On the Nature of Tariffs

Working backward, let us start with the question the layperson typically has. What is the impact of tariffs on prices? Some of the considerations when calculating the impact of tariffs on prices:

• Productivity gains / productivity regressions, outside factors impacting production over time
• Existing inventory, tariff not fully realized until pre-tariff stock is exhausted
• Time delays, tariffs can eaten on a temporary basis to give a business a tactical advantage before fully realizing it in price later in the future
• Supply chain absorption, a B2B player might choose to accept lower margins on the tariffed goods as a business advantage
• Product / sector sensitivity, high turnover and perishable goods will price adjust faster than durable, long held in inventory goods
• Product substitution, acceptable product alternative from a non-tariffed source

All the aforementioned factors are in addition to the challenges in calculating prices of any good or service in general. Even when we can make rough estimations of tariff impact, it is far in the future, helping to explain what has been and not what will be.

A tariff is a tax. The impacts of taxation via a tariff versus other forms of taxation is written about the most among economists, but it is also the least interesting bit. A tax is a tax. You cannot tax your way to prosperity.

The most interesting bit about tariffs is the influence they have on external parties. Note that if you have group A and group B, there is a limited number of mechanisms that can be used between them:

1. War. They can either threaten force or use force against each other.
2. Migration. They can control the flow of people between each other.
3. Trade. They can control the flow of goods and services between them.

Thus on the international stage, if we have a dispute between country A and country B, which are in military alignment, and have a stable migration policy, tariffs or other restrictive trade policies will emerge, as there is nothing else to be done. This key insight helps explain why free trade, although optimal on purely economic grounds, restricts dispute resolution. Someone who is strictly anti-war, open borders and pro free trade is actually incapable of solving disputes as these liberties must be restricted to see a resolution.