Archives For Tariffs

Quiz!

Which of the following are expected results of protectionism (e.g. taxes on imports, quotas to limit imports)?

  1. Saving jobs.
  2. Lowering costs of products.
  3. Better products.

Long-Term Protectionism is Unnatural and Not Likely

Protectionism (e.g. tariffs = taxes on imports, quotas to limit imports) is done for two reasons:

  1. Temporary: negotiations between countries on different topics, alternatives to wars.
  2. Long-term: protect local producers from competition from foreign producers.

There is a concern about long-term protectionism (#2 above), that can affect stock prices. Long-term protectionism is unlikely for the following reasons:

  1. Unintended consequences: While higher prices save jobs in one industry, it costs jobs in other industries. It does so in two ways:
    1. Consumers have to pay a higher price for products, leaving them with less money to spend on products and services of other industries.
    2. When the consumer is a company, it has to raise its own prices to make up for the higher input cost. This makes the company less competitive with foreign producers that have lower input costs.
  2. Net loss: The higher cost to the consumers goes to benefactors beyond retaining jobs in the protected industry, including company profits (investors), manager bonuses, and higher pay to employees. For example, it cost consumers $826,000 per year for every saved job in the sugar industry in 2002 (Federal Reserve Bank of Dallas).
  3. Online Shopping promotes globalization: The coronavirus accelerated the transition to online shopping, where comparing prices is much easier than going to multiple physical stores. This gives a boost to cheaper products that are imported from countries with cheaper labor.
  4. Improved Quality: There was a time where buying from China involved a tradeoff – lower quality for lower price. The quality of products improved significantly and is no longer a concern, improving their exports.
  5. Economies of scale: Protectionism limits trade and reduces the number of buyers from each company. This hurts the scale of companies, leading to lower efficiencies.
  6. Specialization: Protectionism limits the market for each company, and reduces the opportunities to specialize.

Quiz Answer:

Which of the following are expected results of protectionism (e.g. taxes on imports, quotas to limit imports)?

  1. Saving jobs.
  2. Lowering costs of products.
  3. Better products.

None of the answers is correct. Specifically:

  1. Protectionism saves jobs in the protected industry, but takes away jobs from other industries. The overall effect is lost jobs.
  2. Protectionism artificially inflates the prices of the product coming from abroad, leading to a higher price.
  3. Protectionism limits the market of companies, leading to lower specialization and lesser economies of scale. At best, the quality of products stays the same, and at worst it is hurt.
Disclosures Including Backtested Performance Data

Quiz!

Who are the winners when a country increases taxes on imports (tariffs) from another country?

  1. The country taxing imports.
  2. The other county (the exporter).
  3. Neither country.
  4. Both countries.

The Winners and Losers of Tariffs

Tariffs hurt specialization across borders, limit global trade, and increase the costs to consumers – it’s a losing proposition for everyone involved. So, why would the US seek to increase tariffs? I believe that it is a negotiation tactic by the US, to try to reduce the trade imbalance with other countries (the US imports more than it exports). If I am correct, this can go on while each country involved figures out the extent of its power. I believe that once all the information is available and the negotiations are complete, any buildup in bilateral tariffs would be removed to everyone’s benefit.

Supporting my opinion is the fact that the world is very interconnected economically. Let’s view two big players in these negotiations: the US and China. I will point out several mutually beneficial connections in the table below.

Action

Benefit to the US

Benefit to China

The US imports from China a lot more than it exports

US consumers get cheaper products, thanks to cheaper labor in China.

China gets more buyers for their products

China loosely pegs the yuan (its currency) to the dollar. They get dollars from exports to the US, and buy US treasuries to keep the dollar’s value high enough relative to the yuan.

The US government gets cheap loans from China, to support its huge budget deficit. China is the largest lender to the US government.

By buying dollars, China keeps its currency low, to make its exports cheaper in dollars, and be more competitive.

Quiz Answer:

Who are the winners when a country increases taxes on imports (tariffs) from another country?

  1. The country taxing imports.
  2. The other county (the exporter).
  3. Neither country. [The Correct Answer]
  4. Both countries.
Disclosures Including Backtested Performance Data