Tariff talk

Economists describe who benefits, how they work

Tariff this, tariff that … What's a tariff?

Certainly not a rhyme from a Dr. Seuss kid's bedtime story, but something more significant that could have a damaging effect on the U.S. economy and the bottom line for consumers who face paying more for their everyday, routine purchases.

Tariff talk has dominated the news lately -- President Donald Trump increased tariffs from 10 percent to 25 percent on Chinese imports and he's planning to tax an additional $300 billion in goods from China in the future.

But what really is a tariff?

Simply put, it's a tax on goods imported from foreign countries, either intermediate or finished goods, or both, said Abdi Shaeye, assistant professor of economics at Kent State University at Trumbull.

The amount of tax and on what goods it will be imposed is determined by the country receiving the goods, said Albert J. Sumell, economics professor at Youngstown State University, and the duty is collected by U.S. Customs and Border Protection personnel, Shaeye said.

"It's a tax, but a tax specific to imports, so most tariffs are based on percentages instead of a flat tax like a sales tax … So with tariffs, it's going to depend on the goods, so there are different amounts and of course, in this case, the country (China)," Sumell said.

How do tariffs work and who benefits?

"Like with any tax, it's going to increase the price of those goods to consumers, and by how much depends on the level of the tariffs and the type of good," Sumell said. "Some of that additional cost might be borne by the seller, which means if there is a 25 percent tariff on a particular good, it doesn't mean the price will increase by 25 percent because some of the additional cost will be taken in the form of lower profit."

Retailers, suppliers and consumers all will feel the impact.

The Associated Press reports the new tariffs on Chinese and Mexican imports amount to potentially $190 billion per year in new taxes that would be paid by U.S. importers and then typically passed down to consumers. On Friday, President Trump said the Mexican tariffs were indefinitely suspended and Mexico had agreed to take "strong measures" to stem the tide of Central American migrants heading through Mexico to the U.S.

Shaeye said Trump's claim that China foots the bill while the U.S. government reaps the benefits of millions in dollars or revenue isn't, "economically speaking," exactly how it works.

Importing businesses, he said, could deal with the greater cost burden in a number of ways:

• By asking the foreign suppliers to offer discounts to offset the price increase;

• By switching to tariff-free countries;

• And by passing the tariff down to consumers or absorbing the additional cost.

"Having probably already taken advantage of the two first options as profit-maximizing strategies to begin with, the only remaining tactics available to the typical importing firm is most likely settling for lower profits, cutting costs by laying off U.S. workers and most prominently passing most of these tariffs to consumers," Shaeye said.

He agrees the government will collect more revenue and domestic producers of the same goods facing a tariff will benefit by charging higher prices for their domestically produced goods, but the U.S. will be worse off as the economic distortions wreak havoc.

"Consumers of imported goods shoulder most of the burden by paying higher prices of the goods regardless of buying the goods from foreign or domestic producers," Shaeye said.

And unlike free trade, "all countries involved in (a) trade war will most likely be worse off as contractions harm economies and cause recession in extreme cases," Shaeye said.

So who really benefits?

"Honestly, the economist perspective is tariffs are a bad thing for the economy because there are certain concentrated groups that benefit," Sumell said. "Really, the only beneficiaries of tariffs are domestic producers of the goods that are subject to those tariffs."

Take domestically produced steel, for example. Tariffs on foreign produced steel give U.S. steelmakers a competitive advantage.

"If you are producing in the U.S., well, now you can charge higher prices as well, and it makes your product relatively less expensive," Sumell said.

But there can be drawbacks.

Business Insider reported in July 2018 an analysis by Trade Partnership found steel and aluminum tariffs would cost about 400,000 U.S. jobs lost at manufacturers that use the metals compared to about 30,000 jobs gained in the production industry.

The same can be said for the sugar industry, said Sumell, who uses the example in his courses at YSU.

Tariffs on sugar protect about 10,000 domestic jobs, but the cost is about 20 jobs lost for every direct sugar industry job protected as the companies go elsewhere for cheaper sugar.

