News that the Trump Administration is planning on placing a 25% tariff on steel and a 10% tariff on aluminum inports was not well-received in the vast majority of business circles. The stock market hates the idea. And even if you are one of the manufacturers of these products and you ar eone of the few expected to benefit from the tariff directly, you will likely experience higher consumer prices as a result. Why is this so?
Simply put, the prices of goods that are upstream in the supply chain, such as ingredients and components (ones that are used by finished goods manufacturers to make the products we buy) affect pricingand costs further downstream in the supply chain. When costs rise in an entire industry, they can be more easily be passed on to consumers since competitors all experience the same increases at the same time. In the case of aluminum, for example, a tariff is likely to increase the costs of finished goods that use aluminum such as cans for soda and beer.
Indeed more than half of the beer in the U.S. is put into aluminum cans, and the craft beer industry in particular, already beleaguered by slowing sales, is increasingly sold in cans partly because aluminum offers a superior surface for more attractive branding. Consumers of foods like soups, tuna, soda, and others will likely see price increases as well to say nothing about the cars and bikes that contain both metals. The reasons for the proposed tariff mostly involve variables related to importing metal for defense manufacturing and its propensity to weaken domestic production being potentially bad for national defense, but many industries are expected to be affected by this action.
Free market economists do not favor trade barriers such as these because they often result in retaliation from the nations affected by the higher costs induced by the tariff. Higher prices could also re-ignite inflation which will cause prices to rise even higher. It's probably bad news all the way around, so perhaps the administration will reconsider any anti-trade policies such as this one, which are not at all policies that the majority of Republicans embrace. If the tariffs do happen, consumers must prepare to pay slightly higher prices for many of the things they buy.
Discussion: How do you feel about the use of tariffs and other barriers to trade to protect American production and reduce trade deficits? What would you do if you were in charge?
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