[Video] We’ll Survive the Tariff Tiff

I think we could all improve our mental health by viewing most news as warped entertainment instead of education or edification.

Listening to reporters treat each twist and turnrn of political, social, and economic sagas as the end of the world can be exhausting.

I find it much easier on my blood pressure, and my psyche, to treat the news as a game of finding actual facts while dismissing most of the analysis.

As far as I can tell, our world hasn’t ended based on, well, anything. And we’ll survive tariffs, no matter what you hear on the news.

Let’s put this in perspective… I talked with our Dave Okenquist about the tariff tiff on Economy & Markets TV today.

Governrnments claim they use tariffs to protect important domestic industries. That might be true, but it’s not the main reason such taxes exist. It’s all about money.

When nations were agrarian and citizens could sustain themselves through farming, countries had a hard time raising revenue for the state.

The natural path was to tax goods as they entered and exited the country, which is why stamp taxes and tariffs abounded until the 20th century.

As the industrial revolution took hold and more people worked in factories, governrnment officials found personal and corporate taxes to be a more efficient way to raise cash.

By taxing wealth creation (income), governrnments focused their efforts on something we all want to grow (our pots of cash) and imposed smaller burdens on the largest number of people.

In contrast, tariffs change consumption patternrns and create perverse incentives.

The U.S. sugar program puts an artificial floor under domestic sugar prices, raising the cost to industries that use the sweet stuff. Since 1999, U.S. sugar prices have been between 17% and 238% higher than world prices.

As consumers, we pay $1.2 billion per year more for sugar than we would without governrnment interference. The sugar industry claims this saves 40,000 jobs while detractors note that it costs the economy 120,000 jobs.

The artificially high price is why we get goopy high fructose cornrn syrup in our sodas instead of sugar, which is why my kids order “Mexican Coke” when they can find it.

The imported cola is made with real sugar and definitely tastes better. The Sugar Program has been a boon for cornrn growers as well as sugar producers. For the consumer, not so much.

As long as governrnments can generate sufficient revenue with broad taxes, then their citizens are better served by allowing market forces to dictate the flow of goods and services, which is why most wealthy nations impose relatively small tariffs.

On average, the U.S. charges just 1.61% in tariffs. That’s pretty low, but not the lowest. The countries in the European Union charge 1.6%, and our neighbors to the north in Canada charge a mere 0.85%. Even Japan, which we typically think of as trade unfriendly, charges a modest 1.35%.

The numbers get bigger as you move farther from countries of wealth. Mexico charges 4.36% and Brazil 8.0%. The biggest tariffs in general are in Africa, where Chad and Gabon charge 16.4% and 16.9%, respectively. The dubious winner of the largest average tariff is closer to home, the Bahamas.

The island nation slaps imports with a massive 18.6% tariff. That sounds heinous, because it is, but at least it’s 10% lower than it was in 1999!

China falls in between the rich and poor countries with an average tariff of 3.54%. That’s more than twice the rate of the U.S., but still not extreme.

The problem is that tariffs aren’t spread equally to all products, and the pain is generally felt in a small way across the nation while the benefits are narrow and deep. Sugar producers reap a rich reward while we pay a bit more for candy and have worse tasting soda.

The sugar industry makes much bigger political donations for one specific purpose than anyone on the other side of the sugar tariff argument. This makes tariffs a game of political football, where the only certain loser is the consumer.

The biggest issue with China is that the country almost compels a technology transfer from any company that wants to set up a local operation.

While this might gall foreign companies, they don’t have to enter such agreements. Instead, they can simply refuse to domestically manufacture goods in China and pay the applicable tariffs on their imports.

Maybe Trump’s negotiation tactics will work with China and he will get a concession to ease the technology transfer issue. But as for NAFTA, particularly as it pertains to Canada, it’s hard to see what the fight is about. Maybe the president thinks their average tariffs are too high at almost 50% less than ours.

While the current fight, with claims of national interest and crippling financial burdens, makes great headlines, the facts tell a different story.

Yes, we have tariffs, as most nations do. We should probably address specific inequities by industry as trade changes over time.

But the constant move toward lower tariffs since World War II has generally served us well.

Now if we could only get industry lobbyists out of the picture, but that’s a story for a different day.

Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.