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Effect of Increasing Tariff

Updated on April 12, 2018

Introduction

A tariff is a tax imposed on imported or exported goods and services, and it is a tool of monitoring international trades. In general, there are two outcomes derived from an import tariff. First, a higher import tariff on foreign goods or services increase the price of these goods or services, and make imports less desirable, or less competitive contrasted with domestic goods and services. Second, an import tariff reduces the efficiency of the global economy. For example, the protective import tariff tends to encourage domestic industries or firms to produce more at home, or use more domestic resources; this will easily result in the ignorance of opportunities from foreign countries as well as the insufficient usage of worldwide resources. Under today’s improved global economic environment, can increased imports’ tariffs protect and help American domestic industries and/or companies? What is the true effect of increasing tariff? And what is the cost of high protection by increasing tariff? In this article, I will try to elucidate the actual effects of increasing tariff by analyzing two recent cases about new tariffs on solar panels and washing machines.


Case one: Solar Panels

On January 22nd, 2018, the Trump Administration started to put a 30% tariff on imported solar cells and panels. According to the U.S. Trade Representative, this tariff will be put in place for four years and decrease by 5% annually, which means it will drop to 15% in 2021. How will this new steep tariff actually affect the solar power business in the United States?

The Impact on Price of Solar Products

The first significant effect is on the price of solar products as well as the domestic solar cell manufacturers, solar panels installation firm, and domestic customers. The high tariff on foreign solar panels makes the domestic manufacturers more competitive, and it might help the U.S. solar panel manufacturers grow. Nevertheless, about 80% of the solar panels used in the United States are currently imported from foreign countries such as Malaysia, South Korea, and China. Some experts estimate that the tariff would roughly add additional $650 to $1,000 to the cost of the residential rooftop system, and it will slow down the residential solar market because of the less affordable cost for potential customers. Moreover, the slack solar market will also weaken the tariff’s benefits on domestic solar cells manufacturers.

The Impact on Employment

According to the Solar Energy Industries Association (SEIA) analyses in 2016, of the 260,000 to 374,000 America solar workers, only approximately 38,000 people work in solar manufactories. Moreover, only 6% of the 38,000 people in solar manufactories actually produce solar panels. The other 94% employees work on mounting or tracking systems, inverter, and other solar hardware. According to the estimation by SEIA in 2018, this decision will cost 23,000 American jobs in this year, including many in manufacturing, and it will result in the delay or cancellation of billions of dollars in solar investments. Therefore, the tariff on foreign solar panels cannot protect U.S. solar energies effectively.


Case two: Washer Machine and Parts

On January 22, 2018, the Trump Administration approved the tariff on washers and parts. The new duty is 20% tariff for the first 1.2 million imported washers and then up to 50% tariff for the first year, and it decreases by 5% each year for the next two years. Does this tariff effectively protect and promote domestic washer manufactories?

Washer Manufactories

Based on 2017 Euromonitor data, Whirlpool hold 47% of the US automatic washing machine sales market, 15% Haier Group (Chinese brand), 13% Samsung Corporation (Korean brand), 12% LG Corporation (Korean brand), 5% Electrolux AB (Swedish brand), and 12% others. Obviously, Whirlpool, which is the largest U.S. home appliance manufactories, holds the largest share of the washer sales market. Whirlpool also is the biggest beneficiary from the tariff. Whereas, LG said they have spent $250 million on a new factory in Clarksville, Tennessee in 2017, which would help reduce the tariff pressure. Moreover, Samsung has also considered to build a manufacturing plant in Newberry, SC. As a result, these two South Korean companies’ actions would weaken the efficiency of the protective tariff.

U.S. Customers Pay off the Tariff

When the protectionist tariff has a few benefits for a few domestic washer producers, many more customers and workers bear the cost of the tariff. On January 24, 2018, LG told retailers that the prices of new washing machines are expected to go up by 15% to 20%, which means adding $70 to $100 per LG washer. Furthermore, the tariff not only makes foreign-made washing machines more expensive but also pushes up the price of American-made washers. As the tariff would more likely drive consumers to buy American-made washing machines because of the significant price disadvantage of foreign-made washers, domestic factories face a little less foreign competition and pave a way to raise the price. The price will not increase overnight, but the price will tend to go up gradually. It’s a piece of bad news for customers who will pay more for new washers.


Conclusion

To conclude from the above two cases, even though the domestic factories get some benefits from the new tariffs on solar panels and washing machines, the tariffs will increase both products’ price and cause sluggish sales and employment market. In other words, the consequence of new tariffs will be gaining little rewards with bigger costs. Today, the global economy is more interdependent with conflicts and overlapping interests. Therefore, protectionist tariffs could have disastrous effects on the American economy. Evaluating the international trade system and American economy as a whole, and real understanding an entire industry are the essential factors to set up appropriate tariffs. The proper tariffs should be a tool of balancing international trade to avoid conflicts and achieve mutual benefits.

© 2018 zoeliu37

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