An Anti-Tariff Strategy

I could be wrong here; I am not a trained economist. I am just like you. But just like you, I was trained to think.

My understanding of a Tariff is that it is a tax on imports.

Let’s say, for example, that the USA “slaps” a 25% tariff on Canadian Aluminium. We don’t know the price, so let’s assume that a billet or a roll of Canadian Aluminum is one. The units of currency could be “a thousand Canadian Dollars” for all I know, so that the purchase agreement reads that for each roll or billet of Aluminium, the USA will pay to the Canadian supplier, one thousand Canadian Dollars.

A 25% tariff means that the USA purchaser will now have to pay the $cdn1,250 for each roll or billet. The extra 25% goes to the USA government coffers, not to the Canadian supplier, and not to the Canadian government. A Tariff, as you know, is a direct tax on the immediate consumer.

Of course the tariff cost/tax filters down so that someone somewhere pays for it. Maybe the price of a car or truck rises by 20% with the USA producer swallowing the extra 5% (By laying off workers? Reducing production figures? Reducing wages?)

Now the Canadian consumer who buys a USA vehicle pays more than they would in the past, so the tariffs have a trickle-down effect, where the import tax is gradually spread back-and-forth, and around the world. Nobody wins.

Let’s now suppose that the Tariff can be used as a retaliatory economic weapon. I can suppose this because I am not a trained economist.

Let’s suppose that the tariffed country – Canada in our example – slapped an Export tax (i.e. an export Tariff) on the roll or billet, a percentage that was numerically equal to the import tariff. Canadian producers of Aluminium would immediate increase their price by 25%. So the USA purchaser would have to pay $cdn 1,250. To which would be added that 25% tariff imposed by the USA on its own consumers.

The firm that imports rolls or billets into the USA must now pay $cdn 1,563 for that billet, an increase that the consumers must pay.

Once again the trickle-down effect would affect a Canadian consumer who wanted to buy a vehicle from the USA, but the greatly-increased price would be a deterrent; the Canadian consumer would be more inclined to settle for a Canadian vehicle, even if increased demand drove up the Canadian price of that Canadian manufacture

The Canadian Manufacturer does NOT pay an import tax for local consumption. The Canadian government receives an extra 25% for exported billets or rolls, and can, if it chooses, use that 25% to boost local manufacture of vehicles.

I think that that is a valid economic tactic.

This tit-for-tat strategy is acclaimed by Game Theory.

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