Tariffs and Free Trade

What are they and what do they impact?

During all the discourse regarding tariffs and free trade has anyone heard the actual tariffs folks seem to be so upset about? I have not. However, you’ve been made acutely aware of the drama caused by the tariff discussion. Did you know that “tariffs” and “free trade” are two different things?

Tariffs are the penalty (tax) that is imposed by a country on an import to protect an industry or group. According to the World Trade Organization, average tariffs in the US are 3.5% compared to 5.2% in the European Union, 9.9% in China, 4.1% in Canada and 7.0% in Mexico. Interesting isn’t it that our top trading partners have higher tariffs?

Determining whether a nation is truly a “free trade” nation depends other factors beyond tariffs. Free trade or the lack thereof, is established by the policies of nations to foster or discourage trade. Policies that impinge on free trade include exchange controls, subsidies, fair trade laws, local-content requirements and quotas on imports and exports.

*Free trade rankings, 2014 Ranked 0 to 10 (blue, most open, red more restrictive) * 

Americans are blessed by the nature of our economic and legal system: capitalism and property rights fosters innovation and investment, and these characteristics have led to the development of the largest economy and market for foreign and domestic goods on this earth.

The attractiveness of our markets, in my opinion, has created a tough competitive environment demanding much of producers and created elevated consumer expectation while lowering prices while increasing product performance, think computers, mobile telephones, music playing devices, smart TVs, cars, et. al., thus consistently improving our lifestyles, consumer experiences and standard of living.

Anything less than free trade, between trading partners creates pricing, investment, and product, distortions ultimately leading to higher consumer costs and an impingement on standards of living. Tariffs, in my opinion, distort free trade and are a barrier to fair and free trade.

Take note that our tariffs are low compared to our trading partners and our free trade ranking is among the highest in the world; maybe we should seek and develop a fair market ranking and go from there.

Our portfolios and strategies reflect overweighted positions in US and International Equities.
Carlos Dominguez, CFP® – Portfolio Manager

https://www.investopedia.com/ask/answers/040115/which-countries-have-highest-tariffs.asp

http://tao.wto.org/report/TariffAverages.aspx

*Source Fraser Institute: http://ftw.fraserinstitute.org/studies/economic-freedom-of-the-world-2017-annual-report

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