Tariffs - Good or Bad?

The market continues to react to the whole tariff thing - down big, recovery, up, down. With the Big Orange Man in charge, the tariff thing will likely proceed in his usual seemingly capricious way: First he says one thing, then another.

Contradiction? Confusion? Or just the way he's behaved throughout an illustrious, or at the very least, very public career. Why should he be any different now?

Another example of this behavior: the statement that the U.S. "take over" Gaza, which includes "removing" all the inhabitants. Who else would come up with such an idea? No, actually, who else would come right out and say it? He even said a rebuilt Gaza would be the "Riviera" of the Middle East.

It never ends.

And with it all markets react. Why? Do those big time investors - the real pros - really react to every thought of word of our Prez? The answer is likely the same as do they react to ever hit or miss in earnings, as the financial media contends every day. The answer is "No." The headlines are just filler and click bait. But we've covered all this before. The algorithms that drive the High Frequency Trading machines incorporate news and trade accordingly - either long or short - to clip mini-bits of profit over millions (as in millions) of itsy-bitsy trades. Nice work is you can get it.

As for our reaction to the comments of our fearless leader, we might remember this in the coming months and years Any gyrations have more to do with the "machines" (those massive algo trades that dominate daily trading in the stock market) than with any rational - or even irrational - human responses. At least we'll not get sucked into that vortex of emotion that can easily lead us down the road of investing perdition.

But back to to tariffs.

One of our reasonably intelligent sources of analysis stated that the last time tariffs were the rage was the 1930s. Remember that, right? - the Great Depression. So the connection is made not just by this source, but by many others. Indeed, a storm of tariffs spread across the world and with that - the theory goes - the Great Depression dug deep into the economies of country after country.

The very word "tariff" thus becomes something always and everywhere bad.

But what of the use of tariffs before the 1930s? Yes, tariffs were, for many years, a part international trade. And they didn't lead to a Great Depression. (If not familiar with this, perhaps you do some research on it to get up to speed. For now, we simply point out the facts.)

So if tariffs weren't always the bane of economic progress, why will they inevitably be so now - as many seem to believe? It's a fair question.

We don't have a definitive answer. But we can make a suggestion. 

Looking back, it seems that as a general rule tariffs have always been part and parcel of government economic policy here and abroad. And when applied selectively, they have not created Great Depressions.

The key word here is "selectively."

Sure, the argument can come back that any tariffs will lead to a rise in prices on the goods subjects to tariffs. You don't need to be a trained economist to figure that one out. Slap on, let's say, an extra 10% cost on an imported item and, if left on long enough, that 10% - or some portion - will find its way into the price of the item when it hits the market for sale.

But isn't the devil in the details here?

For example, if tariffs are applied to imports of wine, and said wine goes up in price, it's not like an American can't drink wine anymore. One can either pay up, or avail oneself of the myriad other American grown grapes or grapes from countries on whom tariffs were not slapped.

Even steel and aluminum could fit the bill here. It's not like none of these are produced here in the USA. Sure, prices might rise and the goods made from these commodities may cost more in the short run. But if said tariffs remain in place long enough to spur more domestic production, might the result not be a settling of prices as well as an increase in employment for American workers?

We'll stop there, especially in light of knowing that our analysis could easily be subject to criticism based on our at best cursory knowledge of how all this works.

Of course, the assumption here is that some "experts" understand not only how all this works, but exactly what the consequences will be if tariffs are imposed in significant numbers. Do they really know this? 

It's said that inflation will be the inevitable result of tariffs. And that's not a crazy thought. But we might also factor in the possibility that items that folks may simply not buy or at least cut back on items that rise in price. 

The point is that an economy is a rather complex collection of relationships and actions, no one of which exists in isolation and no one of which necessarily can be pinpointed as to its consequence or consequences.

So are tariffs good or bad? Wouldn't a reasonable conclusion be that it might be a little of each? In which case, the impact would have to be which outweighs the other - the good or the bad.

It's a thought, in any case.