the US and trade protection

tariffs and quotas

There are two main ways in which a country can shield a domestic industry from foreign competition.  Tariffs are taxes on imports, which make foreign goods more expensive for domestic purchasers.  Quotas are limits on the amount of a foreign good that can be imported over a specific time period.   The first controls the price of the foreign good, the second its availability.  Unless the quota is set at an wildly high level, tariffs and quotas have generally the same effect.

The main impact is that both allow domestic producers to raise prices.  This is very good for those working in the protected industry, which will have higher profits than before.  It’s at least mildly bad for everyone else, who will have fewer choices and must pay more for what they need.

infant industries/developing countries

There can be a legitimate place for trade protection.  A developing country, for example, may want to establish a textile manufacturing industry.  In the early days, the infant industry may not have the technical skill or economies of scale to compete with more established foreign competitors.  So the home country government may limit foreign competition for a period of time to give the new endeavor a chance to get on its feet.  Tariffs/quotas may also guard against predatory pricing by foreign firms that want to keep the local industry from ever developing into a competitor by “dumping” product at below production cost.

effects of protection

There are several:

–overall GDP growth slows; domestic users of imported goods or their domestic substitutes now pay higher prices and are most likely worse off.  This economic loss may be hard to trace back to the protection, making the tactic more attractive to elected officials

–economic energy shifts to the protected industries, which raise prices and become more profitable.  In many instances, however, the protected industry doesn’t modernize but simply collects the extra revenue and continues its outmoded/inefficient practices.  So it falls progressively further behind world standards, with it and domestic consumers ending up worse off in the long run vs. having had no protection.  The domestic auto/light truck industry in the US during the 1980s is a prime example.

–affected parties figure out how to deal with tariffs.  In the case of the 25% US tariff on light trucks imported into the US, protection forced foreign automakers to establish plants in the US to serve the market.  In the case of current US tariffs on imported aluminum and steel, on the other hand, manufacturers who use these inputs have cancelled US expansion plans and have begun to shift production to other countries.

–we can see the negative long-term effects of protectionism around the world in the ossified telecom industry in the EU, the pickup truck business in the US, the semi-bankrupt state-owned industries in China or the senescent keiretsu structure in Japan.  Generally speaking, except for infant industries in developing countries, the state planning that tariffs exemplify seems to have worked out pretty badly just about everywhere in the OECD.

retaliation

When a country alters the trade status quo by applying a tariff or import quotas, the affected countries most often respond in a tit-for-tat fashion.  The original tariff is intended to help a politically important industry in the home country.  The response, called retaliation, has the aim of hurting a politically important industry in the home country.  If it also helps an industry in the original target, fine;  if not, also fine.  In this sense, retaliation is different from the initial tariff.

After the US placed tariffs on imported steel and aluminum, for example, the EU has responded with a retaliatory tariff on imports of Harley Davidson motorcycles (an early supporter of Mr. Trump) made in the US.  China has placed a similar retaliatory tariff on US soybeans.  HOG has since announced plans to move manufacturing of Harleys for export to the EU from the US to Thailand.  Chinese soybean buyers have shifted to Brazilian output, a loss that US farmers worry may end up being permanent.

 

Next time:  the Trump tariff plans, as far as I can figure out, and stock market implications

 

 

 

 

 

trade wars

Recently President Trump announced plans to impose tariffs of 25% on imported steel and 10% on imported aluminum, citing national security reasons.  He followed this up with a Twitter comment that, for the US, trade wars are good–and easy to win.

My take:

–much of modern economics stems from study of the causes of the Great Depression of the 1930s.  The key factors:  the wrong fiscal and monetary response, world wide; and the imposition of tariffs to “protect” local industry.  These did substantial economic damage, deepening and prolonging the global slump instead.  The idea that Mr. Trump may not be aware of this is the really worrisome aspect of the current situation.

 

–the first-order effects of the proposed tariffs will, in themselves, likely be miniscule.  Domestic prices for both metals will rise.  As a result of that, and of possible tariff payments to the government, income will shift from the users of the two metals to Washington and to domestic producers of steel/aluminum.  Because of this, at least some metal fabrication will shift away from the US to other countries.  One EU-based maker of appliances has already suspended plans to increase its manufacturing capacity in the US.

–second-order effects will likely be larger.  The EU, for example, is indicating it will retaliate by placing large tariffs on several billion dollars worth of goods that it imports from the US.   Presumably, other affected countries will do so as well.

 

–there was a similar incident during the Obama administration involving Chinese-made truck tires.  Economists estimate that it resulted in the loss of 3,000 American jobs.  If there was anything good about that situation, it was that it was isolated–Washington understood this was a one-off payment to a domestic union for its political support.  Today’s concern is that, despite overwhelming economic evidence to the contrary, Mr. Trump actually believes that trade wars are good–and will continue to act on that belief.