Tariffs Punish Consumers, but Remain Politically Popular
This article first appeared in the St. Louis Beacon.
With all the talk about polarizing politics and the fracturing of our democratic institutions, I have found the one topic upon which everyone can agree. Oh, and can disagree. That is protectionism.
On Sept. 11, President Barack Obama imposed a whopping 35-percent tariff on imported Chinese tires. Right-wing free-traders raised a hue and cry about his action. On the left, the New York Times editorial page observed that Mr. Obama “acted unwisely” in erecting this newest barrier to trade.
In response to critics, Mr. Obama should simply claim right of office. History shows that protectionism knows no party affiliation.
Ronald Reagan, the great advocate of free trade, slapped a 100-percent tariff on Japanese electronics in the late 1980s. His administration also pressured Japanese automakers into a “voluntary” restraint on their exports to the United States.
Bill Clinton championed the North American Free Trade Agreement and imposed punitive tariffs on imported steel. One Clinton official anonymously justified the move to the New York Times by noting that “The U.S. has a right to safeguard its industries and to impose temporary relief to address serious injury.” (By the way, much of the tariff fell on the kind of wire rod used to make clothes hangers.)
There are other examples: Lyndon Johnson threatened the French that the United States would not lower its tariffs on manufactured goods imported from their country unless they lowered the tariffs on our agricultural goods. George W. Bush followed Clinton’s lead by imposing stiff tariffs on steel, in an effort to protect the domestic steel industry.
Presidents of all political stripes seem disposed to impose tariffs, but is there an economic justification?
A tariff acts as a tax on an imported good. Like any tax, a tariff distorts the market’s equilibrium price and quantity for the good. And, like any tax, the government prospers. In this case, however, so do domestic producers. Because the imported good is now more expensive, U.S. producers are able to continue operating. And therein lies the true reason for tariffs: They supposedly save jobs.
In the case of Clinton’s steel wire tariff, the domestic wire industry employed at most an estimated 4,000 workers. For the modern tire industry, however, the number of “protected” jobs is much higher. But tariffs may not even save domestic jobs. Economist Thomas Prusa of Rutgers University estimates that Obama’s tariff could actually result in a net loss of 25,000 U.S. jobs over time. Moreover, he calculates that the annual cost of each job saved in the short term is upward of $300,000.
The big losers from a tariff are consumers. The price of tires, on average, will be higher after the most recent tariff. Using data from the International Trade Commission, Daniel Ikenson of the Cato Institute estimates that the average tire price for a post-tariff Chinese import will be about $60, significantly higher than its current average price of about $39. That raises the import price much closer to the average U.S. price, which is around $68. But the average post-tariff price of a tire — imported and domestic — has increased from $53 to $64. On average, consumers pay more for tires. Period.
If we all pay more for tires or steel or electronics after a president imposes a tariff, how can they get away with it? Consumers who pay more for tires or coat hangers or electronics are politically diverse. We do not have a strong lobby in Washington, D.C. The workers who face stiffer competition and may lose their jobs are much better organized. So are their lobbyists.
Presidential tariffs are as common as admonishing welfare cheats and overpaid CEOs. Leaving good economics behind, Obama is only channeling his predecessors. Too bad: I thought he was the president of change.
Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.