Tariffs and a New World Order?

I have been trying to avoid writing about tariffs since I try to be apolitical for this blog, and this is a very heated subject. My goal is to provide you with supply chain knowledge and tariffs directly impact your supply chain operations. I will lay out what they are and what some of the effects it has on trade. However, the economy involves complex interacting forces, and I will not attempt to make any macroeconomic predictions.

What is a tariff?

A tariff is a tax imposed on the importer of a good by the country imposing the tariff. The importer can be a foreign or domestic entity, and that entity can be a company or an individual. For example, if I want to use or sell something in Canada that is made in the US and there is a Canadian tariff on the US for that good, I will have to pay that tariff to the Canadian government to bring it into Canada.

Why are tariffs implemented?

Just like any other tax, the tax revenue is used to fund government operations. Unlike other taxes, however, it also aims to alter trade patterns. In the example above, the Canadian government has made it less attractive for me to bring that item to Canada from the US. As a reaction, I may try to buy the same item, but one that is produced in Canada or another country that does not have a tariff imposed (assuming it is available and the cost-to-benefit ratio is superior to that of the US item).

What are some of the possible effects (desired)?

Because foreign goods will be less economical domestically, this will incentivize businesses to invest and produce domestically. As a result, the domestic industry for the targeted good may become stronger. Globalization has weakened many industries in developed countries and caused hardship in regions where these industries exist or existed. If successful, there can be a reduction in the inequality between white-collar and blue-collar workers in the developed countries today. Also, it could make the country less reliant on goods from unfriendly and hostile countries, thus improving national security.

What are some of the possible effects (undesired)?

Businesses are not able to adapt quickly enough, and they will have to pass the higher cost of acquiring the goods to their customers. This will result in inflation. Consumers will have reduced spending power in a high-inflationary environment, resulting in low demand and a general economic downturn.

Other countries will respond with tariffs of their own and start a trade war. These will further reduce trade and economic activity domestically as well. Trade improves economies through a concept called comparative advantage in economics. This means that countries can specialize in producing goods that they are relatively better at producing and then use the efficiency (profits from surpluses) to buy (import) other goods they need. Both parties increase the goods and services that are available to them over what they had, if they had to produce everything themselves.

What are some other considerations?

Tariffs from pre-globalization and post-globalization do not have the same impact on trade. Supply chains are much more complex than they used to be. As products became more advanced, so did the supply chain. There are much more intermediate goods that may cross multiple borders or the same border multiple times before a final good is completed.

Like a traditional war, trade wars are dynamic and unpredictable. It is difficult the make good business decisions when the environment is uncertain. A stable environment (economically or politically) allows businesses to make good long-term decisions and to make capital investments and operational improvements.