Brux column: The economics of trade restrictions
This opinion column will address the economics of current policy issues. Writer Dr. Jackie Brux is an emeritus professor of economics and founder/director of the Center for International Development at UW-River Falls; and author of the college textbook, “Economic Issues and Policy.”
International trade is again hitting the headlines. The president has now placed additional tariffs on China and is threatening more. He is also threatening France with new tariffs and Mexico with a new 25% tariff on cars. We have tariffs on our allies in Canada and the European Union. What is the impact on U.S. jobs?
Consider the new tariffs on China. Trump says, "We're going to be taking in more money than we've ever taken in before ... we'll be taking in over $100 billion per year!" Trump is stating his fundamental confusion over tariffs — it isn't the foreign seller who pays the tariff (tax) to our government; it is the U.S. importer who pays it and passes much of it along to the U.S. consumer in the form of higher prices. You and I will be paying the billions of dollars per year, not the Chinese.
We have both a foreign and domestic supply of most goods. The tariff reduces the foreign supply, leaving us with a smaller total supply of the product. This pushes up the price of not just the foreign product, but also the domestically produced counterpart.
When consumers are hit with higher prices, they usually buy fewer goods. Smaller sales mean less production; less production means fewer jobs. But it gets so much worse.
Consider tariffs on Chinese steel. Many U.S. industries use steel as an input in their production of other products. When they pay more for steel, their production costs increase, consumers pay higher prices, sales fall, and workers are laid-off. Economists calculate that for any potential job created in the steel industry, U.S. consumers and businesses pay $900,000. There are better ways to achieve job growth.
Furthermore, many of our industries (including autos and steel) consist of U.S. companies with considerable market power, meaning that a few large firms dominate the industry. Tariffs on imported automobiles, for example, reduce competition in the U.S. auto industry, thereby increasing its market power. Market power is then used to raise the price to an optimal level that will maximize the automakers' profits. Fewer consumers buy the product and workers lose their jobs. This is what happened in the 1980's when Reagan placed restrictions on auto imports from Japan — many U.S. autoworkers were told there would be more jobs; in fact, autoworkers lost their jobs. Tariffs on industries with market power serve to decrease, not increase, jobs in these industries.
Finally, trade restrictions harm our exporters, for three reasons:
• First, using the car example, Mexican autoworkers suffer from lower sales and job loss. As their incomes decline, so too do their purchases of U.S. products.
• Second, Mexico responds to U.S. tariffs with tariffs of its own (on our agricultural exports, for example). Mexico buys fewer of these and our farmers suffer. And since markets for farm products take years to establish, our farmers will suffer for years beyond the Trump administration.
• Third, tariffs cause natural movements in exchange rates. If the U.S. buys fewer Mexican cars, we (our importers) reduce our overall demand for Mexican pesos with which to pay for the cars. A drop in the demand for pesos causes a fall in the exchange rate for pesos relative to U.S. dollars. The peso depreciates (relative to the dollar), whereas the dollar appreciates (relative to the peso). "Cheaper" pesos mean cheaper goods from Mexico, so we buy more of other products from Mexico. "More expensive" dollars mean that Mexicans buy fewer of our export goods.
The reason most large countries signed onto a global system of fluctuating exchange rates was to eliminate incentives to increase jobs through trade restrictions. For every potential U.S. job gained by a tariff, at least one other job is lost in our export industries.
Trump really doesn't understand this. His concept of trade is win/lose: for the U.S. to gain, the other country must lose. This isn't the case. Free trade is win/win, something he will never understand.
In the case of China, there are legitimate issues besides trade. These include certain tariffs, subsidies and intellectual property rights. These would be resolved more effectively by the U.S. joining with allies on appropriate measures. The current administration, however, has shown its penchant for going it alone. Not only will this not work, it heightens awareness of the same kinds of tariffs and subsidies with which the U.S. harms developing countries.
Republicans understand the economic theory behind free trade but are reluctant to educate our president. Democrats support free trade, though they often have concerns when competitive global markets mean fewer work and environmental protections. This doesn't mean that trade is bad. It means that free trade agreements should incorporate these protections. As for tariffs, you really will not find a single economist supporting them.