December 03, 2016
The answer may not be as simple as readers were led to believe in a NYT article on the topic. The article explains several ways in which tariffs can be counter-productive. As evidence that tariffs tend to be net job losers, the article cites a study by the Peterson Institute on tariffs that President Obama imposed on tires imported from China, ostensibly to counter dumping. The study concluded:
“Some 1,200 American tire-making jobs were preserved, but American consumers paid $1.1 billion extra for tires. That prompted households to cut spending at retailers, resulting in more than 2,500 net jobs lost.”
There are several important assumptions that drive this calculation of net jobs lost.
First, it assumes that the increased employment in the tire industry did not also lead to higher pay for other workers. Effectively, it assumes that all the additional revenue earned by U.S. manufacturers went to higher profits, other than what was needed to pay the 1,200 workers who were able to keep their jobs. Since workers are frequently asked to take pay cuts to preserve jobs, this seems to be a dubious assumption.
Second, it assumes that the tariff revenue collected by the government is effectively thrown in the garbage. If this money is either used to support government spending or hold down other taxes, then it would have a positive effect on employment.
Third, the study’s analysis works from the levels of imports from China at the time the tariffs were imposed rather than the growth path of imports. According to the data in the study, imports of tires from China were rising at close to a 100 percent annual rate in the first half of 2009 before the tariffs were imposed. It seems reasonable to assume that if the tariffs had not been imposed imports would have continued to rise rapidly rather than remaining at the level they were at when the tariff was imposed. A further rise in imports would have mixed effects on the jobs story. It would have cost more jobs in the tire industry, although it also would have freed up more money to spend elsewhere, since it would imply a further drop in tire prices.
Finally, the study assumes that the imposition of tariffs had no effect on the future pricing behavior of Chinese firms in either the tire industry or in other sectors. If China’s manufacturers were in fact dumping (selling below their cost to sustain production levels), then the credible threat of tariffs may discourage this behavior in the future. The allegation of dumping against Chinese firms has been common; the risk of facing tariffs would likely discourage dumping. If this is the case, then the impact of a tariff would extend beyond the specific market in which it was imposed.
None of this means that tariffs in general are a good policy or that they were beneficial in this particular case. However, the analysis used by the Peterson Institute is far less conclusive than is implied in the article. As a practical matter, the market mechanism for adjustment for large trade deficits is supposed to be a decline in the value of the currency of the deficit country. This increases the competitiveness of the goods and services it produces. In the case of the United States, the value of the dollar has been held up in currency markets by the decision by China and other countries to buy and hold huge amount of dollars. If the U.S. government could change this practice, then the dollar would fall, and the trade deficit would move toward balance.
There is one final point worth noting. While the Peterson Institute and NYT have made major issues out of protectionism that is ostensibly intended to benefit manufacturing workers, there is little notice of the much more costly forms of protectionism that benefit more highly paid workers.
There is virtually no discussion of the regulations that prohibit foreign doctors from practicing in the United States unless they complete a U.S. residency program. As a result of this protectionism, our doctors are paid twice as much as the average for other wealthy countries, costing us close to $100 billion a year (@ $700 a family) in higher health care costs. There is similar, if weaker protection for other highly paid professions. (Patent and copyright protections also impose enormous costs. This is discussed in my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.) In any case, this selective concern for protectionism might be an issue that would concern the sort of people who would vote for Trump.
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