Wall Board (Sheet Rock) Tariffs Levied by Canada.

I am kinda bored on Thanksgiving Eve.  Read this article on tariffs Canada is going to levy on Wall Board (Sheet Rock) that is used to finish out walls in houses and other structures. Gotta have it if you want to build a house!

Canada accused US producers of Wall Board of "dumping" the product in Western Canada a prices "below cost".  The suggestion is that US producers are trying to out price Canadian producers and put them out of business.

"""A new trade dispute has broken out between Canada and the U.S. that threatens to raise prices in Canada’s already overheated housing markets. 

The Canada Border Services Agency imposed a provisional tariff as high as 277 per cent on U.S. drywall imports in September after ruling that manufacturers were dumping the product, or selling it below the price in their home market, undercutting local suppliers. 

The tariff has raised the price of drywall, or gypsum board as it’s also called, by as much as 30 per cent and is causing “chaos” and delays as contractors scramble for alternative sources. 

Some builders say the tariff could add as much as $13,000 to the cost of a new home, which would amount to a $2.6-billion increase to the roughly 200,000 homes built in Canada each year.""" (from Globe and Mail)

Here are some graphs I made to go along with the article.  Tariffs are a tested concept on the AP Microeconomics test so hopefully this will be helpful to someone.

Is a new house about to become more expensive? Plywood producers seeking an Import Tariff on plywood from China. Let's go to the graphs and examine this!

Plywood manufacturers in the US petitioned the Government to investigate claims that Chinese producers of plywood were "dumping" their plywood on the US market at unfair prices.  The implication is the Chinese government is giving their producers subsidies so they can sell the plywood at prices that are actually below the cost of producing them.  The overall goal of "dumping" is to gain market share as (1) the company sells more because the price is cheaper and (2) competitors without the subsidies go out of business because the dumping price is lower than their cost of producing.

U.S.Plywood industry's plea for help rejected: Firms complain of Chinese 'dumping' on domestic market.

That's more than Sloan can say for the inside of the mill, where Columbia has been hit hard by Chinese competitors dumping plywood on the North American market, undercutting price by as much as 56%, says Gary Gillespie, Columbia's general manager for northern operations.

Dumping is defined by the U.S. Department of Commerce as a foreign company selling a product in the U.S. at "less than its fair value."

U.S. producers are crying foul and would like have tariffs imposed on each piece of plywood imported into the US.

Welch testified before the ITC this past September, urging it to impose tariffs on Chinese plywood imports to ensure a "level playing field."

Microeconomics has a lot to say about the effect tariffs have on the marketplace.  I am going to show you graphically how this MAY/MIGHT play out in the Market for Plywood. This is an IMPORTANT concept in AP Microeconomics so I hope it will be helpful to you.

The following graphs have made up prices and quantities.  They are just for instructional purposes and not to be taken literally.

If an economy is not open to trade with foreigners it is said to be in a state of Autarky (pronounced "Otter-Key").  The first graph shows the market in this state with a domestic price or $10.00 and a domestic market quantity of 1,000 pieces of plywood.

This next graph is the same as above but shows the areas of Consumer Surplus and Producer Surplus in equilibrium in autarky. 

Now, assume the country engages in trade and comes out of autarky.  The price of the same good when it is imported is $5.00. Half of the domestic price!

When the price of the good changes we MOVE ALONG the respective Supply and Demand Curves (Law  of Supply and Law of Demand). We can see in the graph above, when the price is $5.00 the Domestic Quantity Supplied is 500 (Point "B") and the Domestic Quantity Demanded is 1,500 (Point "A").  Our Domestic Market for Plywood is no longer in equilibrium---Quantity Demanded ("C") is GREATER than Quantity Supplied ("B"). Normally this would result in a shortage, but the shortfall is going to be made up with  IMPORTS or 1,000 pieces of plywood from China.

Important point: Notice what happens to Consumer Surplus in the graph below.  There is additional CS for consumers: They get to "enjoy" more plywood at a lower price than before trade. However, notice that Producer Surplus is less than it was before.  Some producer surplus was transferred to consumers.  Producers are left with a small sliver on the bottom left hand portion of Supply*.

So, US consumers are much better off and US producers are much worse off.

Because US producers are worse off, they may choose to try to "level the playing field" by lobbying for a tariff to be assessed on imported plywood so the price will closer reflect the US cost of producing.  In other words, to take away the un-competitive edge the foreign governments may have given their producer.

