One of my favorite quotes from the classic tome Zen and the Art of Motorcycle Maintenance by Robert Pirsig is the following simple truth:
“Some things you miss because they’re so tiny you overlook them. But some things you don’t see because they’re so huge.”
For most Americans (US consumers), the concept of tariffs (trade barriers) is nothing more than another repeating story on the news outlet of their choice. This is because the direct effect of these tariffs is typically distant at best, and even if the effects are ultimately realized by some segment(s) of the economy, they may not have the greatest impact on the most obvious, or even their intended, target(s). However, when motorcycle producer Harley Davidson recently cited tariffs as a reason for closing a US production plant and moving some operations to the EU, the resulting news coverage and saber rattling by both sides of the political aisle put the concept of tariffs more in the forefront of the average US consumer’s mind. Anything but a “moment of Zen.”
Since tariffs essentially represent an additional tax on international trade between countries, they consequently have the potential to become a hinderance to global growth and may put upward pressure on the prices consumers pay for goods and services. For investors, these trade barriers can be unsettling as they tend to increase both short-term volatility in the capital markets and the risk of a broader economic slowdown. This is because outside of direct armed conflict between countries, tariff-based actions are one of the Government policies that has the highest potential to directly impact the future of US employment, consumption, and consumer confidence. However, our intention is not to provide a historical evaluation or commentary on the viability or advisability of such trade policies, but rather to address the common question – why implement tariffs at all?
The US currently classifies 99 categories of imports, representing over 5,000 items, in its Harmonized Tariff Schedule. This schedule is overseen by the US International Trade Commission but the tariffs themselves are then implemented by the U.S. Customs and Border Protection. The basic intention of implementing a tariff on the import of goods from a foreign producer is seemingly logical from a domestic perspective. When US companies (and/or industries) are at a competitive disadvantage (labor cost, raw materials cost, distribution networks, etc.) to their global peers, it makes them less competitive in the global marketplace. This disadvantage can challenge profits, threaten jobs, and ultimately, impact the ongoing viability of these companies as a domestic producer of goods. These challenges can create corporate, and often public, pressure on the Government to provide some form of competitive protection and/or relief to these companies.
Unfortunately, since trade actions do not occur in a vacuum, well-intentioned protections that benefit domestic producers can have the opposite effect on their global competitors. As a result, other countries may implement their own retaliatory tariffs in an effort to protect their own domestic producers and/or their global advantages. This tariff escalation is commonly known as a trade war (an escalating game of chicken).
Regardless of where you fall on the issue of tariffs, their objective is not the disruption of trade for the simple sake of creating punitive or destabilizing market upheaval. Even if today’s trade policies ultimately prove to be misguided by history’s all-seeing compass, it is important to remember there is a larger, competitive objective to implementing tariffs, regardless of the government that implements them, to somehow “level the playing field” and/or bring interested parties to the negotiating table. This process historically results in the eventual removal of the tariffs and/or the establishment of some form of mutually-agreeable free trade agreement between the countries.
While this bigger picture synopsis may not provide a true “moment of Zen” as current trade tensions continue to escalate between the US and several of its trading partners, I’ll close with another quote from Robert Pirsig’s book that tries to see over the horizon since change is often messy through a current lens:
“One thing about pioneers that you don’t hear mentioned is that they are invariably, by their nature, mess-makers.”
Remember, this is just a quote. History is the only judge with the perspective and qualification to assign labels.
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