Wednesday, July 28, 2010

Tariffs Are Not The Answer

With the US unemployment rate holding near 10% for several months, there has been a great clamour for government-sponsored initiatives that will help spur job creation. One such crusade that has gained traction across several sectors of the manufacturing industry is the call for import tariffs. Those who support import tariffs are no doubt well-meaning (at least, towards their domestic citizenry they are), but their stance is helping hold America back from its more prosperous potential.

The logic behind import tariffs is simple enough: raise the price on foreign goods so that domestic producers can profit as a result, which allows domestic producers to maintain or grow the domestic workforce. The problem with this approach is that it assumes this action exists in a vacuum, whereas in reality it has a ripple effect which actually serves to harm the economy.

First, while import tariffs may (if only temporarily) save the jobs of a few Americans, it raises the cost of goods for the buyers of that product. As such, it reduces the profits (for a business) or the standard of living (for individuals) reliant on that product. The impact is spread out over a number of people, which can obscure the fact that there is an impact, but overall, the country is worse-off by protecting the industries which are least competitive at the expense of all of its other industries.

In addition, countries producing goods on which tariffs have been slapped may choose to retaliate by protecting their own weaker industries from their stronger American counterparts. This would harm America's successful businesses, which are the ones that should be encouraged to grow. In effect, the tariff is transferring jobs from successful businesses to businesses that are barely scraping by, which results in a poor overall result for the country. Even if the affected countries do not retaliate with formal tariffs, their businesses will end up poorer than they otherwise would have been, again lowering their abilities to increase their business with America's successes (Google ads, Apple smartphones, Boeing jets, pharma drugs etc.), which drive the high-paying American jobs that university graduates seek.

Finally, those who accept the aforementioned economic reasoning but who reject its application on compassionate grounds should consider which worker needs their help the most: the worker in the developing country who either works or starves, or the one in the developed country, who has access to temporary jobless benefits, worker re-training programs and welfare protection, should the transition to new employment take longer than expected.

If tariffs aren't the answer to increasing American jobs, then what is? Education.


Ankit Gupta said...

Yeah, tariffs will only kill the country really.

Think about it - let's just use tires as an example. If imported tires are $50 with tariffs and domestic tires are $100, and let's say they now put a tariff on imported tires of $75. This makes imports $125 and domestic $100.

You'll buy the domestic, but it's actually bad for the economy. Instead of having spent $50 on tires and $50 elsewhere for a total of 2 goods (assume twice the economic value), you now spend $100 on a domestic tire and have less. The idea of the economy is to have *more*, because that's what motivates people.

With cheaper goods, people have money to spend on new things, and I'm willing to say that people want more/better things all the time. We want to go out more, see more movies, have great drinks, etc. - there are plenty of things people want more of.

By limiting what we can buy, you're holding the country and citizens back from having a reason to prosper. The government cannot create a system where they basically force people into certain actions, like protectionism, and still expect us to work. We work for ourselves at a political level, it's the only system that works.

The day we start catering to the people (*politically*) with less is the day our system will continue to fail. If you try to help those with little, you encourage doing less. The less you do, the more you *need*, and so people are incentivized to do less and less. If this worked, people would not be starving in India.

Atlas Shrugged says this 10x more eloquently and with better reasoning than me :P

Paul said...

I'm sure most people here have read this, but for those who haven't, it's a pretty good read. Buffett on the trade deficit:

synaptic said...

This is pure ideology. Using the tire example, the main reason that the imported tires cost $50 and the domestic tires cost $100 is government regulation.

We are not operating in a free market. To suggest that "the country is worse-off by protecting the industries which are least competitive" requires that this is protectionism (it is not). It is equalization of the disparity of artificial constraints imposed by governments.

Are the Chinese somehow better at producing tires? Or is the cost of the domestic tire a reflection of the labor costs, the osha, the epa, and the countless other regulations that HANDICAP ONLY OUR OWN TEAM.

I get it. You don't want tariffs. And for trading partners with similar regulatory/constraint structures, there can still be essentially free trade. However, where there is a huge disparity, tariffs to equalize DO make sense. We're now reaping the harvest of close to 20 years of bad policy. This is that "giant sucking sound" Perot warned us about and it's a testament to the momentum of the USA that it has taken this long to crash.

The alternative is to repeal the domestic regulations and return to a free market (or at least as free as our least-regulated trading partner).

So which would you prefer? Do you want to keep your minimum wage, worker protections, and social safety net? Or shall we get rid of all of that and let the economy flourish? If you want to keep the minimum wage and whatnot, then you tax imports.

Personally, I think that it's a combination of the two but tariffs are a necessary first step (we're really hemhorrhaging now). We must balance the equation and stimulate domestic production of the things that we consume domestically.

That, my friend, is the road to recovery.

I would also like to see a tax on foreign remittances and a freeze on importing guest workers unless they have an exceptional skill (i.e. not agriculture, construction, or flipping burgers).