Could you explain Tariff's , like who pays them and what they do to a country?
Well, I can definitely guess where this question is coming from.
Honestly, I was pretty excited to get this prompt, because it's one I can answer and was part of my studies focus in college. International business was my thing, and the issues of comparative advantage (along with Power Purchasing Parity) were one of the things I liked to explore.
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At their simplest, tariffs are an import tax. The United States has had tariffs as low as 5%, and at other times as high as 44% on most goods, such as during the Civil War. The purpose of a tariff is in two parts: generating revenue for the government, and protectionism.
Let's first explore how a tariff works. If you want to be confused, then you need to have never taken an economics class, and look at this graph:
(src)
So let's undo that confusion.
The simplest examples are raw or basic materials such as steel, cotton, or wine.
First, without tariffs:
Let us say that Country A and Country B both produce steel, and it is of similar quality, and in both cases cost $100 per unit. Transportation from one country to the other is $50/unit, so you can either buy domestically for $100, or internationally for $150. So you buy domestically.
Now, Country B discovers a new place to mine iron very easily, and so their cost for steel drops to $60/unit due to increased ease of access.
Country A can either purchase domestically for $100, or internationally for $110 (incl. shipping), which is much more even. Still, it is more cost-effective to purchase domestically, and so Country A isn't worried.
Transportation technology is improved, dropping the shipping costs to $30/unit. A person from Country A can buy:
Domestic: $100
International: $60+$30 = $90
Purchasing steel from Country B is now cheaper than purchasing it from Country A, regardless of where you live.
Citizens in Country A, in order to reduce costs for domestic construction, begin to purchase their steel from Country B. As a result, money flows from Country A to B, and the domestic steel industry in Country A begins to feel the strain as demand dwindles.
In this scenario, with no tariffs, Country A begins to rely on B for their steel, which causes a loss of jobs (steelworkers, miners), loss of infrastructure (closing of mines and factories), and an outflow of funds to another country. As a result, Country A sees itself as losing money to B, while also growing increasingly reliant on their trading partner for the crucial good that is steel. If something happens to drive up the price of B's steel again, like political upheaval or a natural disaster, it will be difficult to quickly ramp up the production of steel in Country A's domestic facilities again.
What if a tariff is introduced early?
Alternately, the dropping of complete costs for purchase of steel from Country B could be counteracted with tariffs. Let's say we do a 25% tariff on that steel. This tariff is placed on the value of the steel, not the end cost, so:
$60 + (0.25 x $60) + $30 = $105/unit
Suddenly, with the implementation of a 25% tariff on steel from Country B, the domestic market is once again competitive. People can still buy from Country B if they would like, but Country A is less worried about the potential impacts to the domestic market.
The above example is done in regards to a mature market that has not yet begun to dwindle. The infrastructure and labor is still present, and is being preemptively protected against possible loss of industry to purchasing abroad.
What happens if the tariff is not implemented until after the market has dwindled?
Let's say that the domestic market was not protected by the tariff until several decades on. Country A's domestic production, in response to increased purchasing from abroad, has dwindled to one third of what it was before the change in pricing incentivized purchase from B.
Prices have, for the sake of keeping this example simple, remained at $100(A) and $60(B) in that time.
However, transportation has likely become better, so transportation is down to $20, meaning that total cost for steel from B is $80, accelerating the turn from domestic steel to international.
So, what happens if you suddenly implement a tariff on international steel? Shall we say, 40%?
$60 + (0.4 x 60) + 20 = $104
It's more expensive to order from abroad! Wow! Let's purchase domestically instead, because these prices add up!
But the production is only a third of what it used to be, and domestic mines and factories for refining the iron into steel can't keep up. They're scaling, sure, but that takes time. Because demand is suddenly triple of the supply, the cost skyrockets, and so steel in Country A is now $150/unit! The price will hopefully come down eventually, as factories and mines get back in gear, but will the people setting prices let that happen?
So industries that have begun to rely on international steel, which had come to $80/unit prior to the tariff, are facing the sudden impact of a cost increase of at least $25/unit (B with tariff) or the demand-driven price increase of domestic (nearly double the pre-tariff cost of steel from B), which is an increase of at least 30% what they were paying prior to the tariff.
There are possible other aspects here, such as government subsidies to buoy the domestic steel industry until it catches back up, or possibly Country B eating some of the costs so that people still buy from them (selling for $50 instead of $60 to mitigate some of the price hike, and maintain a loyal customer base), but that's not a direct impact of the tariff.
Who pays for tariffs?
Ultimately, this is a tax on a product (as opposed to a tax on profits or capital themselves, which has other effects), which means the majority of the cost is passed on directly to the consume.
