International Trade and Global Business

 

New Study Faults Tariffs as Trade Weapon

An argument often heard by proponents of higher tariffs is that they promote domestic job growth by restricting cheaper imports.  Faced with higher costs, domestic producers will step forward to produce what was once imported.  “Bring back those good jobs and make America a manufacturing powerhouse again.”
 
Turns out, they were wrong.
 
A recent Federal Reserve study found that in the aggregate, US tariffs have led to job losses for the US manufacturing sector as well as higher prices for US consumers. It indicates that while tariffs did reduce competition for some industries in the US market, this was offset by the effects of rising input costs and retaliatory tariffs on US goods.
 
It is helpful to have a report empirically demonstrating these effects, because the findings are not surprising. As the report authors note, in an era of globally interconnected supply chains, you cannot simply raise tariffs on imports to protect domestic manufacturing because a lot of those imports are actually intermediate goods that domestic manufacturers need. On top of that, many domestic manufacturers have customers all over the world, so retaliatory tariffs have hit US manufacturers’ exports pretty hard, too.
 
Consider the case of Mexico and Canada, where goods in various states of assembly cross their and US borders in some cases numerous times before getting delivered to the final consumer.  Subject to tariffs every time they traverse a national border, the goods would end up unaffordable. Those who rely on tariffs in an attempt to save jobs, end up eliminating jobs because they’ve missed the changes that have taken place in the global economy. Misplaced efforts to protect the domestic economy risk taking us back to pre-world war eras when trade plummeted and unemployment skyrocketed. Economies are much more interconnected than they were before the world wars.  So unilateral efforts by big economies like the US to protect specific industries under the guise of national security or some other reason, risk causing serious damage to other countries that are part of the value chain.
 
The Federal Reserve report indicates that industries hardest hit by retaliatory tariffs include those that produce aluminum sheet, iron and steel, motor vehicles, household appliances, computer and other electronic equipment.
 
The US and China appear to have agreed on a plan to pause their trade war and both sides seem relieved that no new tariffs will be added to the ones already imposed. But the fact is that the US will still have tariffs on roughly two-thirds of imports from China after phase one is signed, probably in mid-January. These tariffs remain on 90% of Chinese-origin inputs for US manufacturers. The average US tariff rate on Chinese imports will also remain very high at 19%, vs. the 3% average before the trade war began. Most of the remaining tariffs target intermediary goods and hitting US companies’ supply chains. This will continue to be a drag on business.
 
Far from protecting important domestic industries or retaliating against the dodgy trade practices of others, tariffs imposed unilaterally cause self-inflicted wounds that sap business vitality and cost jobs.
 

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