Things have been pretty smooth sailing for our economy and the financial markets. Sort of like being carried along by those gentle trade winds in the south Pacific. Warm breezes. Smooth turquoise waters. A cool boat drink in one hand and a cigar in the other. Then all of a sudden, WHAM! hurricane Trump strikes. Out of the blue, with no warning, blindsiding the economy and the financial markets around the world by proposing high tariffs on foreign steel and aluminum brought into this country.

Tariffs are in essence taxes imposed on certain imported items to help make those items more expensive to purchase, hopefully prompting people to buy those same items that are produced here locally, because they now cost the same or even less than the imported products. That all sounds good on the surface. Buy American steel and aluminum (in this case). This will create more jobs in the steel industry as they will theoretically produce more steel here to meet the demand for U.S. steel because the foreign steel is more expensive.

There are a couple of things wrong with this thinking. First, other countries don’t like tariffs being put on their goods imported here in the U.S. It makes them less competitive; therefore they sell fewer of those goods. That means they need to produce fewer of those goods and this leads to layoffs and higher unemployment in their country. So, what these countries do is impose their own tariffs on goods that the U.S. sells in their country. That isn’t good for businesses in the U.S., as they won’t sell as much of their product overseas. Tariffs, being a tax or an additional cost of doing business for the manufacturer which he in turn passes along to the end consumer. So, tariffs drive up prices of goods.

The European Union announced that they will be imposing tariffs on U.S. products being sold there of up to 25%. Products like t-shirts, jeans and other clothing, whiskey and a number of other products will be subject to this tariff.

Let’s think this through for a moment because this seems like a no win situation for either side. In the U.S. we will likely sell more steel and aluminum, but it will be more expensive to purchasers than the old foreign steel prices that they were using before the tariff was imposed. So we will possibly see more jobs in the steel industry created. We will also see higher prices on the things steel and aluminum goes in to. Things like cars, beer and soda cans, aluminum foil, washers and dryers. As prices of these items go up, people will tend to buy less of them, so production of these things goes down and we lose jobs in these areas. Gain jobs in a couple of areas and lose them in others. Not much of a net gain, plus now a lot of things cost more. Add to that the fact that now our jeans and whiskey costs more for Europeans to buy, so they buy less of it. Production of these items goes down and all of a sudden, the Jack Daniels factory in Lynchburg TN., starts laying off people.

Truth be known, it was a trade war and a protectionist attitude that helped cause the Great Depression. A U.S. imposed tariff on foreign wheat to help keep wheat prices up for our farmers escalated into a full scale trade war. By the time the dust settled, most U.S. products were so high priced overseas because of tariffs imposed in retaliation to the tariffs we put on foreign goods, that U.S. manufacturers could only sell their goods to people in the U.S. Having a smaller market to sell your goods means you sell less of them, so you produce less of them and end up reducing your workforce. All this added to an already tough time economically for the U.S.

In a free market economy, if you can make a widget of equal or better quality than your competitor, then you deserve the business. Some will argue that many of our trading partners don’t play “fair” in our trade deals and the tariffs will push them into negotiating a better trade deal with us. Maybe, but rather than imposing tariffs, negotiate a better trade deal.

I don’t know who’s advising the President on economics, perhaps Moe, Larry and Curly. Perhaps no one. Regardless, the idea of tariffs is a goof ball idea and I hope someone can talk the president out of imposing them.

 

These are the opinions of Mike Berry and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.

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