Are U.S. tariffs on goods produced in other countries beneficial to the United States economy? We need to look at what tariffs accomplish for the country who levies them. Let’s say that an industry exists in the United States that produces widgets and our country wants to become the leading producer of widgets in the world. To help accomplish this goal, the U.S. levies a 25% tariff on widgets produced in all other countries who want to send widgets into the United States. Businesses in these other countries who produce widgets and attempt to sell them in the United States will have to raise their selling cost of the widget by 25% above production costs to break even. So they will probably decide that they will not produce widgets or just produce enough for local consumption. The widget industry remains relatively small in all other countries except the United States who has, in effect, cornered the market in widgets. Old economic theories state that the United States widget market should reach economies of scale, that is, they produce so many widgets that they can lower their production costs so that widgets can be produced real cheap. But economies of scale does not take into consideration demand for the widgets. If widgets are in high demand, there is no guarantee that the U.S. companies will pass on production cost savings to the buyers. In fact, these widget manufacturers may become greedy and increase the sale price of widgets in the United States and in other countries who decide not to produce them.
Let’s look briefly at another example. Let’s say that China wants to reach economies of scale in the computer chip industry and places a 50% tariff on computer chips produced in the United States and sold in China. China gets the selling price of a chip to one dollar because they have cornered the market. The United States may continue to produce computer chips but it costs U.S. companies two dollars to produce the same chip because of limited market share. Companies who use chips determine that they will buy chips made in China for one dollar instead of two dollars in the United States. The chip production industry in the United States slows and eventually dies out. China realizes that it now can increase the price of the chip to two dollars or even more since chips are no longer produced in the United States.
Having no tariffs by any country achieves the best result. If tariffs did not exist at all in any country, the result will produce the lowest cost of production. No tariffs create and even playing field. If all countries produce widgets or chips within their own countries, each business has an incentive to produce the best chip or widget at the lowest cost. Buyers may have many choices and will seek the best deal. A large supply of widgets and chips will keep the price relatively low to satisfy the demand in the market. A free market in the long run will actually lower costs of production for chips and widgets because supply will be regulated by demand and not by tariffs. Economies of scale is a fallacy. It is a theory that holds true only if there was one buying market, i.e. not hundreds of different countries seeking to produce and sell its widgets or chips. If the whole world, i.e., all the countries in the world, were one market and one giant country per say, then economies of scale would work. One company would produce cars, and everyone in the world would buy cars from the car company who would sell cars at production costs. One company would produce computer chips and would be required to sell the chips at production costs. Companies would never have to show a profit, because they have no competitors. In theory there would be only one company in each industry that would produce and supply the whole world with its product at cost. But the world is comprised of hundreds of nations and thousands of companies. Individual political states create competition and stock exchanges. Competition causes price increase and fluctuation. Tariffs have a negative drag on economies of scale.
I propose an economic system wherein each country produces all of its products and services within its boundaries and trade among and between countries is eliminated. Trade would occur between nations only when a nation cannot or does not have the necessary resources to produce a particular product. For example, Japan has no petroleum reserves. The world would create a market for petroleum because Japan would seek to purchase oil at the cheapest price. Markets are created only for natural resources or products which cannot be found or produced in every country. The problem with such a system is that there are not many natural resources or products that are available within every country especially the smaller countries. Production of goods and natural resources causes a vicious circle however. Markets for most goods and natural resources must exist because there are very few countries who can produce all of their own goods and natural resources. The result is our current free market system. In any event, tariffs should be banned worldwide. In the meantime, tariffs are good because they may cause other countries to reduce or remove the tariffs they charge on United States products and natural resources. In time, we will reduce or remove U.S. tariffs when we are treated more fairly. We must encourage free and reciprocal trade. China must stop its unfair trade practices.
Let’s look briefly at another example. Let’s say that China wants to reach economies of scale in the computer chip industry and places a 50% tariff on computer chips produced in the United States and sold in China. China gets the selling price of a chip to one dollar because they have cornered the market. The United States may continue to produce computer chips but it costs U.S. companies two dollars to produce the same chip because of limited market share. Companies who use chips determine that they will buy chips made in China for one dollar instead of two dollars in the United States. The chip production industry in the United States slows and eventually dies out. China realizes that it now can increase the price of the chip to two dollars or even more since chips are no longer produced in the United States.
Having no tariffs by any country achieves the best result. If tariffs did not exist at all in any country, the result will produce the lowest cost of production. No tariffs create and even playing field. If all countries produce widgets or chips within their own countries, each business has an incentive to produce the best chip or widget at the lowest cost. Buyers may have many choices and will seek the best deal. A large supply of widgets and chips will keep the price relatively low to satisfy the demand in the market. A free market in the long run will actually lower costs of production for chips and widgets because supply will be regulated by demand and not by tariffs. Economies of scale is a fallacy. It is a theory that holds true only if there was one buying market, i.e. not hundreds of different countries seeking to produce and sell its widgets or chips. If the whole world, i.e., all the countries in the world, were one market and one giant country per say, then economies of scale would work. One company would produce cars, and everyone in the world would buy cars from the car company who would sell cars at production costs. One company would produce computer chips and would be required to sell the chips at production costs. Companies would never have to show a profit, because they have no competitors. In theory there would be only one company in each industry that would produce and supply the whole world with its product at cost. But the world is comprised of hundreds of nations and thousands of companies. Individual political states create competition and stock exchanges. Competition causes price increase and fluctuation. Tariffs have a negative drag on economies of scale.
I propose an economic system wherein each country produces all of its products and services within its boundaries and trade among and between countries is eliminated. Trade would occur between nations only when a nation cannot or does not have the necessary resources to produce a particular product. For example, Japan has no petroleum reserves. The world would create a market for petroleum because Japan would seek to purchase oil at the cheapest price. Markets are created only for natural resources or products which cannot be found or produced in every country. The problem with such a system is that there are not many natural resources or products that are available within every country especially the smaller countries. Production of goods and natural resources causes a vicious circle however. Markets for most goods and natural resources must exist because there are very few countries who can produce all of their own goods and natural resources. The result is our current free market system. In any event, tariffs should be banned worldwide. In the meantime, tariffs are good because they may cause other countries to reduce or remove the tariffs they charge on United States products and natural resources. In time, we will reduce or remove U.S. tariffs when we are treated more fairly. We must encourage free and reciprocal trade. China must stop its unfair trade practices.
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