Monday, 12 September 2016

Tariffs: Why The Benefits Are Overstated & The Costs Understated

In a week in which tariff-friendly Donald Trump is the shortest price he's been to become US President, in no small part due to his seducing the electorate with promises of import taxes that will help 'make America great again', there are one or two reality checks that need offering.

Perhaps the most important thing you can learn about tariffs is that when (y)our government imposes them on foreigners to make us better off it instead makes us worse off, and also the people trying to trade with us.

Knowing this makes you understand that when politicians want to impose tariffs on outsiders to artificially protect fledgling, ageing or inefficient domestic industries from foreign competition they have their own best interest at heart (votes) and not our own (free trade).

The golden rule about all economic inefficiencies - be they minimum wage laws, rent controls, tariffs, or any regulation of that kind, is that politicians get away with selling the bad policy as popular because the benefits are quite easy for everyone in the country to see, while the costs (that far outweigh the benefits) are more difficult to see because those costs are spread more widely and thinly throughout the nation as a whole.

To illustrate this, suppose there is an ageing firm in the UK called Steve's Steel that employs 3,000 people in Yorkshire. Understanding how the gains and losses of tariffs are distributed is key to understanding the problem with tariffs.

The obvious benefits of lumping a tax on foreign competitors are felt by all the workers at Steve's Steel. The cost of saving those jobs, however, is distributed more thinly through the economy, which means as far as voters go, they see a tangible benefit to 3,000 of their fellow country folk and perceive no real cost to themselves.

Moreover, since the workers and families have every incentive to lobby the government to save their jobs, and the rest of the population have little or no incentive to lobby the government to not subsidise Steve's Steel, there is more of an incentive for the government to listen to those connected to Steve's Steel.

But, alas, while you can see the losses connected to Steve's Steel quite easily, what you don't see are the losses that occur around the rest of the country by subsidising Steve's Steel - the numerous other workers that lose their jobs for every one job saved at Steve's Steel - you never get to see all those who lost their jobs because the tariffs were enacted.

Equally you never see all the reduced consumer income that Brits have due to these tariffs, via the increased prices they pay, nor the lost job opportunities by not having that money to spend elsewhere. You also never see that a British import tariff against, say, Chinese imports would mean the price of the yuan measured in pounds falls, making British goods more expensive to the Chinese, which reduces demand for things priced in yuan and reduces demand for yuan, making UK consumers worse off..

The upshot is, as I've said before on these pages, if you stifle foreign competition directly, you stifle domestic industries too, because somewhere down the line in the complex nexus of global trade, your fellow country folk are the competition.