Written by: Nik D.
On June 1st, 2017, the United States imposed 10% tariffs on aluminum and 25% on steel being exported to Europe, and as a retaliatory response, the European Union placed 25% tariffs on European-made clothing being exported to the United States. Recently, the Trump Administration set out to try and “force” companies to produce goods within the United States in hope of a more self-sustaining economy. In order to do this, they placed large tariffs on an aluminum and steel being imported to the United States. In a retaliatory response, the European Union slapped 25% tariffs on jeans, shorts, t-shirts, and synthetic woven trousers being exported to the United States ( a tariff is an extra tax added to a good being exported or imported). Some of these clothing goods are shown on the right. A common output from tariffs is that they change the number of goods being imported or exported). According to Rick Helfenbein, the chief executive/president of the American Apparel and Footwear Association, “‘Made in USA’ apparel... will suffer as a direct result of this action by the Trump administration”. I believe that Helfenbein is on point with the outcome effects of these tariffs, and believe that they are not beneficial for our economy and greatly hurt individual clothing companies.When looking on a smaller scale, these clothing tariffs can be devastating to clothing companies; in specific they affect implicit/explicit costs, profit, as well as the marginal cost/revenue of the companies. The production of the clothing being produced within the United States rather than overseas leads to greater explicit costs. A majority of the increased explicit costs are due to higher wages needed to pay to the workers in the United States. Yes, it is good that the businesses are producing product within our country, but then again they are doing so less efficiently than they would if the product was produced overseas. The increase in wages outweighs the costs of producing within the United States (such as less transportation cost due to no international transportation), so these tariffs are not beneficial whatsoever. The production of the clothing, as well as the material costs, are close to the exact same as they are overseas, so it is the increase in worker wages that is responsible for the greater explicit costs. There will also be an increase in implicit costs because the opportunity cost is larger for producing the items inside the United States (the items would be produced more efficiently overseas and for less of an opportunity cost). Overall, these costs lessen the profits from the clothing companies and hurt the economy in the clothing and textile sector (which has to do more macroeconomics).
These changes in explicit and implicit costs affect the overall profit of the company. Accounting profit (Total revenue - explicit costs) is much less after the tariffs are imposed because, provided that the total revenue stays constant or less than before, there are greater explicit costs, so the money earned (after paying off all of the costs) is less than it would be if it were produced overseas. The same goes for economic profit, however, the difference in economic profit would be greater than the difference in accounting profit for before and after the tariffs were imposed. This is because the implicit and explicit costs are both greater, so when calculating for the economic profit (Total revenue - explicit and implicit costs), there would be more subtracted from the total revenue, in turn making the economic profit much smaller. Furthermore, the profit of the companies will be closer to normal profit due to the difference in the total revenue and the total implicit and explicit costs being close to zero after the tariffs were put into place. When analyzing profit, the further away from the normal profit a company is (when the revenue is greater than costs), the better off the company is doing. Therefore, the companies producing clothing within the United States are less efficient when doing so, proving that the tariffs are not beneficial to the economy.
Marginal costs and revenues also vary when substantial tariffs are placed on a good. The marginal costs are greater after the tariffs are imposed because the cost added by producing one additional piece of clothing is larger (due to larger explicit costs). Also, provided that the total revenue would stay constant and the total quantity of goods would decrease, the marginal revenue would increase. Therefore, the quantity would be greater at the optimal output due to the fact that the marginal revenue and marginal cost are greater than before the tariffs were in place. In the end, even though the tariffs sound good at first, they end up hurting the clothing companies within the United States. The goal of imposing them is to try and get the clothing companies to produce clothing within our country, and it does so, only at the price of increased explicit/implicit costs, less overall revenue, and in turn less profit.
The table above represents countries in the European Union that the United States imported the most clothing from after the tariffs were imposed. Table from https://wits.worldbank.org
I agree that it is harmful to the overall economy of both trade partners to impose tariffs on clothing. It sounds like the high labor costs in the U.S. would cause overseas clothing exporters to have the comparative advantage in clothing production. As a result, maximum benefits from trade would occur if overseas companies specialized in clothing production while the United States specialized in production of another good with a relatively lower opportunity cost. However, in this instance, the administration's will to create a more "self-sustaining" economy has resulted in less possible consumption on both sides.
ReplyDeleteClothing is something that all of us must wear each day and considering that most of the clothes we own are manufactured out of the United States says a lot. I do agree that it is a good idea to buy “made in the US” products to better our own economy, however the cost of those goods is much higher than the foreign goods, especially when it comes to clothing. I think that even with the tariffs imposed on the goods the consumers in the US will still buy just as much “foreign made clothing” as before because the cost is lower. I also like it that you talked about the different wages in the the US vs. the other countries related to the cost of making the clothing. I think that is a really good point that the US is required to may workers a significant amount more per hour than other countries, so making the clothing out of the US is more cost effective.
ReplyDeleteI agree that imposing these high tariffs on clothing companies and other industries is not the best solution to stimulating the United States' economy. As you stated, the opportunity costs are too high; if other countries can produce the same goods for a lower cost than the US, then they have the comparative advantage in production (therefore, the US trying to produce those same goods is a poor use of the country's resources). Additionally, these tariffs will lead to a higher prices for both local and foreign clothing, due to the weight of the tariff being placed on consumers and minimum wage laws that are in effect in the US. Therefore, tariffs are not beneficial to the American people (or economy) in the long run.
ReplyDeleteAll of our clothing are mostly made from out of the U.S. I have yet to buy a piece of clothing that was made in the United States. This says a lot about where our economy lies in the clothing industry. With tariffs being placed on clothing companies, this only negatively affects the U.S economy because rarely any clothes are manufacture in the U.S to begin with. These tariffs will begin to raise prices of all clothing industries. Even though there is a small amount of clothing produced in the U.S, there still is that small amount. They are sold at the price of increased explicit/implicit costs, less overall revenue, and in turn less profit, like you mentioned in this blog.
ReplyDeleteEllie Reyes