Assume they are successful  and a tariff of $3.00 is levied on each piece of plywood (graph below).  This will increase the price to $8.00. 

Remember: PRICE increases we (again) MOVE ALONG our respective Supply Curve (from Point B" to "F") and Demand Curve (from Point "C" to "E"):

As a result of the tariff, we have a change in Imports, Domestic production, Domestic Consumption, Surplus, Dead Weight Loss, and Tariff Revenue.  The most significant change is imports have been reduced to 500 pieces of plywood. The higher price as a result of the tariff induced the producers to increase quantity supplied by 250 (movement from "B" to "F") AND the the higher price has decreased the quantity demanded by US consumer by 250 pieces of plywood (movement from "C" to "E"). 

Other significant changes take place as well.  These areas have the "?" in them and are important to be able to identify.  Note they are all areas that USED to be Consumer Surplus. That is going to go away!

The first one (below) Producer Surplus is recaptured by US manufacturers of plywood. Because the price is now $8.00 in the marketplace they are induced to produce an additional 250 pieces of plywood (Law of Supply!).

The second area is "Dead Weight Loss" (DWL) to consumers.  This is the area just below the Demand curve between Point  "C" and "E".  This means that as a result of the tariff consumers lose the benefit of purchasing 250 pieces of plywood at the lower import price of $5.00.

The second area of "Dead Weight Loss"(DWL) is attributed to "Society" (graph below).  It is DWL because resources were allocated to produce additional plywood SOLELY as a result of the tariff.  This implication is society could have benefited in two ways: (1) consumers could have enjoyed more plywood at lower prices from the foreign producer and (2) the resources allocated to produce the additional units of plywood could have been used for something else.  You might recognize this as  "Opportunity Costs".

Lastly, the some lost Consumer Surplus is transferred to the Government by way of the tariff.  We can calculate the Tariff Revenue ("T.R.") by taking the amount of the tariff ($3.00) and multiply it by the number of imported pieces of plywood (500) and get $1,500.  This area is not considered DWL because the tariff revenue could be used by the government to subsidize the production of another good, creating surplus somewhere else.  

Oh, wait, isn't that what the foreign government did in the first place to create this situation?  Makes you think, doesn't it?? :)

The Sales Tax Holiday for back to school shopping is nice, but the real money is in tariffs levied on imported back to school items. How about a "Tariff Holiday". See here how much that adds up to.

Here is a nice graphic showing common back to school items parents purchase and the tariffs, in percent, that are embedded in the price you pay for these items.

A tariff is the same thing as a tax and is levied on an item when it is imported into the US.  The over-all goal of a tariff is increase the price of the imported good in order to make it more comparable to the price of the same (or similar) domestically produced good.  The assumption is the price of the imported good is too low for domestic producers to match.

While the State you live in might give you a break during the Sales Tax Holiday, the Federal government keeps on charging you.  A "Tariff Holiday" would REALLY help low income parents buy what they need for their kids.  How about it, Congress?

It really adds up, doesn't it?

Source: The Foundry (Heritage Foundation)

Note: Tariffs are applied to the cost of the good at the time of import, not on the retail price.

Example: Tennis shoes.  If the import price of the shoes is $10 then the 20% tariff is applied on the $10 not, say, a $20 retail price at Payless Shoes.

Wanna help low income people? End a shoe tariff that protects NO US shoe industry jobs so shoes can become cheaper overnight. Why can't Congress and the President do this simple thing??

If Congress and the President were really serious about doing something easy, practical and HELPFUL for low income people they would eliminate the tariff (tax) on imported shoes.  This tax is highly regressive and would do wonders in boosting the purchasing power of those households.

It is a tax that was put in place in the 1930's to protect the US shoe manufacturing industry from low cost foreign producers.  There are NO mass low cost producers of shoes in the US anymore. This tax is protecting no US jobs in that sector  It is simply a revenue producer for the Federal Govt.

From an article at the BBC:

"From the importer to the distributor to the retailer, that price is marked up to create profit margins," says Matt Priest, president of the Footwear Distributors and Retailers of America (FDRA).

"So looking at a children's shoe at $9.99, $3-4 of that could be attributed to the tariff paid at the border."

By eliminating that barrier, put in place by the Tariff Act of 1930, prices will fall in the mass market, he says.

"If Walmart was to pass on that saving to consumers, the competitors will follow. If you're a single mum with three kids and you have to buy them shoes once a quarter you're talking about a decent saving just by eliminating this tax."

