Import Tariffs: Decline of Reason

The use of economic tariffs has been widely prevalent in the United States history. With the Hamilton Tariff (named after the first Secretary of Treasury under the new U.S. Constitution, Alexander Hamilton) becoming the first tariff legislation to be passed by the U.S. Congress, raising tariff rates between 5% and 10% relative to the appropriate product, the passage would create a precedent for what would become perhaps the greatest injustice in the realm of fundamental economic principles. Today, we’ll examine the common arguments of those supporting economic tariffs, with a subsequent rebuttal of each individual argument.

Let us begin by defining “import tariffs.”

According to the American Heritage Dictionary, tariff is “A list or system of duties imposed by a government on imported or exported goods.”

Essentially, when a product to be sold on a domestic market (in the United States, for example), is actually being manufactured in a foreign country (China, Taiwan, Puerto Rico, etc.), the domestic country would levy a tax on the import, effectively raising the price of the imported product. Why would anyone do this? The common arguments are:

1. Because foreign corporations can usually take advantage of a cheap labor force (the stereotypical “Mexican” worker, for example), it is unfair to the domestic corporations that have to compete with these businesses.

2. If foreign corporations were to enter our markets, the unemployment rate would skyrocket, as all of the domestic corporations would be driven out of business (given that the foreign corporations would have lower prices).

3. Import tariffs are a significant source of national revenue, providing our government with the resources needed to appropriately provide for basic social services as education, transportation, and mail delivery.

4. By protecting our domestic economy, we seek to create a sense of national unity.

5. In a time of war, tariffs can be used as a retaliation method against another country (referred to as the trade war).

Because a time of war creates unforeseen circumstances and fundamental changes in the national economic order (institution of draft, ensuring citizen safety, increased manufacture of weapons and transportation utilities for the military, etc.), let us focus on the use of tariffs in a time of relative peace. Thus, cross off argument #5 off the list.

Now that we know what tariff imports are and why anyone would want to have them, let us consider each of the individual arguments suggested by protectionist advocates.

Unemployment rate would increase

Many tariff proponents argue that the failure to institute tariffs would have negative implications on our domestic unemployment rates. The core idea of this logic seems sound at its surface;

If a foreign corporation that can produce goods more cheaply comes into the United States, the domestic corporation that produces the same product, but sells it at a higher price, given that it lacks the advantages of its foreign competitor, would eventually start to lose revenue, resulting in a loss of jobs.

Sounds pretty reasonable, no? Unfortunately, it truly is only on the surface that this theory has any valid standing in the sphere of economic validity.

Let’s consider the following example. In the year 2020, the two most sought-after products by the U.S. consumers are TVs and computers. Because the federal government becomes alarmed at the prospect of those in the TV industry losing their job to a foreign competitor, however, Congress levies an import tariff on all Samsung and Sony TVs, raising their price by $300.

Because the price went up, consumers are faced with two choices: Either they can keep buying the same number of TVs, but, because of its higher price (tariffs = limited competition = higher prices; economics 101), he now cannot afford to buy a new computer OR they can decide to invest in the new computer system, but, correlatively, not buy a TV. Either way we look at this, someone will be losing their job.

How does this work in practice? Consider the following example. In the year 2000, President George W. Bush raised tariffs on imported steel goods between 8 and 30 percent (a politically-motivated reason, though the argument was that this will protect the steel industry and the domestic workers). According to a report issued by the Mackinac Center for Public Policy, “For every job saved by this measure, 8 will be lost.”

At first, one would ask: how could something like this happen?

Well, according to Adam Romney, a junior at Emory University, the tariffs caused U.S. grain exports to decrease because "high tariffs scare off freighters from which they normally unload 42 percent of U.S. steel imports. Once emptied, those same boats usually haul away 62 percent of U.S. grain exports. With fewer ships available to be loaded, grain overflows from silos and sits in storage on barges." The argument is simple: the same foreign tankers that bring us steel then take the agricultural products we produce. The problem is….higher import prices = fewer ships come to pick up our own products.

Again, remember: For every job saved by this measure, 8 will be lost. It is much easier for a newspaper headline to say: “Hundreds lose jobs because of foreign competition moving into the steel industry” than saying “thousands lose jobs because of increased prices in a given scope of domestic products.”

Tariffs can greatly improve domestic economy

Because the federal government is now collecting taxes for foreign imports, it can be easily argued that the domestic economy would skyrocket. Experience, however, shows otherwise:

As contended by the National Center For Policy Analysis, the “1994 tariffs cost the U.S. economy 32.3 billion dollars or $170,000 for every job saved.” Because of the 2000 steel imports, the U.S. national income was reduced by between 0.5 to 1.4 billion dollars. In 1984 U.S. consumers paid $42,000 annually for each textile job that was preserved by import quotas, a sum that greatly exceeded the average earnings of a textile worker.

Though a government is collecting taxes, we need to remember that tariffs result in price increase of DOMESTIC products, leading to decreased purchase trends of other sought-after goods (as in our TVs and computer example).

Tariffs are a source of national unity

Perhaps the weakest argument put forth by protectionist fundamentalists. In 1828, the U.S. Congress passed the Tariff of 1828, otherwise known as the Tariff of Abominations. Created with the purpose of protecting northern American industries from the competing European companies, the passage received wide criticism from John C. Calhoun, later to become the United States President. Because the tariff increased price of goods produced by southern corporations, in conjunction with making it more difficult to obtain revenue from the sale of raw materials, Calhoun published the infamous South Carolina Exposition and Protest. Four years later, in 1832, in what became known as the Nullification Crisis, South Carolina declared that the tariff is unconstitutional and will cease to follow it.

Many modern scholars argue that this was one of the several factors leading to the disarray that eventually erupted into one of the bloodiest conflicts in the United States history: the Civil War.

Now, maybe it’s just me, but the death of 620,000 soldiers really just doesn’t convey the whole idea of “national unity” for me.

It is unfair to the domestic corporations

The idea of “fairness” is irrelevant in this discussion. The principles of a free-market competition are as follows: Companies compete for consumers. To do this, they offer discounts, special offers, and ultimately lower prices. Whoever can do this the most efficiently gets the most consumers, the most profit, and can thus stay in business. The consumers benefit because of the lower prices and those who can’t keep up go out of business. Saying that it is “unfair” to the domestic corporations goes along the same line of reasoning as saying that it is unfair for professional babysitting services that charge $50 an hour to allow teenagers who charge $20 an hour to babysit.

If a domestic corporation is put of business because of competition, this is an inevitable, and a healthy result of the free-market economy. Plus, the idea of lower prices for consumers certainly does not seem “unfair” to me.

Conclusion

So let’s see. We’ve proved that tariffs do not, in fact, provide valuable revenue to our federal government, do not protect ‘domestic workers” (and even so, at the price of losing jobs in other fields combined with costs ranging into hundreds of thousands of dollars needed to save them), oftentimes result in civil disarray, not unity, and certainly do not constitute “unfair” to domestic corporations. In fact, they effectively propagate the one and only economic system worth of any serious consideration: capitalism.

Reference:

http://economics.about.com/cs/taxpolicy/a/tariffs.htm