"Without these tariffs, those jobs would be lost, but the fact is there is a lot more jobs in the sugar-using industry, like candy manufacturers, cereal. So, all of the producers that use sugar have to pay more for the sugar they are using as a result of those tariffs," Sumell said.

National effect

The AP also reported the U.S. economy largely has shaken off the trade wars, but Trump's raising the stakes with China could have a detrimental effect on the U.S. economy.

Americans can see higher prices on a variety of items -- from vehicles to food -- and exporters may feel a pinch when China strikes back with tariffs or other sanctions on goods coming from the U.S.

Although it remains up in the air if the additional tariffs will be levied, the ripples would be far reaching.

UBS (Union Bank of Switzerland) predicts the effect of a 25 percent tariff against Chinese goods would, "in a prolonged trade dispute," reduce the U.S. gross domestic product by 1 percent. Gross domestic product represents the cash value of all goods made and services given in a country in one year.

The tariffs also would disrupt supply chains, be difficult for consumers to avoid and hit the automobile industry hard, as automobiles and automobile parts are the largest category -- $93 billion in 2018 -- of U.S. imports from Mexico, UBS reports.

Local effect

and fireworks

Information from the U.S. International Trade Commission shows 97.75 percent of consumer fireworks imported to the U.S. come from China. The remaining 2.25 percent come from eight other countries, including Israel, Thailand, Great Britain and Mexico.

Youngstown-based Phantom Fireworks imports from China 99.8 percent of the fireworks it sells, said William Weimer, Phantom's vice president and general counsel. The remaining percentage comes from Japan, and it's not a firework, but a novelty item.

Phantom ranks among the top three fireworks importers in the U.S., Weimer said.

"There is no alternative country to which we can turn to for replacement of the Chinese product. From China, we get everything you can imagine," Weimer said, adding the production capability of the other fireworks manufacturing countries isn't enough to supply even one of the top three importers.

That's why Bruce Zoldan, Phantom's CEO, is trying to convince Trump to remove fireworks from the $300 billion in future goods targeted.

Zoldan met with Trump in late May to explain the case for exemption. Although the White House didn't give a firm commitment, "we hope they heard our message and will react when the time comes," Weimer said.

Phantom, a wholesaler that has the largest fireworks warehouse in the U.S. on Larchmont Avenue NE, and a retailer that has 79 showrooms, wouldn't raise prices for this year if the additional tariffs are implemented, but prices would likely go up next year.

Phantom sales catalogs went out in early May, "so we're not even going to think about raising our prices this year -- that wouldn't be fair," Weimer said.

Importers, he said, "have no choice but to swallow real hard" and pay the tariff, but it "cannot possibly be absorbed 100 percent by importers," most of which will pass the increase down to consumers.

Prices would rise 15 to 20 percent with importers like Phantom unable to absorb more than 5 to 7 percent of the increase, Weimer said.

Hearings on the additional tariffs are scheduled to begin June 17, which is the same day written comments are due, Weimer said. He is preparing comments to submit and plans to register to testify.

A decision is expected in August.

Trade war's effects

In the end, it's generally considered a trade war, and trade restrictions are bad for the economies of both countries engaged, Sumell said. In the case of China, which has imposed higher tariffs on U.S. imports, the U.S. tariffs could be thought of as a way of incentivizing China to reduce the tariffs on goods coming from the U.S.

"So we end up with a scenario where both the U.S. and China have fewer trade restrictions on products so it's a more level playing field for U.S. producers, and we open up markets and are open to more customers as a result," Sumell said.

However, should the trade war escalate further with China, Shaeye said, it could have "huge implications for the global economy.

"Besides the direct effects induced by the potential contraction of these two economies, it could have indirect ripple effects on the economies of other countries, especially those that are dependent on exports of the countries," Shaeye said. "Financial markets turmoil due to uncertainty and subsequent global economy decline could be in the cards."