The baby needs new shoes! Do you want to pay 40% of the purchase price in taxes to do so? Probably not, but you DO. See here why...

Going to buy the baby some new shoes!!

Got this idea from Mark Perry.  Go HERE for more on the subject of Tariffs on imported shoes, which is the crux of this posting.

How much in taxes, that we can actually figure out, goes to purchase a $10.00 pair of basic rubber sole canvas sneakers for a child.  We HAVE to assume these are imported from China because there is NO domestic producer of this type of shoe.

Well, I have to earn the money first. So the first taxes I encounter of payroll taxes--Social Security, 6.2% of what I make and Medicare, 1.45% of what I make. So a total of  7.65% of my income.

I calculate I would (roughly) have to earn $10.85 before taxes.

Minus Payroll Taxes (Social Security (6.2%) and Medicare (1.45%) --Total = $.85 cents

I now have my $10.00 to purchase my babies shoes, right? Sort of. I assume I am driving to the store.  Assume I am going to need gas. Gotta pay gas taxes, State and Federal on each gallon of gas I buy.

In Texas the State Gas Tax assessed PER gallon (Texas it is $.20)
Federal Gas Tax assessed PER gallon (18.4 cents---round down to $.18)

Assume I need half a gallon of gas--Total Gas taxes would be =  $.19

Texas State Sales Tax---8% (give or take depending on your locality) =  $.80

Not done yet...Gotta back track a bit.

The shoe was imported.  Imported shoes of the type (cheap!) I want to purchase have a Tariff of 48% (unless it came from Mexico or Canada---NAFTA).  I am going to round to 50% to make the math a little easier.

Assume the shoe had an assessed value of $4.00 at the point of import at Customs.  The Federal Tariff would be $2.00 (50% of $4.00).  The importer of the shoe would now have that shoe for a total cost of $6.00.  They might add a dollar for good measure and sell it to the retailer you are purchasing it from for $7.00. They in turn sell it to you for $10.00.

So, how much in various taxes have you paid on your way to purchasing a $10.00 pair of shoes.

Tariff----$2.00
Payroll taxes--$.85
Gas Taxes--$.19
Sales Tax---$.80

Total: $3.84 in taxes that I had to encounter in order to get the shoes.  That is an effective tax rate of 38.4% on the $10.00 purchase.  I did not include any Federal Income Tax on the income.  The purchaser could subject to no income tax or a high tax. I just let that go. I also am missing other taxes embedded in the price of the good, other than the tariff, that the retailer pays too. Never ends, it seems.  The effective rate is probably higher.

I am not a math person. Tell me where I am going wrong. I am a willing learner.  Thanks!

The point of this posting is this tariff of nearly 50% is regressive and hurts the poor. There is no domestic industry to protect from foreign competition. Those are LONG gone, but the tariff remains.  If Congress and the President wanted to help the poor, this is easy pickings for repeal. 

Why don't they do it???

Chinese Tire Tariffs (2009) re-visited...Policy success or failure? More Unseen here than Seen--F. Bastiat lives....

This analysis by The Conversable Economist of tariffs imposed on Chinese-made tires (2009) should be required reading for populist politicians who cater to narrow special interests AND want appear to be a champion of workers and "American Jobs".  It is not long and you will learn A LOT about basic economic principles within the context of "the seen and the unseen".  Most excellent.

Tire Tariffs: Saving Jobs at $900,000 Apiece

In September 2009, President Obama approved a special tariff on imports of tires from China. In his 2012 State of the Union address, he stated that the policy had saved "over a thousand" jobs. Gary Clyde Hufbauer and Sean Lowry look at what happened in "US Tire Tariffs: Saving Few Jobs at High Cost," written as an April 2012 "Policy Brief" for the Peterson Institute for International Economics.

The basic economic lessons here are the same as ever. There's never been any question that imposing tariffs on foreign competition could dissuade imports, and thus allow U.S. manufacturers to keep production and prices higher than they would otherwise be. As a result, U.S. consumers pay more, the firms make higher profits--and workers for those firms get some crumbs from the table. In this case, Hufbauer and Lowry estimate that consumers paid $1.1 billion in higher prices for tires in 2011. This saved a maximum of 1,200 jobs, so the average cost of the tariff was $900,000 per job saved. But of course, the worker didn't receive that $900,000; instead, most of it went to the tire companies. And in an especially odd twist, most of it contributed to profits earned by non-U.S. producers.