Get Ready to Pay More for Beer

Get Ready to Pay More for Beer

By Mark Nestmann • March 13, 2018

It’s a punch to the gut from a president who claims to be uniquely in touch with American workers.

President Donald Trump has announced that he will impose new tariffs on imported steel (25%) and aluminum (10%). These tariffs will increase the domestic price of many products, including America’s favorite libation: beer.

The most convenient way to transport beer is in aluminum cans. And beer manufacturers estimate that the new aluminum tariffs will force them to increase beer prices to the tune of more than $250 million annually.

Of course, the tariffs may reduce the social problems associated with alcohol consumption, such as drunk driving, so I suppose that they could be construed as an economic benefit. But by any other economic measure, tariffs are a lose-lose proposition. All parties involved – both the US and the countries targeted by the tariffs – will be worse off.

It’s obvious how countries targeted by tariffs suffer economically. Those countries’ exports to the US – e.g., shipments of Heineken beer from the Netherlands to the US – are likely to fall. But some exports will continue, and the domestic businesses that use or distribute products that are tariffed will pay more for them. Again, beer is a great example, as is any other product made with imported steel or aluminum.

Tariffs are also a lose-lose proposition from a jobs standpoint. Some workers in steel and aluminum factories in those countries targeted in the latest round of tariffs will likely lose their jobs or be forced to work shorter hours as a result of decreased demand from the US.

The tariffs will also have a negative impact on the domestic job market. Here in the US, higher prices for steel and aluminum will mean that domestic manufacturers will pay more than their global competitors who use the same products. That will make vehicles, aircraft, and any other products manufactured in the US more expensive. Higher prices will dampen consumer demand.

Less demand will result in reduced production. More than seven million people work in the American automotive industry. How many of them will lose their jobs or be forced to work shorter hours due to Trump’s short-sighted tariffs?

Trump defends tariffs based on his understanding of the “balance of trade.” A balance of trade is the difference between the value of a country's imports and its exports for a given period.

As the president stated on Twitter:

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!

If only if it was that easy… But it’s not. For instance, the countries that have the largest trade surpluses with the US are:

  • China - $375 billion
  • Mexico -$71 billion
  • Japan - $69 billion
  • Germany - $65 billion
  • Canada - $18 billion

All of these countries have a trade surplus because they don’t need what the US manufactures; because they can produce items domestically for less; or because they export more than they import in general. Tariffs are not going to change any of these factors.

Imposing a 25% tariff on steel imported from China might make an unemployed steelworker in my home state of West Virginia happy. But it’s not likely to give him back his job, since tariffs are likely to cause a decline in the demand for products made with steel.

As well, Chinese companies will be unlikely to purchase more American-made products containing steel. Tariffs will increase the prices on those products, so any product the US might want to export will be available for less money from a country that hasn’t imposed steel tariffs.

Tariffs also have a coddling effect on domestic producers which can diminish their ability to compete in the global market. US producers will see profit margins increased – at least temporarily – as the pressure to match lower imported prices subsides. That in turn stifles innovation, encourages wasteful practices, and makes it more difficult for those producers to compete without tariffs. Thus, tariffs become self-sustaining, as businesses constantly repeat the mantra,
“We can’t compete without tariffs.”

No wonder David Burritt, the CEO of US Steel, loves the idea of tariffs on imported steel. As he put it, "This is vital to the interests of the United States…This is our moment.”

Then there’s the inconvenient truth that tariffs by one country invite retaliation by the countries the target tariffs. The European Union has threatened to impose tariffs on imports of products like American whiskey. Canada, who supplies the US with most of its imported steel and aluminum, has also threatened countermeasures.

Trump has temporarily exempted Canada and Mexico from the tariffs, but there is no promise that the exemption will last. Since Canada exported $15 billion in steel and aluminum products to the US last year, the loss of an exemption would likely result in retaliation.

Finally, it’s sobering to recall that American tariffs, in part, helped launch the global depression of the 1930s. And while it nudged the world toward the biggest economic downturn in history, the Smoot-Hawley Tariff Act of 1930 hardly had its intended outcome: to protect American workers.

The Smoot-Hawley tariff act raised tariffs on more than 900 imported goods. Yet, within a year of its enactment, unemployment doubled from 8% in 1930 to 16% in 1931. By 1932, unemployment was 25%.

Something to think about when you’re drinking your now-more-expensive beer out of its imported aluminum can!

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About The Author

Since 1990, Mark Nestmann has helped thousands of clients seeking wealth preservation and international tax planning solutions. He is the author of highly acclaimed Lifeboat Strategy and other books & reports dealing with these subjects.

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