The South Asian Times

15 October 2019 21:58 PM

Should the US levy tariffs on foreign businesses?

By Shivaji Sengupta

Last Friday, June 1st, the US started to levy tariffs against practically all its major trade partners, after a brief period of concession which ended that day. For those not keeping up with this "trade war", tariffs are surcharges, over and above taxes, that a country may charge on business, charges that cannot be passed on to consumers in the form of further taxes. But, of course, consumers pay the price because sale prices go up. The Trump administration has been courting a "trade war" of tariffs ever since the promises the president had made during his election campaign. However, for those not keeping up with "all this trade war business, perhaps a brief synopsis is in order.

According to President Trump, American trade has been suffering from an imbalance in trade regulations with other countries for decades. Because of our commitment to the free market, every one may freely buy and sell in this country. They have to pay taxes, but the US government would not put further financial burdens to reduce their profits. This applies to both domestic businesses as well as to foreign ones. Now, this is not the case in other countries.

In India, our former home for instance, the government used not only to charge a huge amount of money to foreign countries to trade in India, for over 30 years they prevented foreign countries to sell certain kinds of goods. Those of us who grew up in India may well remember that our parents' generation could not buy foreign cars. Car buying was limited to just three brand names: Ambassador, Fiat and Standard 10 - cars which were originally made in Britain and Italy, but their entire manufacturing took place in India. The trade rights were sold to three Indian auto companies. They became Indian cars.

The Indian government took these measures in order to encourage the progress of the Indian auto industry by forcing buyers to buy one of the three brands so that some of the profit made could go to research and development of automobiles in India. Then in the 1990s the government opened its doors to other countries and Indians could buy not only foreign-made cars, but many other products. This example of the Indian auto industry is an extreme one. Whereas selling of foreign cars was completely forbidden, tariffs were imposed on other goods such as perfume, silk, writing equipment, even foreign films! 

Coming to the United States, historically we didn't charge any tariff for most of the items being sold in this country by foreign businesses. Every other country imposes tariffs. When Trump campaigned for the presidency he came out swinging against the fact that we did not charge tariffs on other countries while those countries levied stiff tariffs against the US. This was not a level playing field, Trump said, and that American business, and hence its economy, is suffering: loss of jobs, siphoning of American dollars into other countries, and so on. When he became president, he announced with a swagger he would levy taxes on China, Japan and India, the European Union, Canada and Mexico, in other words on all of the United States' long-term trading partners.

Now, on face-value, all this sounds fair. Why should we suffer tariffs, and, in the process, make less profit in foreign countries, while those countries have a "field day" doing business here? However, like most things involving business and politics, the situation is more complicated.

For one, foreign goods will go up in price - some items, steeply. The automobile is again a good example. Since half the cars sold in this country are foreign-made, we will have to pay more for a Toyota or Honda; which, in turn, may boost the sale of American cars, but consumers with brand loyalty, may not switch and may in fact pay much more for their cars. But even American cars may go up in price! This is because, many parts of American cars are manufactured abroad: they will all cost more because of - you guessed it: tariffs! Since the US is planning to charge tariffs on aluminum, and since auto bodies are made with aluminum as the main alloy, there will be even higher prices for American cars.

Everything for which tariffs are charged will experience a rise in prices. Mexico will charge tariffs for manufactures of farm equipment, which will hit the farmers in the South and Midwest - from where most of Trump's supporters come - and prices of farm products will go up. So will farm produce, and so on.

Are we sure that the Trump administration should go ahead with trade tariffs?

Update: 13 June, 2018