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July 22, 2018

Worsening Effect of Tariffs

One of the joyful indulgences of my profession comes in chatting with people about the economics of their jobs. The very best folks to chat with are those who deal with prices and wages. Men and women in the trades are maybe the most informed about the immediate vagaries of the economy. Local bankers, insurance agents and small business owners are usually just as good. 

My interest in these business folks is nothing special in economics. Alfred Marshall, the British economist who might rightfully be called the father of the profession, encouraged economists to walk about ports and markets to learn about the profession. So, I try to never skip an invitation to visit a factory or warehouse. 

Mostly, these conversations confirm what economists know, and that much is useful. The real value is in revealing things that I didn’t before know. Let me share two of these in the context of the growing trade war.

I’ve a friend who is a roofer and small business owner. The business is challenging, and involves dealing with the price of roofing a home or business, as well as hiring workers and buying materials like aluminum for roofing and gutters. Few people buy a new roof on a whim, so one would suppose that a price increase wouldn’t cost too much business. However, with the increase in aluminum and steel that accompanied the trade wars, he must charge between 15 and 25 percent more for much of his materials. That costs him business, and drops the margins on his jobs. This means fewer employees, less overtime and less investment in crew equipment for his small business. 

I hadn’t really expected steel and aluminum tariffs to affect roofing quite so quickly, and this conversation clarified to this economist how deeply the disruptions might be. Then I spoke to an insurance agent in an agricultural and manufacturing town. He provided some stunning insight.

I asked about tariffs, soybean and corn prices. He was clearly worried, and noted that all the farming community was concerned. He explained, that even though most farmers had futures contracts, and so were only minimally worried about short-term prices, they were already adjusting their spending. 

The soybean farmers had largely stopped buying new equipment, or at least slowed their purchase schedule. Many were considering reduced planting next year and were thinking about alternative uses for some of their fields. I suspected this, but he also noted that with falling grain prices and tariffs on some beef and pork products, that he expected many livestock farmers to cut back on beef and pork sales. With lower feed prices for corn, it made sense to fatten their herds for another year. 

I had not expected that trade would have such a quick ripple effect on the decisions of these farmers. But, one lesson I learned long ago is that underestimating the savvy of people in any line of business is a serious mistake. 

These conversations were short but helpful, and I thank the anonymous contributors to my understanding of trade and the effect of trade wars. I’ve researched and written a good deal about trade and understand much of what economics knows about the effect of trade, or the lack thereof on local economies. I’ve even added some modest contributions of my own. Still, these conversations gave me two important insights.

The first is that the growing effects of the trade war are going to be longer, deeper and more broadly painful than I’d expected. 

The second lesson is that the roofer and small-town insurance agent know a lot more about the complexities and risks of tariffs and trade than does the president and his economic staff.

Link to this commentary: https://commentaries.cberdata.org/960/worsening-effect-of-tariffs

Tags: economic theory, pres. trump administration, trade, prices and inflation, foreign policy


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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