Fair is Fair – Tariffs and the Global Marketplace
Sifting through the contradictory reporting on the impact of increased US tariffs on imported goods, consumers might be confused while trying to understand the effect of tariffs on their daily lives. Simply stated, tariffs are a tool for evening the playing field when your global trading partners do not appear to be abiding by fair trade practices. Unfair practices can include artificially low pricing or one-sided market access. Complicating issues include exchange rate management and the security of intellectual property.
Consumer or industrial goods (automobile parts, soybeans, clothing, electronics, etc.) can be produced in one market (country) and subsequently shipped (exported) to another market (country) where demand exists. Sellers ship these products to places where product pricing ensures a profit so that exports only occur if they are profitable. In some cases, local governments at the place of origin might subsidize production or partially pay the product’s cost, so that the cost of production is lower than what economics would dictate. An unfair trade event occurs due to an artificially low cost at its origin and similarly, a below market selling price for the product in a destination market.
In this instance, an artificially low selling price forces producers in the target market to lower prices in order to remain competitive and maintain market share or customers. However, for example, if target market costs exceed the effective costs for the importer, the business in the target market might close due to an inability to compete on price with the importer. The “unfairness” of this transaction rests in the idea that the import benefits from subsidies while the target market has no such benefits, and tariffs would even the playing field. Unfair trade can also originate in an absence of “open” markets where one economy has free access to markets in another economy, but this access is not reciprocal.
Imposing tariffs on imports ensure that global sellers are pricing products at their true cost and unfair advantages provided by foreign governments do not destroy domestic producers. Tariffs can also stimulate discussions on market accessibility and reciprocity.