The Alternative to Tariffs

The problem with tariffs is that they are a tax. People may not understand precisely what they are or how they work, but they know tariffs are a tax.

Contrary to what some Trump supporters claim and what the President himself asserts, tariffs are not paid by foreign governments, but by the American people. Importers pay taxes on each part or whole product imported into the country. They then raise the price of goods to recoup the American people's cost.

Contrary to what some claim, the increased cost is typically not 100%, at least at first. Many companies eat into their profits first. They slow hiring and increase layoffs. They avoid a full increase in prices passed on to consumers, but it comes at the cost of jobs or rates of return to shareholders invested in the companies.

If the tariffs stay, prices will go up, consumer purchasing power will be reduced, and the economy will become more inefficient and slower over time.

Some argue tariffs are the necessary elixir to redeem the bottom 80% of the economy as the upper 20% have prospered. The economic data show that the top 20% of income earners have been spending enough to keep the economy going while the bottom 80% have already pulled back. A tariff does not care whether one is in the upper 20% or the lower 80%. They will all be negatively impacted.

Tariffs affect the rich and the poor. There is no income exception. Tariffs, in fact, arguably hurt lower wage earners more because companies would prefer to reduce workforces to save money rather than passing the full cost of tariffs on to consumers. So, when tariffs are used to help the working class, the working class actually gets hit hardest.

Housing prices increase because so much of what goes into building a home is imported. The alternative would be making stuff in this country, but that is another way to make those products more expensive due to domestic labor and production costs.

While, undoubtedly, some American industries will benefit from tariffs, more will not. The economic data inarguably shows that tariffs negatively impact more businesses than those that benefit.

Some people want tariffs because they see it emotionally as a stick-it-to-the-rich scheme. Those rich clowns have been well off, and the 1% have been doing well. This is a way to stick it to them. But that is cutting off one’s nose to spite one’s face.

The solution to improving the lot of the bottom 80% is not tariffs, which have greater potential for harm than good, but a two-pronged approach that, thankfully, Donald Trump’s team seems committed to.

First, we must reduce the size of the government. Every dollar spent buying a government bond is a dollar not spent in the private sector, whether on a stock purchase, an investment, or an employee hire. As the public sector grows, the private sector shrinks.

Though a somewhat crude analogy, think of two inflated balloons connected by a straw. Squeeze one balloon, and the other grows. Think of those as the public and private sectors. Apply pressure to the private sector balloon, and it shrinks as the government balloon grows, and vice versa. We must apply pressure to the government balloon to shrink it so the private sector grows.

How we apply that pressure and expand the public sector also matters.

Many of the major corporations in the United States are currently beneficiaries of tax schemes that protect the big and prevent the small from growing. Regulators and Congress have passed laws and regulations that require companies that grow to certain levels to face new and more cumbersome regulations.

A great example is small banks. As banks grow, the Consumer Financial Protection Bureau imposes more and more burdensome regulations on those banks. It becomes increasingly complex for state chartered banks, where many working class voters do business, to grow and provide more services for their customers and more jobs. Likewise, the burden of starting community banks, which tend to be more engaged in working class communities, has become almost insurmountable thanks to government regulation and capitalization rules designed to shut out competition from the “too big to fail” major banks.

Most Americans work at small businesses, not Fortune 500 businesses, but federal laws and regulations benefit the Fortune 500 at the expense of the small. A basic example is in the ever-growing tech sector, where intellectual property rules are regularly used to stymie innovation. Software used to be governed under copyright rules, but now a growing body of patent laws drives up costs to small tech companies, which do not have the legal capacity to compete in an ever-increasingly litigious society.

Republicans in Congress could pass Congresswoman Kat Cammacks’ REINS Act, which would require affirmative congressional legislation to enact regulations that are determined to be overburdensome and costly on businesses.

Republicans can also roll back regulations and laws currently creating barriers to small business growth.

The President and his Administration are driving up costs to businesses through tariffs and the uncertainty around implementing tariffs, which will be borne out in job losses and price increases. Instead, using the tax laws to incentivize labor and hardware investments in business and reduce the tax and regulatory burden on small businesses would benefit Americans whose incomes are derived from the labor of their hands and talents instead of financial investments.

Ronald Reagan was right. Tariffs produce inefficient economies.

President Trump and his base have accurately assessed that the US economic situation is in decline. But they have come to the wrong conclusion about that decline. Our decline is not due to competition but to a lack of competition. Much of that lack of competition comes from laws and regulations that create barriers to entry, coupled with an enormous growth of government that deprives the free market of the resources to grow around those barriers to entry. Tariffs will make the problem worse, not better.