The newly-announced tariffs on foreign imports have disrupted the stock market and sparked financial concerns.
WSHU’s Desiree Diorio spoke with professor Andrew Forman of the Frank G. Zarb School of Business at Hofstra University about the impacts Long Islanders can expect as the tariffs take effect.
WSHU: My first question is, ‘What is a tariff?’ and my second is, “Is it possible to talk about tariffs without talking about politics?’
AF: So what a tariff is, in essence, it's a fancy word for a tax. We're familiar, obviously, with income taxes, and we're familiar with sales taxes, and those are the taxes that as individuals and as consumers, we're typically aware of. This would fall under the category of a sales tax. Although unlike when you go to a store, and you have your sale rung up and at the end, they add on the sales tax depending on your state and municipality, this is a sales tax that's not leveled directly on the consumer, but instead leveled on the importer who is bringing in goods from another country. So, in essence, the goods would arrive at a port. There would be a list of the items that are being brought into the country. There would be a schedule of the tariffs that are attached depending on the country it's coming from and the nature of the product, and the importer then would be charged that amount. They would basically receive a bill that they would have to pay to customs for the amount of the import duty that's placed on the goods.
In terms of how that rebounds down to the customer, the question then becomes for the importer: How much of that sales tax are they prepared to absorb? And how much of it would they pass on to their customers as the product enters the distribution chain, eventually ending up at a store or an online site?
In either case, there are implications. Because if the importer absorbs the cost, that will certainly impact their bottom line and their profits, and that could have implications in terms of their growth and hiring and all those sorts of things. If they pass the sales tax, the tariff, on to the customer, then that's going to come back as a higher price for the customer. That could tamp down demand and implications for customers being able to make their incomes and their wealth stretch as much as possible.
WSHU: It sounds like this will be a hardship for both business owners and consumers.
AF: Yes. And then depending on how prepared or how able the importer is to absorb the cost, what proportion of that increased price is going to be absorbed by the importer? The reverse is passed on to the customer.
And I think the other question you asked was the degree to which you can divorce tariffs from politics. Mostly, there's a pretty intricate connection between the two. Whenever a country levels a tariff on another country, there are a variety of reasons for doing it — sometimes, in a more general sense, not saying in this particular incident, that there are cases where tariffs might be leveled in terms of some punitive action because of some military action or something along those lines.
More commonly, what tariffs are leveled against is trying to protect the country's own interests, in this case, protecting the industrial base or bringing back the industrial base to the United States. And so to the extent to which a leader, in this case, the president, is trying to for political reasons, or whatever other reasons, to give more advantage to particular industries or to help boost particular industries, because there are voters in that area that they might appeal to. That's another question.
But in this particular case, it's hard to see that it's politics per se, because it's being done with such a broad brush. It doesn't matter if we are friendly with the country, if we're unfriendly with the country, if there is a readily available way — in medium or long term — to bring that production into the United States. None of that seems to be considered.
So in this particular case, there seems to be some politics involved, but it's not the traditional politics of trying to figure out what the most direct way might be to improve a particular region of the country or a particular industry. It just seems like it's across the board.
A great example would be the tariffs on countries from which we get bananas and coffee. We're not going to start growing coffee or bananas, but yet there's a tariff. So it's hard to see what the politics are there.
WSHU: When I think about the economy of Long Island, I think about tourism and health care. How could these tariffs impact the average Long Islander?
AF: I guess you have to look at it from two perspectives. One is from the consumers, the residents who live on Long Island, and the other would be the impact on any businesses.
So, if you take the first, obviously, Long Island and the New York metropolitan area have some of the highest living costs in the country. While some people in the area are affluent, there are others who are living paycheck to paycheck. They're likely to see the brunt of any price increase on anything they buy a lot more readily than people who might have more resources. So as a percentage of the income that people spend on their day-to-day living expenses, that's obviously going to rise for people who are in the lower rungs of the economic scale.
From that standpoint, in an area that already has a high cost of living and difficulty in keeping younger people on Long Island and trying to figure out how to make the math work, that will be an issue. From the standpoint of home construction, for example, the materials that we would need — lumber would be subject to tariff. Steel would be subject to tariff. The appliances you would put into a house now would be subject to tariff. So in an area where housing costs are already very high, we're likely to see some degree of increase in that, which would further make it harder for people to stay on the island. Anytime we're in an inflationary cycle, obviously, it's going to have an impact on people’s ability to make do.
In terms of health care, a lot of that is services-driven, so that wouldn't directly necessarily be affected, but from the standpoint of any sorts of supplies and materials, or I know there's a carve-out for pharmaceuticals for now, but I'm not sure if that's going to last. The healthcare organizations — labor costs aren't going to be directly affected, but certainly any equipment that they import, any supplies, materials they import, would be subject to that.
We’ve been talking about the inflationary aspect of tariffs. But the other part of it, too, is that we can see in terms of what's been going on in the stock market over the last couple of days. The Dow, again, as of now, is down over 1,000 points. We saw about $2 trillion worth of wealth evaporate yesterday, and we're on par to see about the same today.
So now you're asking companies to reinvest and to bring their production back into the United States in an era where we might be very clearly heading for recessions. People start to cut back. We mentioned the wealthier people on Long Island who may be immune from the inflationary factors. They’re not going to be as concerned that they have to pay a few extra dollars in the grocery store, but as they see the value of their investment portfolio start to evaporate, they're likely to see cutbacks there as well.
You mentioned tourism as a major area for Long Island’s economy. The extent to which people are going to cut back on vacations and decide, even at the higher ends, saying, “Well, maybe my retirement isn't as secure.” And then, as people stop spending, it almost becomes a self-fulfilling prophecy that the economy will shrink. So the other part of it is not only the inflation, but the fact that there's a fairly good chance that as people become more concerned about the cost of things and see their investments shrink, people become much more cautious. They don't buy as many cars, don't take as many vacations, don't redo their houses, and then those lost jobs, and you can start seeing the downward spiral that all this can trigger.
