If anyone was under any delusion that Donald Trump was not going to be as bonkers as he said he would be, then his announcement on Tuesday that he would slap a 25% tariff on all imports from Canada and Mexico (and deeper tariffs on China) should remove all doubt.
“Tariff” has become the economic word of the year thanks to the incoming US president.
It is no surprise that there has been a spike in Americans searching “What is a tariff?” on Google (sadly more people are asking that now, rather than before the election).
The answer is this: a tariff is essentially an import tax.
And despite what Trump might tell you, it is not paid by the country or the company that is exporting things to your country.
A 25% tariff means anyone importing things from – in this instance Canada or Mexico – to the US will now have to pay a 25% tax on the good. So, something that cost $100, now costs you $125.
If you are then selling that item or using it to build something that is then sold, that cost is of course going to be passed on to your customers.
Tariffs raise prices much like the GST raised the prices of things – and like the GST it hurts people on low and middle incomes the most.
Canadians and Mexicans will lose out as well because American importers will look to get goods from elsewhere because now those products are more expensive to buy. Maybe they will buy American-made items; more likely they’ll just import them from another country.
But the world economy is complex. A lot of what Americans import are things used by American companies to make their own products.
About 35% of what the US imports from Canada is petroleum – either refined, crude or gas – so the tariff now raises the price of that. Same for aluminium products and wood and all manner of other “input” goods.
That means the cost of overall production in America also rises.
So, not good.
And you can expect Mexico and Canada to retaliate with their own tariffs against US imports.
This would hurt the US economy because Canada and Mexico are America’s biggest export destinations:
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The Mexican president is already announcing this will happen.
Welcome to a trade war – where no one really wins, because everyone just pays more for things.
Australia used to have some very high tariffs – especially for manufacturing and agriculture.
But since Gough Whitlam, who cut tariffs by 25% in 1973, the drive has been to lower them:
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The big drops occurred during the 1980s and 1990s as the Hawke and Keating governments sought to make Australian industries compete with the rest of the world.
As Bob Hawke told parliament in his 1991 “Building a Competitive Australia” speech, the result of these tariffs was “inefficient industries that could not compete overseas; and higher prices for consumers and higher costs for our efficient primary producers”.
Because tariffs keep import prices high, local industries can become rather inefficient and lazy.
In the 1980s imported cars had a 57.5% tariff. It meant Australian cars could be poorly made with few features that were standard in Europe and the local companies didn’t have to worry about you buying the better made European car because they were far too expensive.
And so down came the tariffs from the 57.5% rate to 35% by 1991 and then by 2.5% a year to a 15% rate in 2000.
The impact on car prices is pretty clear:
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From 1972 to 1996 car prices rose essentially in line with overall inflation. Since 1996, inflation has risen 108% while car prices have fallen 12%.
That’s the good news – cheaper cars for all!
Not so good if you had a job making one though.
The problem with tariffs is that while there are clear benefits to the economy (and society) from reducing them from very high levels to low levels, the benefits diminish with each cut.
This is pretty obvious from the improvements in productivity in the 1990s when the big cuts were made on manufacturing tariffs, and the only small improvements after then even though the smaller tariffs kept being cut:
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The tariff of 15% brought cheaper, better cars onto the market, forced the local industry to improve in order to compete, and yet still gave it just enough protection to be able to compete against the massive car producers of Japan, the United States and Germany.
But the tariff cuts kept going.
The tariff on passenger motor vehicles dropped to 10% in 2005 and 5% in 2010.
And in 2008 Mitsubishi announced it would stop local production.
Government subsidies kept the industry going but Joe Hockey as treasurer ended that assistance.
And in 2013 Ford and Holden announced they would stop local production.
And then in 2014 Toyota announced it too would stop local production.
And now just 6% of all employed work is in manufacturing, compared with more than 20% in the 1970.
But Australia is not alone in this – in the 1950s about 30% of all workers in the US worked in manufacturing, now it is just 8%:
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And this brings us back to Trump.
Why put tariffs on Canada and Mexico and China (and other nations including Australia) if it is just going to raise prices?
The theory is that it will bring back the factories and jobs.
Alas tariffs are a bit like a bath plug – they keep the water at a certain level but if you take it out the level goes down, and putting the plug back won’t cause the water to rise.
American manufacturing might get more work but mostly it will just take workers from other sectors that are not as protected or which get hurt more by tariffs other nations apply.
The big question though is: is this all just bluff?
Trump is great at saying he will do something, not doing it, saying he did and declaring some huge victory when nothing actually happened.
Economists and anyone who buys products imported or made from imports will be hoping this is what he intends this time.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
