Marc Cuniberti: Tariffs vs. tax credit on steel
March 18, 2018
The media has been rife with news about the Trump steel tariffs and the opinions run the gamut from full support to outright stern objection.
The argument is not so much about whether our steel industries need protection as whole as an argument could be and has been made that China, the target of the tariffs, has been playing unfairly in the arena of free trade.
Although most of the media coverage has centered around the specifics of the industry in question, the microscope of analysis should be explaining and detailing how tariffs are thought to work and whether tariffs in general are a useful and efficient remedy to such maladies.
Simply put, this particular tariff is an additional tax placed on Chinese steel. Therefore the price of domestic steel would not be reduced.
The obvious reasoning is that by making an import more expensive though tariffs and thereby making American steel more attractive by comparison, our domestic steel industry would benefit.
The first question I would ask is wouldn't a tax credit offered to our steel companies serve the same purpose?
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Breaking down the differences
Think of it this way: by installing tariffs on imported steel, the price of domestic steel would not drop in nominal terms. The cost savings to the industries that use steel therefore would not be reduced.
These steel consuming industries such as the auto and packaging companies, to name a few, would see no savings. Meanwhile, the tariff money goes into the coffers of those that initiated the tax, and that means into government coffers.
I have always made the argument that if the governing authorities want to help the bulk of the economy, meaning the consumer, a tax credit would serve the same purpose by giving our industries the needed break in question.
The difference is by allowing domestic steel companies to take a tax credit, they could offer their steel at lower prices to those consuming it. That in turn would mean lower steel prices to those that make the end products which is all the stuff you and I buy that use steel.
This would result in a general price reduction in all products that use steel and its related products and that in turn would mean more money in the pockets of American consumers to spend on other items in the economy.
Conversely, when a tariff is used, there is no price reduction in the end product which means the consumer saves nothing. The money which is the tariff tax goes into government coffers and that should be the end of the story but it's not.
It is generally believed the import tariffs actually cause price increases in whatever end product is in question so you get a double whammy, and not in your favor dear reader.
What it means to the consumer
One could argue the government would use those additional monies to spend on whatever it spends its money on, but since the consumer is the driving force of all economies, putting that money into the hands of the everyday Joe would not only help a struggling constituency, which is all of us, but get into the economy that much quicker.
It's believed by some, this analyst included, that money in the hands of consumers is more wisely spent with less waste than putting that money into an already bloated bureaucracy known as Uncle Sam.
In each specific case a tariff is implemented, the subsequently higher priced import does make the domestic product more attractive by comparison, but besides stuffing government coffers, the consumer would see no benefit from reduced prices.
In fact, the consumer would likely see higher prices. Compare this to a tax credit which would have a similar effect on domestic steel demand yet have the additional benefit of lowering prices to the consumer.
That the powers at be wish to help domestic producers and assist in what arguably could be unfair practices is the obvious reasoning. That the money goes into the hands of Washington instead of into the American consumer is the larger issue and something few people are even discussing.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. He is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. He can be contacted at 530-559-1214, or at SMC Wealth Management, 164 Maple St #1, Auburn. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.
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