The Trouble with Tariffs

I’m old enough to remember the original Star Trek TV series starring William Shatner as Captain Kirk of the starship Enterprise. One of my favorite episodes is “The Trouble with Tribbles.” In this comic episode, the Enterprise visits a space station that soon becomes overrun by rapidly reproducing, small, furry creatures called “tribbles.” But, of course, their rapid reproduction rate soon overwhelms, and that means trouble for the crew and its mission.

I thought about this rapid reproduction idea because, just like tribbles, the trouble with tariffs is they are also a rapidly reproducing organism that will speedily overwhelm if not quickly contained.

On Jan. 31, President Trump announced the imposition of 25% tariffs on goods from both Mexico and Canada, and a 10% tariff on goods from China. The president’s reasoning for this, as he’s been claiming for years, is “tariffs are going to make us very rich and very strong.”

To this I say… bollocks!

Let’s get this straight right now… tariffs are taxes levied by the federal government on U.S. companies. Full stop.

When a tariff is placed on imported goods from Mexico, Canada, China or anywhere else into the United States, that tariff is paid by U.S.-registered firms directly to the U.S. Customs agency. Perhaps a better term to use, which is much more clarifying and much less subject to Orwellian language manipulation, is to call a tariff what it actually is — an import tax on U.S. companies.

Contrary to what the president claims, tariffs (i.e., taxes) do not make any nation rich and strong. They only serve to make companies and citizens poorer and less free. And because my mission in life is to help companies and investors get richer and enjoy more freedom, I am vehemently opposed to tariffs.

Star Trek: The Original Series, episode “The Trouble with Tribbles,” https://en.wikipedia.org/w/index.php?curid=40155418. Image courtesy of Wikipedia. Copyright 1967 Paramount Pictures, produced by Gene Roddenberry.

But here is the real trouble with tariffs.

Like tribbles, they keep having that multiplier effect. You see, U.S. companies don’t just treat import taxes as a static cost of doing business. Instead, like all forms of tax increases, these companies usually pass the costs on to their customers by raising their prices.

Higher prices mean higher inflation, and higher inflation means more constrained and more restricted economic activity. And then there is the damage to investors, as these higher import taxes pressure corporate profits, and that throttles earnings-per-share growth, which hamstrings share prices. So, tell me, just how does this make us “very rich and very strong”?

Now, lest you think I come to this from a purely academic perspective, I would like to relate to you a personal anecdote regarding this subject, one that captured a lot of kudos from fellow members of the investment community. Last year, I attended an investor event at President Trump’s Mar-a-Lago resort in Palm Beach, Florida.

At dinner that night, our group heard a speech from one of the architects of the first Trump administration’s tariffs, U.S. Trade Representative Robert Lighthizer. Lighthizer spoke for about 30 minutes, and most of his talk was aimed at dispelling what he called the “free-market myth” that tariffs hurt the economy. After citing some rather unconvincing examples, I became disenchanted, which impelled me to act during the Q&A period.

It was then that I was handed the microphone, and asked Mr. Lighthizer the following question, which, of course, I already knew the answer to: “Can you please clear something up for me: Who, exactly, pays these tariffs? Is it the Chinese government, or is it the American company who has to write a check to the U.S. Customs agency?”

Like any nimble politician, Lighthizer saw the dangerous waters he was about to wade into with my direct inquiry. So, rather than give me a direct answer, he pivoted and started talking about how tariffs don’t cause inflation and that this was one of the myths floating around the free-market worldview.

After dinner, and much to my delight, I was approached by multiple colleagues who congratulated me on my direct question. You see, these are sophisticated, and in many cases free-market, libertarian-leaning investors, writers and businessmen who also know that tariffs are a form of taxation, and that they are not good for America.

Finally, while I do certainly think that President Trump is earnest about wanting to “make us very rich and very strong,” the way to do that is not to increase taxes on U.S. citizens via tariffs, but to drastically reduce all taxes for everyone. Here I think the president should pivot his attention to doubling down on the tax reduction that was the signature achievement of his first term, The Tax Cuts and Jobs Act (TCJA).

This overhaul of the tax code that President Trump signed into law in 2018 was a very good piece of legislation that included some of the biggest changes to the tax code in some three decades. We need more policies like this, and NO NEW IMPORT TAXES!

The way I see it, American can get rich and become freer (tax cuts) or it can get poorer and become less free (tariffs). It’s a simple binary choice, and one that I sincerely hope the president makes in favor of freedom.

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In Slow, Out Fast 

“You can’t negotiate a curve in the road by driving in a straight line.”

–Gary Bannister

In auto racing, we have a saying, “In slow, out fast.” What this means is that when you are entering into a turn, or a curve in the road, you slow down first in a straight line before you begin turning the vehicle. Then you apply just enough throttle through the turn to get you around as fast as possible. Once the turn exit is in sight and the car is straightened out, you can go full throttle, thereby maximizing your speed through the turn.

This concept of in slow, out fast also applies to business and investment decisions. You want to slow down before you enter into an equity position or into a business venture. But once you are in you need to go fast enough to maximize your performance around the “curve,” and then once you see the opportunity (the exit), you take it full throttle. This racing maxim proves once again why racing is life, and life is racing!

So, ladies and gentlemen, start your engines!

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods