Let the Bailouts Begin

Let the Bailouts Begin

By Mark Nestmann • December 4, 2018

Like so many other measures that well-intentioned people advocate, tariffs on imports are deceptively attractive.

What’s not to like? Imposing tariffs, after all, will create American jobs. At least that’s what supporters of higher tariffs claim.

Here’s their reasoning: First, we impose a tariff on an imported good – let’s say steel. That’s happened earlier this year; President Trump imposed a 25% tariff on imported steel.

The tariff gives domestic steel producers an instant price advantage. So long as they can produce steel profitably at a lower cost than the imported steel now subject to the tariff, they’ll prosper. Presumably, they’ll hire more workers, or at least not lay them off, thus creating (or at least saving) American jobs.

What’s not to like? After all, at least one steel manufacturer, Steel Dynamics, has announced plans to build a new steel mill in the US set to begin production in 2020. The company estimates the mill will create 600 jobs.

Or as President Trump tweeted:

Steel JOBS are coming back to America, just like I predicted.

If it were only that simple. It’s not.

For instance, the 25% tariff on imported steel has already cost domestic auto producers billions of dollars in additional production costs. The largest domestic auto manufacturer, General Motors (GM), just announced it is laying off 14,000 workers and suspending production at five of its US factories.

It’s not like GM didn’t warn us. Back in June, it predicted that steel tariffs would result in “less investment, fewer jobs, and lower wages” in the domestic auto industry.

Here’s why:

Once the 25% tariff came into effect, do you think domestic steel producers kept selling steel at the same price?

Of course not. Domestic steel manufacturers, like any other company, are in business to maximize profits. If you hand them an opportunity to increase prices because their competition has been hobbled, they’ll take it.

Wouldn’t you, if you were in their position?

In other words, even if domestic steel production doesn’t increase by a single ton as a result of the tariffs, domestic steel consumers still pay higher prices – potentially, as much as 25% higher.

And, as long as the tariffs continue, the domestic steel producers have that much less incentive to invest in innovative technologies that would allow them to compete with imported steel.

The same is true for any other industry in which imports are subject to tariffs. Inefficient domestic producers receive an indirect government subsidy. Thus, tariffs make domestic industries less competitive than they otherwise would be.

Manufacturers such as GM that need goods subject to tariffs only have three choices:

  1. Absorb the cost increases, lowering profitability.

  2. Sell the goods they produce at a higher price to consumers, reducing sales.

  3. Lay off workers and close factories.

All three of these outcomes are highly undesirable.

Tariffs also result in lower exports for domestic producers. The reason is countries whose products are targeted for tariffs inevitably retaliate by imposing tariffs on American exports.

For instance, China retaliated against the Trump tariff policy by slapping tariffs on US-produced agricultural products. As a result, American farmers who previously exported millions of tons of soybeans and other farm products to China have lost billions of dollars.

Since then, the price of soybeans has fallen dramatically. Soybeans are literally rotting in America’s fields because no one’s willing to purchase them for more than it would cost to harvest them.

Naturally, American soybean farmers are unhappy about the situation. So, they’ve done what any rational business would do when faced with a crisis created by government: they’ve asked for a bailout. And the Trump administration has responded with a $12 billion relief package.

People are lining up for the free money – but not all of them are farmers. To qualify for a payout of up to $125,000, you need only to show that you are “actively engaged” in farming.

That was enough to qualify an architect living in Manhattan who is the partial owner of a farm in Ohio a $3,300 payment. Indeed, more than 1,100 people living in the largest cities in America have received bailout payments.

Oh, and get this…some of the bailout funds went to Chinese-owned farming operations in the US. Smithfield Foods, the largest pork producer in the country, got a check from the Department of Agriculture and is Chinese owned.  

Another way the government tries to compensate companies affected by tariffs is by exempting some businesses from them. That sounds reasonable, until you realize that the companies who successfully lobby for exemptions are the ones with the deepest political connections to the government imposing the tariffs.

For instance, the Department of Commerce announced it would exempt steel importers from the 25% tariff if they could show that the steel they used wasn’t readily available in the US or didn’t threaten US national security. More than 30,000 companies applied for an exemption. Is it any surprise that Mick Mulvaney, director of the White House Office of Management and Budget, lobbied the Commerce Department to grant an exemption to a company owned by one of his campaign contributors?

Supporters of tariffs fail to understand that free trade is a voluntary exchange. There are no winners and losers. If there were, no one would bother to trade.

Tariffs improve the economic position of a select few at the expense of everyone else. They’re essentially a tax paid by consumers who purchase imported products.

As economist Thomas Sowell puts it:

If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a “deficit” or “surplus” in the international balance of trade.

President Trump says that “trade wars are good, and easy to win.” The evidence that this is not true is overwhelming. And the economic reality that tariffs hurt both importers and exporters is now becoming apparent.

Protecting your assets (and yourself) against any threat - from the government, the IRS or a frivolous lawsuit - is something The Nestmann Group has helped more than 15,000 Americans do over the last 30 years.

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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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