I bought my car when I retired 20 years ago, and the wear and tear of these past years is beginning to show.
I am also at an age of occasionally needing a spare part but unlike mine, the ones for my car are more complicated to come by. Few spare parts for my old vehicle are kept in stock locally. When a wheel bearing on my car failed, my local repair shop had to special order the replacement parts. Waiting for them to arrive gave me time to reflect on what effect self-serving decisions by governments – in this case the US government – can have on global supply chains.
The steel used to make the bearing I needed was mined and produced in Canada. In keeping with globalized “just in time” supply chains, a steel ingot was shipped from Canada to a US factory producing bearing rings and rollers. As the steel ingot from which my bearing’s parts were to be produced crossed the border, the US government imposed a 25% tariff.
The factory sent the rings and rollers to one of its subsidiary factories in China where the parts were to be assembled into a bearing. Another border – another tariff. This one a sizeable 125% imposed by China on imports from the US.
My bearing was now ready to be installed in my car.
It was shipped from the Chinese factory to my car maker’s parts distribution warehouse for North America, located somewhere in the US. Another border, another tariff: 145% imposed by the US on imports from China.
Without delay the warehouse shipped my wheel bearing to my local repair shop where it was promptly installed. This last leg in my bearing’s travels involved one last border crossing and with that another tariff: 25% imposed by Canada in retaliation for the 25% US tariff imposed on the steel ingot at the outset of my bearing’s odyssey.
The cumulative cost of the four tariffs adds up to a whopping 761% (seven hundred and sixty one percent)!
My local repair shop wasted no time and installed my bearing the day it arrived. My bill for the job listed just two taxes: 7% provincial sales tax (PST) and the 5% federal sales tax (GST). These two tax levies are payable on the value of labour and material only.
The cost of tariffs imposed on my bearing on its journey from the iron mine to my local repair shop was not itemized; it was treated as a cost of production. As a consequence I paid PST and GST on the tariffs my hapless bearing had accumulated in its evolution from steel ingot to finished product.
My car’s age, the need to replace a wheel bearing, and the quoted tariff rates are facts. The story of my bearing’s formation, however, is a parody I concocted to shine a light on the effect tariffs have on supply chains in a global economy.
A tariff is a sales tax. Tariffs and sales taxes are as related as are brushcuts and haircuts. A tariff can be more than an inconvenience or an irritant. Tariffs can be precarious because they encourage retribution in the form of counter-tariffs, thereby setting the stage for a trade war.
Front line troops and civilians are a military war’s first victims. A trade war’s first victims are small businesses and their customers.
