Economics / International Business

From Temper Tantrum to Tempered Tariffs, the Problem with Tariffs in a Globalized Economy

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Photo Credit: Gage Skidmore

Last week, the World Economic Forum met once again in Davos, Switzerland to discuss, among many topics, the continuation of globalization in the world economy.[1]  Of course, the topic is in stark opposition to a variety of events that occurred last year: the rise of populism in Western European countries, the referendum concerning the United Kingdom’s membership in the European Union, and the United States’ election of Donald Trump.

Concern arising from globalization’s accompanying problems for some has sparked push back as to what degree nations should embrace a fairer and freer world economy.  Nowhere is that concern more obvious than in the U.S., where the incoming Trump administration has proposed a variety of measures to combat globalization.

One such measure is the use of trade tariffs on countries and companies to protect U.S. jobs and combat trade deficits in several targeted countries, most notably China ($367 billion deficit) and Mexico ($61 billion deficit).  However popular these tariffs might be to those who are concerned with rising trade deficits and job losses, the negative effects of and widespread opposition against tariffs should give pause to those clamoring for their implementation.

First and foremost, a tariff is essentially a tax on imports of goods to a country.[2]  In the past, they have been used as a tool to save domestic jobs and spur growth in industries that were perceived as “at risk” and in need of what is inherently a government subsidy.  In the past when tariffs have been used, they have at worst exacerbated depressions (in the case of the Smoot-Hawley Tariff Act of 1930, which further depressed global trade during the Great Depression) or at best weakened already vulnerable industries (as in the 2009 Obama administration tariff on tires imported from China, which saved an estimated 1,200 jobs but cost consumers “more than $900,000 in higher prices for every job saved.”)[3]

For the most part, tariffs create more harm than good, and that idea holds true in the present as the Trump administration considers imposing tariffs on a number of countries.  During the campaign, Trump specifically targeted Mexican and Chinese imports with a 35 percent and 45 percent tariff respectively on all imports.  These figures are incredibly high for imports from an entire country, let alone in a climate where free trade deals are actively being sought by many countries, and tariffs of this magnitude were only believed to be campaign rhetoric.  Currently, the figures being tossed around are in the realm of 5-10 percent, damaging nonetheless but more realistic in at least their adoption efforts.[4]  The administration hasn’t specifically noted if these tariffs would apply to all imports or only a selection of countries and industries; however, it can be assumed that Mexico and China would both be targeted, as Trump had heavily berated both countries during the campaign.

Even a tariff as small as 5 percent is still problematic, in that a tariff is essentially a tax, one likely to be borne by the consumer in the form of higher prices on goods and services.  Companies that import goods with imposed tariffs are not going to shoulder anywhere near a majority of the increased price, and the resulting higher consumer charges will disproportionately affect those from the poor and middle class societies.  Moreover, there is widespread consent among economists that besides hurting those who benefit the most from imported goods, tariffs don’t actually bring any jobs back to the U.S. in a measurable quantity.  There was a survey conducted by the Heritage Foundation of 51 leading economists of all different ideological views.  These economists were asked to provide a response as to whether “higher import duties on products such as air conditioners, cars, and cookies” would encourage companies to produce these goods in the United States.  A full 100 percent said no.[5]

Finally, the ability for the executive branch to impose trade duties isn’t even legal under the Constitution.  “That’s because the path to imposing tariffs – along with taxes and other revenue-generating measures –” writes Rebecca Kysar of the New York Times, “clearly begins with Congress, and in particular the House, through the Origination Clause.”  This is because according to the Constitution, “All bills for raising revenue shall originate in the House of Representatives;” and while Ms. Kysar notes that tariffs are more generally used nowadays for protecting domestic industries and not as a primary means of generating revenue, tariffs still create income for the government.  Instead of a tariff, Ms. Kysar suggests a border adjustment tax, which would essentially eliminate incentives to manufacture and shift income abroad and would aim to be trade neutral, neither increasing nor decreasing consumer prices on imports and exports.[6]

No matter where you stand on trade policy (if you even happen to have a stance), tariffs enacted by the new administration, especially in such a unilateral way, hurt consumers, are widely considered a bad idea by economists, and are technically illegal if pushed through by the executive branch.  Hopefully, the Trump administration takes this triple threat to heart and reconsiders such a drastic and ultimately damaging policy.

 

Sources:

[1] http://www.chicagotribune.com/business/ct-world-economic-forum-globalism-20170118-story.html

[2] https://www.bloomberg.com/politics/articles/2017-01-18/why-trump-s-tariff-threats-get-taken-so-seriously-quicktake-q-a

[3] http://www.chicagotribune.com/news/nationworld/ct-donald-trump-tariffs-20161201-story.html

[4] http://www.cnn.com/2016/12/21/politics/donald-trump-tariffs/

[5] http://www.washingtontimes.com/news/2017/jan/5/the-problem-with-tariffs/

[6] https://www.nytimes.com/2017/01/03/opinion/is-trumps-tariff-plan-constitutional.html?_r=0

Photo Credit: https://c1.staticflickr.com/9/8246/8567828196_810cd563d5_b.jpg

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