LET'S TALK ABOUT TARIFFS

[Note: Someone sent me a DM asking me my thoughts on tariffs. I've been avoiding this topic because I know how easily it can get political, but from my perspective, it is not a political discussion, it's an economic one. So, let's tackle it here.]

A tariff is a tax.

It's a tax imposed on businesses when they import certain goods.

For example, if the government puts a tariff on refrigerators, when a US company imports a refrigerator from another country, that US company will have to pay a tariff (tax) to get the product through customs at the US border.

The first thing that is important to note is that, while taxes on unrealized gains have been prominently discussed over the last couple months, very few people seem to realize that a tariff is very much a tax on unrealized gains.

The business is paying the tariff (a tax) on a product that they have invested in (purchased), but haven't yet sold or profited from (they haven't yet realized the gain). No different than if you buy a stock today and have to pay tax before you sell it and realize the profit.

But, let's dig in and see why there is so much disagreement on whether tariffs are good or bad for the economy and the country. And it generally boils down to the fact that tariffs can play out multiple different ways, with some being good and some being bad.

In other words, we need to separate what will happen in the real world from the theory.

Let's start with the theory...

In theory, one of three things will happen when a tariff is imposed:

1. Businesses will stop importing products and instead start to buy domestically manufactured products instead (or even start manufacturing the products themselves).

This is -- again, in theory -- generally good for the country, as it encourages domestic production and increases employment. Unfortunately, if those products can't be manufactured in the US at competitive prices, this can lead to price inflation. And even when they can be manufactured in the US, it generally provides an opportunity for domestic competitors to raise their prices because they can't be undercut by foreign competitors.

2. Businesses will negotiate lower prices with the foreign companies they are buying from, which, after paying the US government the tariff, will allow there overall import price to be the same.

This is definitely good for the country because it doesn't lead to inflation and generates additional revenue for the government.

3. Businesses will pay the import price plus the tariff, and pass the extra cost on to the consumer through higher prices.

This is generally bad for the country, as it's literally a tax passed on to consumers that leads to price inflation. While it does generate additional revenue for the government, this revenue is coming out of the pockets of Americans.

Now, this is where real life comes into play...

Which is these three situations is most likely to play out given our current global economy and the condition of our global trading partners?

* Unfortunately, in the real world, number one doesn't happen very often anymore. It used to. A hundred years ago, when most countries were on a level playing field when it came to manufacturing technology and cost.

But, these days, our labor costs are higher than most of the rest of the world (due to the fact that we have a minimum wage and child labor laws). The only way this option plays out is if the government chooses to regulate the industry and/or provide significant subsidies. We see this with our agriculture in this country, and recently we've seen it with the Chips Act.

Number one would be a great result, but it's unlikely to happen at scale and across industries; if it did, it would require regulation and corporate welfare to implement.

* Number two only happens if we are importing from emerging economies that have high margins and strong growth. These are the countries that can afford to take a hit on prices because they're making lots of money and they are trying to grow their economy.

Unfortunately, very few of these countries exist anymore. For example, China is seeing major inflation, economic slowdown, and higher unemployment among manufacturing workers -- they literally can't afford to simply cut their prices to absorb significantly higher US tariffs. Likewise with many of our trading partners during this highly inflationary period.

* Which means that most of the time we default to number three. Basically, an additional tax on Americans that drives inflation.

US businesses shell out the tax on these imports, and raise their prices to sustain margins. American consumers absorb these higher prices, leading to inflation and economic distress.

(Keep in mind that we are talking about tariffs at a scale substantially higher than what we see today. Current tariff levels have mostly been absorbed into the global economy, kind of like sales tax. We've come to not think about it anymore, even though it costs us all money.)

By the way, it's important to note that what I discussed above only addresses the domestic side of tariffs. It doesn't address the issue that significant tariffs would likely incite a global trade war that would hurt American businesses/exporters, as well as our global trading partners, leading to a potential global depression.