Commentary: Whac-a-mole economics – who pays for tariffs?

To strengthen America's federal government and keep its budget solvent, Federalists Alexander Hamilton and James Madison enacted in 1789 tariffs on imported goods. Their philosophical motive was to declare our economic independence from Britain.

Conversely, in his desire to keep the federal government small and frugal, Thomas Jefferson opposed tariffs on imports to limit Uncle Sam's financial income. Also, as a wealthy plantation owner, he was committed to preserving the South's agrarian economy by shielding farmers from expensive imported inputs.

Tariffs are divisive.When President Hoover imposed tariffs in 1930 on agricultural imports to hopefully boost the depressed farm economy, a thousand economists wrote a letter of objection to Congress, which nevertheless enacted the program, protecting Northern manufacturing industries, with disastrous results for Southern states.

Tariffs are a tax. In the past 10 years, our presidents and Congress have imposed and expanded tariffs on a variety of technological and energy efficient ("green") imports, including semiconductor chips, solar cells, electric vehicles, aluminum, steel, minerals and cranes. Recent tariff rates range from 25% to 100%, significantly increasing the purchase price paid by American importers and/or their American consumers.

Tariffs are costly.Numerous scholarly studies indicate that tariffs cost American households approximately $1,000 to $4,000 in annual expenses, while adding only 2% to federal tax revenues. Aimed at protecting American jobs, the results are mixed. Who gains and who loses depends on economic, environmental, ethical, and political factors.

Tariffs are regressive.When retail prices rise, poor citizens are most hurt. The financial and emotional burden is most intense when everyday items (food, clothing, shelter, utilities, transportation) become more expensive relative to their income.

Tariffs are not

ethically neutral.One way to oppose sweat shops often staffed by Asian women and children is to impose tariffs on their cheap exports. Yet, doing so raises our domestic prices on retail goods, driving low-income Americans to rely on lower quality outlets, flea markets, "Dollar" stores and yard sales, perpetuating cultural divides in our neighborhoods.

Tariffs are malleable.When purchasing an imported item, to what extent do consumers pay the tariff tax? It depends on how they view the item: is it a necessity or luxury item? When selling essential necessities, importing firms can externally pass the added cost onto consumers who will buy the item regardless of its price. Conversely, if consumers view the item as a non-essential luxury, importing firms must internally absorb the added cost in reduced profits or risk losing their customers to alternative choices and brands. If consumers' demand for an item is moderately stable, importing firms often compromise, passing part of the tariff onto their customers.

Economists measure consumers' responsiveness to price changes in mathematical terms of "Elasticity," i.e., when prices rise or fall X percent, does the quantity purchased fall or rise, respectively, by more or less than X percent? For example, the price Elasticity of Demand for gasoline consistently ranges between 20% and 40% of X. Thus, gasoline consumption is a firmly "Inelastic" necessity, consumers tend to drive a certain number of miles per month, regardless of gas prices. Conversely, airline ticket prices are "Elastic" luxuries, vacationers' travel plans are highly sensitive to air fare movements. Successful businesses pay close attention to consumers' Elasticity of Demand for their products.

Tariffs invite retaliation.

Foretold by Jefferson, tariffs frequently result in the penalized nation imposing its own set of tariffs on U.S. exports. What goes around, comes around, hurting importers and exporters in both countries. Hence, our chess game with China.

Tariffs have diverse consequences.Domestically, can we nurture infant industries and protect established firms via tariffs? Yes, but which ones? And our trading partners (friends and rivals) have a say in those dynamic transactions. Unfortunately, tariffs create a zero-sum game: if we help Group A, we hurt Group B, and possibly Groups C-Z. U.S. tariffs pose opposite outcomes for exporting versus non-exporting firms. The distribution of benefits and costs is seldom neutral.

Tariffs violate

a cardinal rule.Specialization of labor with voluntary trade creates global wealth. The most efficient corporations are engines of exchange, wherever they may be. Attempting to counter globalization via tariffs and quotas on imports sparks a game of retaliation, in which the ultimate losers are consumers hurt by fewer choices and higher prices and discouraged employees stuck in stagnant industries. The future lies in new jobs, not old ones.

Tariffs are not sustainable.Mother Earth cannot environmentally sustain all 50 of our American states acting in isolation, producing everything for their own residents. We quickly learned that lesson between our own shores. Likewise today, on a global scale.

Mike Ellerbrock, of Blacksburg, is professor of agricultural and applied economics at Virginia Tech and deacon for the Catholic Diocese of Richmond. These views are his own.