John Phipps' Tariff 102: Do Tariffs Accomplish Policy Goals?

12:51PM Sep 10, 2018
Chrysanthemum
( )

Last week I demonstrated how tariffs are just another form of taxation. This week we’ll look at how well tariffs accomplish their policy goals. Whether they work – and here’s a spoiler: they don’t.

Sticking with the China steel example, one reason the 25% tariff won’t affect much for China is to see how much US buyers mean to Chinese sellers. The U.S. market is the largest single trade partner for China as a whole but is still less than 1/5 of their total trade. In steel, our business is a minuscule part of their exports – less than half of one percent. Meanwhile the retaliatory Chinese tariff on soybeans could have more impact since it is by far our largest export market.

If the goal is to save jobs with tariffs, we have evidence that doesn’t happen. We’ve been there and done that. Both Obama and GW Bush enacted steel tariffs. Here’s what happened in 2002 through 2004. Jobs continued to drop In fact, steel jobs are disappearing even as steel output slowly climbs in the US. The overriding reason is productivity - it simply takes a lot fewer man hours per ton of steel.

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If the goal is to reduce the trade deficit, that doesn’t seem to be happening either. In fact, the balance of trade made its biggest monthly decline in 5 years last month. To be fair, it is too early to judge, but we can say the trend is unfriendly.

While I find evidence against tariffs persuasive, international trade is a slippery thing. Flows of goods and services are hard to reduce down to one or two causes. The long running dispute over tires from China for example probably caused a surge of tires to be imported from Vietnam and Korea. Many of our own soybean farmers and analysts think destinations for beans will just be shuffled.

That said, it is hard to find an example of a successful tariff action such as we now are using, especially steel. Tariffs don’t appear to either save jobs or reduce the trade deficit.

Next week we’ll wrap up the series by showing how tariffs divide us politically.