Tariffs Defy Traditional Marketing and Pricing Thinking

“Trade wars are good, and easy to win,” thus spoke our President over Twitter on March 2, 2018, sending a chill through the world marketing and financial worlds.

The fact is that everyone loses in a trade war. The plan to raise tariffs on steel by 25% and on aluminum by 10% will trickle down to American consumers in the form of higher prices, lost jobs, increases in unemployment and slower economic growth.  What’s so “good” about that, and what does any of it have to do with winning or losing?

Not only will the American economy be hurt, these actions by an American President with very limited knowledge about economics, will affect the economies of many nations.  An economist estimates the price of the tariffs to Americans is 30,000 jobs.  While the cost of steel for automobiles will result in a 1.3% increase in costs, this will be reflected in more than a 3% increase in retail prices.

In a highly price sensitive and price elastic economy, a 3% increase on a $25,000 car is $750.00 at retail. This might be enough encouragement to keep a car a year or two longer or to look to buy a foreign car.

In his announcement of the tariffs, the President said that the tariffs will not apply to Canada and Mexico, leading sources of imported steel.  However, this waiver was contingent on the re-negotiation of the North American Free Trade Agreement (NAFTA).

Highly surprising was the effect of the tariff announcement on the President’s Republican majority. More than 100 members of the House and a number of key Senators loyal to Trump, came out against the tariffs. Among those opposing the import tax were House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell.

A major casualty of the tariff announcement was White House Chief Economic Advisor Gary Cohn, the former Goldman Sacks president.  Cohn’s resignation was considered the reason for a 1% drop (approximately 250 points) in the Dow Jones Industrial Average.  A number of publications refer to Cohn as “one of the adults in the room.”

Construction is another industry fearful of the tariff increase. “These tariffs will translate into higher costs for consumers and U.S. businesses that use these products, including home builders,” said Randy Noel, chairman of the National Association of Home Builders in a statement. “Given that home builders are already grappling with 20 percent tariffs on Canadian softwood lumber and other key building materials are near record highs, this announcement by the president couldn’t come at a worse time. Tariffs hurt consumers and harm housing affordability.”

Dante Roscini, Harvard University Prof. of Management Practice said in an article in Working Knowledge, Harvard’s free on-line bulletin, “…Trump’s actions pave the way for much uncertainty ahead, since the long history of trade protectionism shows that “safeguard measures” rarely remain confined but are likely to have broader negative consequences,” he wrote.

Roscini went on to say, “If the president’s goal was to impact China, which produces over half the world’s steel and aluminum, this policy might not succeed. China is only the eleventh biggest exporter of steel to the United States. Canada, Brazil, South Korea, Mexico, and Russia are ahead of it. The European Union will also suffer from these tariffs; they will poison the global trade climate and may represent the first warning shot in a potential global trade war.”

While Trump was happy to keep a campaign promise to a relatively small industry that competes poorly on the world market, he clearly lacks knowledge in basic marketing and pricing. If these tariffs are enacted, the President will probably beat a quick path away from protectionism, and retreat back to traditional marketing and supply-and-demand pricing basics.