Economy, Regs, & Taxes

Protectionism's Opposite Effect

Tariffs sound great to protect American jobs, but they have a high cost.

Allyne Caan · Mar. 10, 2016

Job creation is a perpetual theme in American politics. So it’s not surprising that the topic is once again in the limelight. As part of Donald Trump’s pledge to return American jobs from abroad — a key promise, understandably, for many of his supporters — he plans to impose protective tariffs on imported goods, including a 35% tariff on cars from Mexico and a 45% tariff on all products from China. Is this a good idea?

Theoretically, higher prices for foreign goods will increase demand for U.S. products and, consequently, create jobs here at home. Nice theory, but reality doesn’t support it.

Instead, protective tariffs have historically cost American jobs while inciting retaliatory tariffs by foreign powers and increasing consumer prices.

Consider, for example, the tariff increase Barack Obama imposed on Chinese tires in 2009. While Chinese tire imports dropped by 30%, U.S. manufacturers didn’t automatically pick up the slack. As Forbes reports, from 2009-2011, “30 percent more tires were imported from Canada; 110 percent more from South Korea; 44 percent more from Japan; 152 percent more from Indonesia; 154 percent more from Thailand; 117 percent more from Mexico and 285 percent more from low volume provider Taiwan.”

“But jobs were created,” some will say. Perhaps, but there’s more to that story. As National Review’s Jim Geraghty writes, jobs in the tire manufacturing industry rose from 50,800 in September 2009 to 52,000 two years later, representing a $48 million increase in income and purchasing power. However, Geraghty notes, “the tariff also forced consumers to spend $1.1 billion more on tires than they otherwise would have — or roughly $900,000 per U.S. tire industry job created.” Plus, in 2010, China slapped a tariff of its own on U.S. poultry imports, cutting our exports by $1 billion and slamming U.S. poultry companies.

The steel industry offers another example of tariffs' unintended consequences. In 2002, the Bush administration imposed tariffs on certain imported steel. The goal? Save U.S. steelworker jobs. As economist Walter Williams explains, the tariffs pushed certain domestic steel prices up by as much as 40% and saved approximately 1,700 steelworker jobs. But at great cost — $800,000 per job, thanks to higher prices. Furthermore, steel-using industries, such as the auto industry, bore the brunt. Williams notes, “It is estimated that the steel tariffs caused at least 45,000 job losses in no fewer than 16 states, with over 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 … and thus had to lay off workers.”

Bottom line: The costs of protective tariffs far outweigh any perceived benefits. Furthermore, foreign-made goods shouldn’t be Trump’s primary concern; rather, he should look at Americans who buy imported goods. As Williams notes, “Donald Trump … can simply ask the American people not to purchase from abroad. Tyrants would never buy that strategy. Tyrants do not trust free markets and what they imply, voluntary exchange, because people acting voluntarily might not do what the tyrant thinks they should do. That is why they favor compulsion in the forms of tariffs and quotas.”

Far from helping American workers, protective tariffs harm workers in the form of higher prices and lost jobs.

We who understand that a free-market economy is best should reject government attempts to rig the market, because invariably, the die is cast in favor of some at the expense of others. For those who think protective tariffs affect only foreign economies and not the U.S. economy, and therefore are not domestic market manipulation, just remember steel and tires.

Free markets are not a threat to American Liberty; they are essential to it.

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