Tariffs are a tool used by governments to maintain a balance between imports and exports. Critics like to claim that tariffs are an affront to free trade. As the thinking goes, countries ought to be able to conduct trade as they see fit, free from tariffs and duties. But when you peel back the politics and look at raw economics, tariffs are not the enemy of free trade. They are essential to it.
How you view tariffs and free trade may depend on how you define the latter. If free trade to you means absolutely no restrictions on the flow of goods and services, then tariffs are a bad thing. But if free trade means that countries are free to trade with one another as long as they all play by the same rules, tariffs are a good thing.
Need evidence? Look no further than China. Over the last 50 years, China has built a powerhouse economy on a combination of manufacturing and exporting. That may seem good on the surface, but the underlying impacts of China’s behavior have been largely negative.
Saving a Syracuse Candle Maker
Syracuse, New York is home to Cathedral Candle, a company that sells candles to religious institutions across the country. The company has been owned by the same family for 124 years. In recent years, Cathedral Candle has only survived because of tariffs on Chinese candles. Now the company is hoping the federal government will extend current tariffs for another five years. If not, they are set to expire at the end of this year.
What is the problem? Chinese dumping. In terms of global economics, dumping is the practice of selling products in overseas markets for less than you sell them at home. The idea is to overpower foreign competition in hopes of eventually cornering the market. Own the market and you can raise prices.
China has a history of dumping. They can do it because labor is so cheap. According to 2020 data, the average labor cost for manufacturing in China last year was $6.50 per hour. Based on a 40-hour week, this is $260 in weekly pay. U.S. manufacturers simply cannot compete with that.
How Tariffs Work
A tariff is essentially a tax. It is paid by an importer when overseas goods arrive in the country. The importer passes the cost on to distributors who, in turn, pass it on to retailers. It is ultimately paid at the cash register by consumers.
Tariffs essentially raise the retail price of imported goods. This prevents a foreign entity from undercutting domestic goods by offering dirt cheap prices. Consumers have no incentive to buy the foreign goods because they get better American quality for a comparable price.
The system works so well that China has attempted to get around candle tariffs by manipulating the product classification system. Vigilant Global Trade Services, an Ohio company that specializes in import and export classification, says that product classification helps customs officials keep track of imported goods for tariff purposes.
Unfair Trade Tactics
One of China’s tactics is to misstate country of origin. They have also attempted to ship candles without wicks, thereby allowing them to use a different product classification code that would not be subject to a tariff.
Genuinely free trade is based on a set of rules that all trade partners agree to play by. When those rules are not followed, trade isn’t fair at all. That is why tariffs exist. They are assessed to account for the fact that some try to skirt the rules in order to gain an unfair market advantage.