By the way, if tariffs are directly sent back to the customer through tax reduction on the tariffed category of products, wouldn’t it be painless for the company/customers (if you forget the retaliation tariffs) while increasing you local insensitive to production? (all things equal if you imagine companies reduce the cost of the products properly etc which is not realistic)
I don’t see how that would help. In the ideal case of a finished product, tariffs artificially raise the effective price for the buyer; they don’t change the math on the cost of production. Usually, they hurt the producing/exporting firm by forcing it to increase the asking price, which reduces sales. It reduces sales because the buying/importing firm has to pay higher prices. If the buying/importing firm gets tax reductions that are directly tied to the tariff, then its out-of-pocket expense hasn’t changed, and it can just keep buying the imported product with no effect on its profits. That means that the producing/exporting firm can still sell exactly the same volume of product at the higher price, covering the tariff cost, with no effect on its profits. Nothing much has changed, except a bunch of extra paperwork and transactions.
There’s only incentive to move production locally if the buying/importing firm can switch to a cheaper, local product, but retain the tax benefits, allowing it to keep more money. But that means the tariff money is no longer being collected, so somebody else is paying the taxes while not getting the benefits. In short, tariffs can only work by causing pain to somebody locally.
That’s 2 if’s. Sure, IF both of those things were true, maybe it would net out, but still be a paperwork and cashflow delay for the company (pay the duty today, get the money back at some point in the future) which sucks liquidity out of the market and generally holds back growth and investment.
But that isn’t particularly relevant since neither of those two things will ever happen. The tax cuts will go to the top earners, and retaliatory tariffs are very much a thing and cannot be ignored.
By the way, if tariffs are directly sent back to the customer through tax reduction on the tariffed category of products, wouldn’t it be painless for the company/customers (if you forget the retaliation tariffs) while increasing you local insensitive to production? (all things equal if you imagine companies reduce the cost of the products properly etc which is not realistic)
I don’t see how that would help. In the ideal case of a finished product, tariffs artificially raise the effective price for the buyer; they don’t change the math on the cost of production. Usually, they hurt the producing/exporting firm by forcing it to increase the asking price, which reduces sales. It reduces sales because the buying/importing firm has to pay higher prices. If the buying/importing firm gets tax reductions that are directly tied to the tariff, then its out-of-pocket expense hasn’t changed, and it can just keep buying the imported product with no effect on its profits. That means that the producing/exporting firm can still sell exactly the same volume of product at the higher price, covering the tariff cost, with no effect on its profits. Nothing much has changed, except a bunch of extra paperwork and transactions.
There’s only incentive to move production locally if the buying/importing firm can switch to a cheaper, local product, but retain the tax benefits, allowing it to keep more money. But that means the tariff money is no longer being collected, so somebody else is paying the taxes while not getting the benefits. In short, tariffs can only work by causing pain to somebody locally.
That’s 2 if’s. Sure, IF both of those things were true, maybe it would net out, but still be a paperwork and cashflow delay for the company (pay the duty today, get the money back at some point in the future) which sucks liquidity out of the market and generally holds back growth and investment.
But that isn’t particularly relevant since neither of those two things will ever happen. The tax cuts will go to the top earners, and retaliatory tariffs are very much a thing and cannot be ignored.
Ah yeah I see I forgot this part, more bureaucracy and delay might hurt cash flow. Thanks that’s a good thinking.
It’s just a though experiment, in real life it’s not a nice math problem to solve like you said.