Since President Donald Trump entered the Oval Office, the U.S. government has imposed a plethora of tariffs on exports, ranging from Canada’s softwood lumber to China’s aluminum foil. But the president isn’t stopping there, and this could be bad news for Americans.
On Saturday, the Chinese government warned that it could retaliate with necessary measures if the U.S. moves ahead with tough trade sanctions against its aluminium and steel exports.
“If the United States’ final decision affects China’s interests, we will take necessary measures to defend our rights,” said Wang Hejun, a director at China’s commerce ministry, in a statement responding to the US report. The findings of the investigations are groundless and do not correspond to reality. [Washington] should not lightly adopt restrictive measures under the pretext of ‘national security’ … a vague formula that can easily lead to abuse.”
This comes after the U.S. Commerce Department proposed slapping heavy levies on China and other nations to minimize the global supply glut of aluminum and steel.
China produces roughly half of the world’s steel, but exports just two percent of its output to the U.S.
One of the unintended consequences of tariffs is the opposing nation’s reaction. For instance, when former President Barack Obama slapped a tire tax on China in 2009, the world’s second-largest economy retaliated by restricting chicken imports, costing 1,200 jobs and $1.1 billion to the industry. Also, the U.S. actually lost 5,000 tire manufacturing jobs!
“..there is much worse form of protectionism than tariffs and border adjustment taxes. Tariffs and similar taxes do at least raise revenue for the government which could lower the deficit.
The worst form of protectionism comes in the form of quotas. Quotas are bilateral agreements, negotiated by governments which allocate shares of the market that thus restrict exports and imports. None of the higher prices on the restricted goods are remitted to governments as is the case with tariffs and border adjustment taxes. The losses to the consumers are allocated to the favored producers under a quota system. Prices are always higher and production is always lower under a quota regime than would be the case in a free market. Higher consumer prices leads to lower standards of living. Lower production always leads to less employment.
The worst impact of quotas is that firms involved have little or no incentive to innovate. If the amount they sell is determined by quotas, then the most important and desired employees of the firm are no longer the scientists and engineers would can come up with the best innovations and inventions. Rather the most sought after and highest paid employees of the firm become the politically connected lawyers and lobbyists who can influence the quota allocations in such a way to most benefit the firm
Reagan and the economists he appointed understood the concept of comparative advantage and the superiority of free trade. Some of Reagan’s most well known quotes on the topic quotes include:
As the leader of the West and as a country that has become great and rich because of economic freedom, America must be an unrelenting advocate of free trade.
Address Before a Joint Session of the Congress on the State of the Union, January 25, 1983
High trade barriers, what is often called protectionism, undermines economic growth and destroys jobs.
Radio Address to the Nation on Free and Fair Trade August 2, 1986
Well, the way up and out of the trade deficit is not protectionism, not bringing down the competition, but instead the answer lies in improving our products and increasing our exports.
Radio Address to the Nation on Free and Fair Trade and the Budget Deficit, May 16, 1987
Senator Reed Smoot and Representative Willis C. Hawley probably did many things in their careers, but history only remembers them for the Smoot-Hawley tariff of 1930 which remains today as the prime example of the damage that protectionism can do. Protectionism is the progressivism of fools. Gandhi was a great statesman but a horrible economist. Just as the ignorant in the USA argue that American workers who earn $15 per hour should not have to compete with Chinese workers who make $2 per hour, Gandhi thought that Indian workers should not have to compete with American and European workers who have the benefit of modern machines. As a result India adopted protectionism. In 1947 the per capita income of India was similar to countries such a South Korea. By 1977 the per capita income and standard of living in South Korea was many times that of India. India has since largely abandoned protectionism and has benefited immensely from free trade. Just as David Ricardo proved would be the case when he developed the concept of comparative advantage.
Reducing international trade generally reduces economic activity which can be deflationary as was seen in the 1930s. American businesses depend on free trade in many areas. Boeing could lose market share to Airbus if a trade war erupts as Chinese airlines are some of their major customers. American natural gas producers are counting on selling an additional 7 trillion cubic feet of gas to Mexico. Trade restrictions such as pulling out of NAFTA could jeopardize that and be deflationary.
Protectionism can save jobs. In the USA the best measurement of the cost per job saved to the rest of the country is about $1 million per job saved. Saving one job might provide $100,000 in gains to the worker and the employer who benefit from the protectionism, but cost the rest of the country $1,000,000. Since the million dollars is just one third of one cent per person in the USA, no one notices it.
To save a million jobs via protectionism would cost the country a S1 trillion which would be about the same impact as a very severe recession. To save 10 million jobs via protectionism would cost the country a S10 trillion. That would make the USA a poorer country than Mexico. That would mean it would be likely the people born in the USA would be going to Mexico to work as servants and dishwashers. The degree of impoverishment that would result from that much protectionism is usually only associated with severe natural disasters or wars. Trump is no Reagan on trade. Trump is a protectionist. Furthermore, the prospect of the Trump administration negotiating bilateral trade agreements featuring quotas is frightening…”
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