Let me tell you a story about how one company reacted to some accidental tariffs. But first, some background.
Tariffs: A Primer
A tariff is a tax that is placed on goods that are imported into a country. There are 3 generally accepted reasons to use tariffs.
- Your country has a nascent industry that you’re trying to help grow. High-tech manufacturing is a common modern-day example. By using tariffs you make it really expensive for a foreign competitor to sell their product. The idea is that by forcing higher prices for competition, your burgeoning domestic industry will gain the expertise to eventually manufacture the same good at the same price. If they can manufacture it at the same price then they’ll have a natural advantage because shipping costs to domestic customers will be lower than someone shipping from overseas.
- National security grounds: if you don’t have the abundance of natural resources that makes your country a low-cost producer then it can make sense to subsidize your farmers’ food production. It keeps them farming and reduces your dependence on foreign countries for food imports.
- Punish other countries: if you’re in some sort of dispute with another country it can sometimes make sense to put tariffs on that country’s imports as a way to apply economic pressure to the government in power. This generally only works if you can target key constituencies of the government in power or you import a heck of a lot more than you export to that country.
Number one and three above are temporary reasons. If you try to do it on a permanent basis then you’re wasting money. If you’re using tariffs to try to permanently shield your workers then all you’re doing is increasing costs for your own citizens. Global trade is a good thing: everyone on average is better off by buying from whatever country has specialized in a way that makes them the lowest cost producer.
A Particular Story about Tariffs
This brings me to how hard it is to implement tariffs and to avoid unintended effects. This past summer the Chinese closed the office in New York City that issues the paperwork to US exporters, which allows those US exporters to ship goods to China. This office was closed because it was the office that handled US agricultural products, among other things. The office was closed because China was targeting US farmers, which were a key constituent of Donald Trump. They believed that if they could cause pain for a core constituency of Donald Trump then they would pressure him to relent on his trade war with China.
There are two fun parts to this little vignette. The first is that the New York City office also handled scrap metal. I haven’t heard anywhere in the news or seen any protests on the streets calling for America’s scrap dealers to be protected.
Coal miners, sure. Scrap dealers, no.
So all of a sudden an exporter of scrap metal to China is scrambling to figure out where to send his scrap metal now that his main market is shut off.
Which brings me to the second part of this story: during the first month that the Chinese office was closed this scrap metal exporter had to re-route all of his shipments to places like Canada, Chile, and some Southeast Asian countries. His volumes dropped by 40 percent.
But manufacturers in China still needed scrap so they could process it into raw metal to feed their factories. So they had to scramble too.
The second month the scrap exporter started sending his cargo loads of scrap metal to Hong Kong, which is a separate economic zone. The buyers in Hong Kong then slapped their own shipping label on the cargo loads and forwarded them into China. Volumes for the US scrap exporter bounced back and now he’s just as profitable as he had been before the tariffs.
Tariffs don’t work for long
The short answer is that tariffs generally don’t work for very long, at least not as intended. Mostly it’s just an invitation for business owners to find new ways to circumvent the rules. At the end of the day the only thing they typically accomplish is the introduction of friction and costs into the system.