As I said, we could see the producers in Country B cut their costs a little bit to maintain a loyal customer base, but depending on their trade relationships with other countries, they are just as likely to stop trading with Country A altogether in order to focus on more profitable markets.
So why do we not put tariffs on everything?
Well... for that, we get into the question of production efficiency, or in this case, comparative advantage.
Let's say we have two small, neighboring countries, C and D, that have negligible transportation costs and similar industries. Both have extensive farmland, and both have a history of growing grapes for wine, and goats for wool. Country C is a little further north than D, so it has more rocky grasses that are good for goats, while D has more fertile plains that are good for growing grapes.
Let's say that they have an equal workforce of 500,000 of people. I'm going to say that 10,000 people working full time for a year is 1 unit of labor. So, Country C and Country D have between the 100 units of labor, and 50 each.
The cost of 1 unit of wool = the cost of 1 unit of wine
Country C, having better land for goats, can produce 4 units of wool for every unit of labor, and 2 units of wine for every unit of labor.
Meanwhile, Country D, having better land for grapes, can produce 2 units of wool per unit of labor, and 4 units of wine per unit of labor.
If they each devote exactly half their workforce to each product, then:
Country C: 100 units of wool, 50 units of wine
Country D: 50 units of wool, 100 units of wine
Totaling 150 units of each product.
However, if each devotes all of their workforce to the product they're better at...
Country C: 200 units of wool, no wine
Country D: no wool, 200 units of wine
and when they trade with each other, they each end up with 100 units of each product, which is a doubling of what their less-efficient labor would have resulted in!
The real world is obviously much more complicated, but in this example, we can see the pros of outsourcing some of your production to another country to focus on your own specialties.
Extreme examples of this IRL are countries where most of the economy rests on one product, such as middle-eastern petro-states that are now struggling to diversify their economies in order to not get left behind in the transition to green energy, or Taiwan's role as the world's primary producer of semiconductors being its 'silicon shield' against China.
Comparative advantage can be used well, such as our Unnamed Countries (that are definitely not the classic example of England and Portugal, with goats instead of sheep) up in the example. With each economy focusing on its specialty, there is a greater yield of both products, meaning a greater bounty for both countries.
However, should something happen to Country C up there, like an earthquake that kills half the goats, they are suddenly left with barely enough wool to clothe themselves, and nothing for Country D, which now has a surplus of wine and no wool.
So you do have to keep some domestic industry, because Bad Things Can Happen. And if we want to avoid the steel example of a collapse in the given industry, tariffs might be needed.
Are export tariffs a thing?
Yes, but they are much rarer, and can largely be defined as "oh my god, everyone please stop getting rid of this really important resource by selling it to foreigners for a big buck, we are depleting this crucial resource."
So what's the big confusion right now?
Donald Trump has, on a number of occasions, talked about 'making China pay' tariffs on the goods they import into the US. This has led to a belief that is not entirely unreasonable, that China would be the side paying the tariffs.
The view this statement engenders is that a tariff is a bit like paying a rental fee for a seller's table at an event: the producer or merchant pays the host (or landlord or what have you) a fee to sell their product on the premises. This could be a farmer's market, a renaissance faire, a comic book convention, whatever. If you want to sell at the event, you have to pay a fee to get a space to set up your table.
In the eyes of the people who listened to Trump, the tariff is that fee. China is paying the United States for access to the market.
And, technically, that's not entirely wrong. China is thus paying to enter the US market. It's just the money to pay that fee needs to come from somewhere, and like most taxes on goods, that fee comes from the consumer.
So... what now?
Well, a lot of smaller US companies that rely on cheap goods made in China are buying up non-perishables while they can, before the tariffs hit. Long-term, manufacturers in the US that rely on parts and tools manufactured in China are going to feel the squeeze once that frontloaded stock is depleted.
Some companies are large enough to take the hit on their own end, still selling at cheap rates to the consumer, because they can offset those costs with other parts of their empire... at least until smaller competitors are driven out of business, at which point they can start jacking up their prices since there are no options left. You may look at that and think, "huh, isn't that the modus operandi for Walmart and Amazon already?" and yes. It is. We are very much anticipating a 'rich get richer, poor go out of business' situation with these tariffs.
The tariffs will also impact larger companies, including non-US ones like Zara (Spanish) and H&M (Swedish), if they have a huge reliance on Chinese production to supply their huge market in the United States.
If you're interested in the repercussions that people expect from these proposed tariffs on Chinese goods, I'd suggest listening to or watching the November 8th, 2024 episode of Morning Brew Daily (I linked to YouTube, but it's also available on Spotify, Nebula, the Morning Brew website, and other podcast platforms).
