Tariffs and Economic Favoritism

by Austin Raynor

President Obama recently announced the imposition of a 35% tariff on imports of Chinese passenger and light truck tires, threatening to set off a global trade war; China has already responded by stating that the U.S. decision "not only violates WTO rules, but also runs against U.S. pledges at the G-20 summits, constitutes an abuse of trade remedy measures, and sets an extremely bad precedent in the current backdrop of a world economy in crisis." It has threatened legal action against supposedly under-priced U.S. exports of auto parts and chicken.

The tire tariff is indicative of a disturbing international trend towards protectionism: discriminatory trade laws outnumber liberalizing trade laws six to one and governments are instituting protectionist measures at the rate of 60 per quarter. 90% of goods currently traded in the international market have been affected by at least one protectionist measure.

Tariffs have disastrous economic consequences. As great free-market economist Henry Hazlitt points out, tariffs are a result of the mistaken but "persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences."

The United Steelworkers Union claims that the tire measure will save U.S. jobs. This claim may or may not be true (none of the domestic tire manufacturers asked for the tariff; seven of the ten domestic manufacturers actually have plants in China that will be harmed by the measure). However, assume for the sake of argument that the tariff does save some American jobs.

It is the American consumer who suffers the cost. A typical set of four Chinese tires sells in the U.S. for around $240. The 35% tariff raises this cost by $84. Thus, consumers who typically purchase cheap tires—those consumers on the lower economic rungs—will have to shell out more than an additional day’s income to get new tires.

If not spent on tires, this $84 would have been spent or invested elsewhere. Perhaps it would have been used to purchase a new suit, which would have helped the suit manufacturer, or maybe it would have been invested in stock, in which case it could have served as capital for expansion of a business. In short, the tariff does not create American jobs, but merely redistributes wealth. The $84 that goes to the tire industry is money taken away from other industries, which as a result are forced to contract. Jobs gained in the tire industry are jobs lost in other areas.

But the tariff doesn’t merely redistribute wealth. It actually decreases net productivity and reduces American industrial efficiency. This occurs because the tariff encourages resources to remain mired in an industry that is fundamentally inefficient and in which we lack a comparative advantage. Thus, American factories will continue to produce cheap tires which could be more efficiently produced by the Chinese. Without the tariff, the resources devoted to these factories would be shifted to industries in which we do produce efficiently enough to be competitive.

When one takes into account these various consequences, it becomes clear that the effect of a tariff is actually a decrease in net wages, that is, total wages earned. Purchasing power of the American consumer is reduced by an artificial increase in prices at the same time that the net productive power of the American worker, or the amount of goods produced in total, is restricted. Less goods overall are produced in this case because resources are being wasted in an inefficient industry rather than being shifted to industries with greater comparative efficiency. These effects combine to produce a decrease in national wealth.

It is undeniable that in certain instances tariffs produce benefits for a certain industry. But these benefits are at the expense of all other industries (no surprise, then, that the Retail Industry Leaders Association, which represents corporations such as Wal-Mart and Target, opposes the tariff) and the nation as a whole.

Tariffs such as the one enacted by President Obama are instances of gross economic favoritism. President Obama realizes that alienating China, our primary creditor, and handicapping competition is not economically sound, but he nevertheless proceeds with this ill-advised policy in an effort to repay the union leaders who played a pivotal role in his election. The recent edict concerning tires is but a small example of the current administration’s unabashed willingness to use the executive power of the American government to select economic winners and losers, rather than allowing the market to determine outcomes based on product quality and satisfaction of consumer demand.

Originally Published by the Dog Street Journal