Tariffs Schmariffs
To My Readers: This article was written Wednesday morning, prior to the announcement that most tariff increases would be paused for 90 days. I don’t think that announcement impacts this article at all, except that perhaps my tenor would have been slightly different.
It seems like recently all we’ve seen in the news are the tariffs that the U.S. is imposing on the rest of the world.
Now I’m sure you have an opinion on whether tariffs are helpful or harmful. I’m not going to try to change your mind.
What I want to do however, is shed more light on some aspects of the subject as I don’t believe that our news media has sufficiently reported on three of these.
While listening to reports about the various tariffs imposed by other countries, I’ve heard of a few crazy tariff rates that apply to specific products.
For example, the EU may have a 10% tariff on U.S. imports but certain manufactured or agricultural products may have significantly higher rates. Why? Well, some countries want to protect certain industries. An extreme example is Japan that places a 700% tariff on U.S. rice.
Besides targeted tariffs, I’ve also heard that the EU’s value-added tax (VAT) is anti-trade. So, I looked into the subject to get a better understanding of how this tax works.
Finally, tariffs are not just about numbers. They may be a barrier to free trade, but there are other non-tariff barriers as well.
Targeted Tariffs
Are targeted tariffs like the one on rice in Japan helpful? One way to look at it is that the tariff shields rice farmers from other countries “dumping” rice on the Japanese market by selling rice at a lower price than they do in their own countries. Another way to look at it is that the lack of competition enables the Japanese rice farmer to use less efficient means of production or charging a higher price, knowing that they compete in a protected market. Neither benefits the Japanese consumer.
There are thousands of targeted tariffs around the world. Here are some of the more egregious ones I was able to find:
So, the EU may impose a 10% across the board tariff on U.S. imports, but it has targeted tariffs on many goods that act as a trade barrier for the U.S.
European Union VAT
The EU’s VAT is a consumption tax that is assessed by the government at each stage of the production of a good.
In the example below, at each of the six stages of production of a product, a 5% tax is assessed on that stage’s input into the product, paid by the producer. The final cost paid by the consumer is $21.00, which indirectly includes the $1.00 VAT.
Although this example seems simple, more complex conditions can considerably muddy the waters, such as different stages of production occurring in different EU countries each with its own VAT rate.
Goods made outside of the EU are still charged the VAT; the VAT is assessed at the point of entry. So, if the U.S. exports the product above to the EU, its full $20 cost would have a VAT of $1.00 levied.
The anti-competitive aspect of VAT comes when the EU exports to the U.S. On export, goods produced in the EU have their VAT refunded, thereby lowering their price.
Non-tariff Barriers
Non-tariff barriers (NTBs) are restrictions on trade that do not involve tariffs but instead use regulations, policies, or practices to limit imports.
Here are a few specific NTBs:
China’s Data Localization: Policies requiring U.S. tech firms to store data locally and restrict cross-border data flows hinders digital service exports and impacts companies like cloud providers or software developers.
Canada’s Dairy Quotas: Canada imposes strict quotas on U.S. dairy imports. Once exceeded, tariffs can reach 270%.
South Korea’s Electronics Standards: Stringent and unique technical requirements for U.S. electronics increase compliance costs and delay market entry.
EU Food Safety Standards: The European Union bans U.S. poultry treated with chlorine washes and beef from hormone-treated cattle, citing health concerns not fully aligned with international standards.
* * *
Tariffs have existed for thousands of years and I’m sure will continue to exist into the future.
Every country naturally wishes to prosper by selling its goods abroad while at the same time limiting the goods foreign countries export to them. Tariffs are a means to limit competition. A basis of capitalism is that, left to themselves, markets will efficiently deliver goods and services to consumers. Tariffs limit this efficiency and we should work to eliminate tariffs and trade restrictions.