Predistribution vs redistribution (Big Tech edition)
I'm coming to COLORADO! Catch me in DENVER on Jan 22 at The Tattered Cover<, and in COLORADO SPRINGS from Jan 23–25 where I'm the Guest of Honor at COSine. Then I'll be in OTTAWA on Jan 28 at Perfect Books and in TORONTO with Tim Wu on Jan 30.
All over the world, for all of this decade, governments have been trying to figure out how to rein in America's tech companies. During the Biden years, this seemed like a winner – after all, America was trying to tame its tech companies, too, with brave trustbusters like Lina Khan, Jonathan Kanter, Rohit Chopra and Tim Wu doing more work in four years than their predecessors had done in forty.
But under Trump, the US government has thrown its full weight into defending its tech companies' right to spy on and rip off everyone in the world (including Americans, of course). It's not hard to understand how Big Tech earned Trump's loyalty: from the tech CEOs who personally paid a million dollars each to sit behind Trump on the inauguration dais; to Apple CEO Tim Cook hand-assembling a gold participation trophy for Trump on camera; to Zuckerberg firing all his fact-checkers; to the seven-figure contributions that tech companies made to Trump's Epstein Memorial Ballroom at the White House. Trump is defending America's tech companies because they've bribed him, personally, to do so.
Given that these companies are so much larger than most world governments, this poses a serious barrier to the kind of enforcement that world governments have tried. What's the point of fining Apple billions of Euros if they refuse to pay? What's the point of ordering Apple to open up its App Store if it just refuses?
But here's the thing: most of these enforcement actions have been redistributive. In effect, lawmakers and regulators are saying to America's tech giants, We know you've stolen a bunch of money and data from our people, and now we want you to give some of it back. There's nothing inherently wrong with redistribution, but redistribution will never be as powerful or effective as predistribution – that is, preventing tech companies from stealing data and money in the first place.
Take Big Tech's relationship to the world's news media. All over the world, media companies have been skeletonized by collapsing ad revenues and even where they can get paid subscribers, tech giants rake off huge junk fees from every subscriber payment. Reaching new or existing subscribers is also increasingly expensive, as tech platforms algorithmically suppress the reach of media companies' posts, even for subscribers who've asked to see their feeds, and which lets the platforms charge more junk fees to "boost" content.
Countries all over the world – Australia, Germany, Spain, France, Canada – have arrived at the same solution to this problem: imposing "link taxes" that require tech companies to pay for the privilege of linking to the news or allowing their users to discuss the news. This is pure redistribution: tech stole money from the media companies, so governments are making them give some of that money back.
It hasn't worked. First of all, the thing tech steals from the news isn't the news, it's money. Helping people find and discuss the news isn't theft. News you're not allowed to find or discuss isn't news at all – that's a secret.
Meanwhile, tech companies have an easy way to escape the link tax: they can just ban links to the news on their platform. That's what Meta did in Canada, which means that Canadians on Instagram and Facebook no longer see the actual news, just far-right "influencer" content. Even when tech companies do pay the link tax, the results are far from ideal: in Canada, Google has become a partner of news outlets, which compromises their ability to report on Google's activities. Shortly after Google promised millions to the Toronto Star, the paper dropped its award-winning, hard-hitting "Defanging Big Tech" investigative series. Given that Google came within centimeters of stealing most of downtown Toronto just a few years ago, we can hardly afford to have the city's largest newspaper climb into bed with the company:
Worse still: any effort to make Big Tech poorer – by curbing its predatory acquisition of our data and money – reduces its ability to pay the link tax, which means that, under a link tax, the media's future depends on Big Tech being able to go on ripping us off.
All of which is not to say that Big Tech should be allowed to go on ripping off the media. Rather, it's to argue that we should stop tech from ripping off Canadians in the first place, as a superior alternative to asking Big Tech to remit a small share of the booty to a few lucky victims.
Together, Meta and Google take 51 cents out of every advertising dollar. This is a huge share. Before the rise of surveillance advertising, the ad industry's share of advertising dollars amounted to about 15%. The Meta/Google ad-tech duopoly has cornered the ad market, and they illegally colluded to rig it, which allows them to steal billions from media outlets, all around the world:
https://en.wikipedia.org/wiki/Jedi_Blue
What would a predistribution approach to ad-tech look like? Canada could ban the collection and sale of consumer data outright, and punish any domestic firm that collects consumer data, which would choke off much of the supply of data that feeds the ad-tech market.
