which again didn't even have a tariff placed upon them, that we can say that consumer in this particular case was the loser.

Again, at ITR, we're not judging this from a political perspective. We're simply looking at the data. We're realizing that it is really specialization and competition that drives deficiency in the marketplace today, and that's why we continue to advocate for those things as opposed to advocating for fair trade because at the end of the day, what is fair trade? How do you define the concept of fair trade? Is fair trade to the United States the same thing as it is to the Europeans, or to companies in Asia like China or Korea?

The reality is, obviously we all have very different definitions of fair trade, and because of that we are not advocating for fair trade. We advocate for that specialization and competition, and really as minimal government intervention into the markets, because government intervention at the end of the day creates inefficiency, and that usually drives costs up.

I hope this has been an interesting and entertaining lesson for you in the way that some tariffs have been manifesting themselves in the day to day lives, and I thank you for spending time with us today in our latest episode of TrendsTalk with ITR Economics, and look forward to talking to you again next time. Take care.


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