There is a myth circulating during the current election cycle that manufacturing jobs would come back to the United States if American politicians were tougher on U.S. companies and forced them to manufacture here, and if we placed higher tariffs on imports from other countries, thus reducing trade deficits. This outlook has several problems.
One, America is a free nation and our economic model is free trade capitalism. We are a market economy, not a socialistic command economy. We do not centrally plan our economy from Washington. Why are so many falling for the populist lie that politicians with the right policies can fix our economy and make it more amenable to American workers? Sure, there needs to equity in our trade agreements with other countries and regulation to ensure fairness and legality is needed, but we cannot just control what companies do. The results, at this point, would be disastrous.
Two, tariffs always have hidden costs that ripple through the rest of the economy causing an influx in prices and layoffs in industries that do not directly benefit from the tariffs. There is always a cost to every benefit. Walter Williams at Investors.com explains the destructive nature of tariffs on the economy, something that was well understood dating back to the economic catastrophe caused by the Smoot-Hawley Tariff of 1930.
Claude Frederic Bastiat (1801-50) — a French classical liberal theorist, political economist and member of the French National Assembly — wrote an influential essay titled “That Which Is Seen and That Which Is Not Seen.”
He argued that when making laws or economic decisions, it is imperative that we examine not only what is seen but also what is unseen. In other words, examine the whole picture.
Americans who support tariffs on foreign goods could benefit immensely from Bastiat’s admonition. A concrete example was the Bush administration’s 8% to 30% tariffs in 2002 on several types of imported steel. They were levied in an effort to protect jobs in the ailing U.S. steel industry.
Those tariffs caused the domestic price for some steel products, such as hot-rolled steel, to rise by as much as 40%. The clear beneficiaries of the steel tariffs were steel industry executives and stockholders and the 1,700 or so steelworkers whose jobs were saved.
But there is no such thing as a free lunch or a something-for-nothing machine. Whenever there is a benefit of doing something, there is a guaranteed cost.
A study by the Peterson Institute for International Economics, predicted that saving those 1,700 jobs in the steel industry would cost American consumers $800,000 per job, in the form of higher prices. That’s just the monetary side of the picture.
According to a study commissioned by the Consuming Industries Trade Action Coalition, steel-users — such as the U.S. auto industry, its suppliers, heavy construction equipment manufacturers and others — were harmed by higher steel prices.
It is estimated that the steel tariffs caused at least 4,500 job losses in no fewer than 16 states, with more than 19,000 jobs lost in California, 16,000 in Texas and about 10,000 each in Ohio, Michigan and Illinois.
In other words, industries that use steel were forced to pay higher prices, causing them to have to raise prices on what they produced. As a result, they became less competitive in both domestic and international markets and thus had to lay off workers.
Tariff policy beneficiaries are always seen, but its victims are mostly unseen. Politicians love this. The reason is simple. The beneficiaries know for whom to cast their ballots and to whom to give campaign contributions. Most often, the victims do not know whom to blame for their calamity.
Here’s my question to those who want to use tariffs to fight cheap imports in the name of saving jobs: Seeing as back in 2002, the typical hourly wage of a steelworker ranged between $15 and $20, in addition to fringe benefits — so we might be talking about an annual wage package averaging $50,000 to $55,000 — how much sense did it make for American consumers to have to pay $800,000 in higher prices, not to mention lost employment in steel-using industries, to save each job?
It would have been cheaper to tax ourselves and give each of those 1,700 steelworkers a $100,000 annual check. Doing so would have been far less costly to Americans than the steel tariffs, but it would have been politically impossible. Why? The cost of protecting those steel jobs would have been apparent and hence repulsive to most Americans. Tariffs conceal such costs.
When Congress creates a special privilege for some Americans, it must of necessity come at the expense of other Americans. Then Americans who are harmed, such as the steel-using auto industry, descend on Congress asking for some kind of relief for themselves.
The facts are that when one benefits, someone else always pays the price. The power to tax is the power to destroy, as Daniel Webster said in arguing McCulloch vs. Maryland (1819). A tariff is a tax that ultimately gets passed on to consumers in the form of higher prices and to workers in other industries when costs get passed on to them and their own margin decreases.
The only economic system that we have seen that perpetually raises the standard of living for the largest number of people is a free market system. Ours is not working now because companies and their executives are keeping inordinate profits for themselves instead of expanding their businesses and hiring more people. Capitalism works when profits are reinvested back into the market instead of being hoarded or simply used for personal gain. But, tariffs are not the answer to this problem and they will not return jobs to America. Rather, they will simply have a ripple effect throughout the economy as higher prices will be passed on to consumers.
The problem with the picture above is that the American cloth will not stay at $4.00 a roll if the cloth from England is not priced in at $5.00. The American companies will raise their prices to $4.95 because their goal is to make as much profit as they can. The increased price will be passed on to American consumers who now have to pay 20-25% more for cloth across the board. And, if an American company can find a new place to make the cloth outside of America in a country which is not facing a tariff, say, Belize, for $3.00 a roll, they will still charge $4.50 or so and make even more profit. Plus, you now reduce trade with England as they start to pass their own tariffs on American goods making it harder for us to sell overseas and thus reducing our own market. The ripple effect spreads through the economy and everyone suffers.
Tariffs are not the way to improve the economy, despite what some are saying in this presidential election season.