Canada could also repeal its wildly unpopular "anticircumvention" law, The Copyright Modernisation Act of 2012 (Bill C-11), which was passed despite the public's overwhelming negative response to a consultation on the bill:
Under this law, it's illegal for Canadian companies to reverse engineer and modify America's tech exports. This means that Canadian companies can't go into business selling an alternative Facebook client that blocks all the surveillance advertising and restores access to the news, and offers non-surveillant, content-based ways for other Canadian businesses to advertise:
Repealing Bill C-11 would also allow Canadian companies to offer alternative app stores for phones and consoles. Google and Apple have a duopoly on mobile apps, and the two companies have rigged the market to take 30% of every in-app payment. The actual cost of processing a payment is less than 1%. This means that 30 cents out of every in-app subscriber dollar sent to a Canadian news outlet is shipped south to Cupertino or Mountain View. Legalizing made-in-Canada app stores, installed without permission from Apple or Google, would stop those dollars from being extracted in the first place. And not just media companies, of course – the app tax is paid by performers, software authors, and manufacturers. Extend the program to include games consoles and Canada's game companies would be rescued from Microsoft and Nintendo's own app tax, which also runs to 30%.
But a C-11 repeal wouldn't merely safeguard Canadian dollars – it would also safeguard Canadian data. Our mobile phones collect and transmit mountains of data about us and our activities. Yes, even Apple's products – despite the company's high-flying rhetoric about its respect for your privacy, the company spies on everything you do with your phone and sells access to that data to advertisers. Apple doesn't offer any way to opt out of this, and lied about it when they were caught doing it:
These companies will not voluntarily stop stealing our data. That's the lesson of nine years under the EU's GDPR, a landmark, strong privacy law that US tech companies simply refuse to obey. And because they claim to be headquartered in Ireland (because Ireland lets them cheat on their taxes) and because they have captured the Irish state, they are able to simply flout the law:
Telling Big Tech not to gather our data is redistribution. So is dictating how they can use it after they collect it. The predistribution version of this is modifying our devices so that they don't gather or leak our data in the first place.
Big Tech is able to suck up so much of our data because anticircumvention law – like Canada's Bill C-11, or Article 6 of the EU Copyright Directive – makes it illegal to modify your phone so that it blocks digital spying, preventing the collection and transmission of your data.
Repeal anticircumvention law and businesses could offer Canadians (or Europeans) (or anyone in the world with a credit card and an internet connection) a product that blocks surveillance on their devices. More than half of all web users have installed an ad-blocker for their browser (which offers significant surveillance protection), but no one can install anything like this on their phones (or smart TVs, or smart doorbells, or other gadgets) because anticircumvention law criminalizes this act.
Big Tech are notorious tax cheats, colluding with captured governments like the Irish state to avoid taxes worldwide. Canada tried to pass a "digital service tax" that would make the US pay a small share of the tax it evades in Canada. Trump went bananas and threatened to hit the country with (more) tariffs, and Canada folded.
Tax is redistributive and getting money back from American companies after they steal it from Canadians is much harder than simply arranging the system so it's much harder for American companies to steal from Canadians in the first place. Blocking spying, clawing back the app tax, unrigging the ad market – these are all predistributive rather than redistributive.
So is selling alternative clients for legacy social media products like Facebook and Twitter – clients that unrig their algorithms and let Canadians see the news they've subscribed to, so they can't be used as hostages to extract "boosting" fees from media outlets who want to reach their own subscribers.
Canada's redistribution efforts have been a consistent failure. Canada keeps trying to get streaming companies like Netflix to include more Canadian content in their offerings and search results. Legalize jailbreaking and a Canadian company could start selling an alternative client that lets you search all your streaming services at once, mixing in results from Canadian media companies and archives like the National Film Board – all while blocking surveillance by the tech giants. This client could also incorporate a PVR, so you could record shows to watch later, without worrying about the tech giants making your favorite program vanish. Remember, if it's legal to record a show from broadcast or cable with a VCR or a Tivo, it's legal to record it from a streaming service with an app.
These predistribution tactics don't rely on US tech companies obeying Canada's orders. Instead, they take away American companies' ability to use Canada's courts and law enforcement apparatus to shut down Canadian competitors who disenshittify America's spying, stealing tech exports. Canada may not be able to push Google or Apple or Facebook around, but Canada can always decide whether Google or Apple or Facebook can use its courts to push Canadian competitors around.
Back in December, when Trump started threatening (again) to invade Canada and take over the country, Prime Minister Mark Carney broke off trade talks. Those talks are slated to begin again in a matter of days:
Getting Trump to deal fairly with Canada is just as unlikely as getting Trump's tech companies to give Canadians a fair shake. Canada isn't going to win the trade war with an agreement. Canada will win the trade war by winning: with Made-in-Canada tech products that turn America's stolen trillions into Canadian billions, to be divided up among Canadian tech businesses (who will reap profits) and the Canadian public (who will reap savings).
If you'd like an essay-formatted version of this post to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:
The "Millionaire's tax" hasn't caused the wealthy to flee.
Why it matters: The uptick in super-wealthy Bay Staters contradicts predictions that rich residents would flee the state for lower-tax areas, like over the state line in income-tax-free New Hampshire.
