Protectionism: Great Politics but Disastrous Policy

Photo: Morris News Service

There is an unfortunate reality baked into the structure of democratic governance; good policy is often bad politics and good politics often makes for disastrous policy. The idea of protectionism, raising taxes on imported goods to protect local industry, is one such example.

Although it’s a great line to whip up a crowd and it appeals to our most basic instinct to protect what is our own, it sows seeds that reap bitter fruit, especially for those who are most in need.

The new president has called for raising tariffs on goods sold in the American market by foreign companies, even floating the idea of a 45 percent flat tariff on all Chinese goods. Arguing that foreign competition decimated American manufacturing, President Trump claims that raising tariffs and thereby increasing the price of Chinese goods will allow our industries to flourish once again. This argument, however, is snake oil.

First, we should check our history books and see what protectionism has caused in the past. Second, we should consider the adverse impacts it could have today on the growing, but fragile economy.

Looking backward, the past is awash with cases against protectionism. The most obvious is the Smoot-Hawley Tariff of 1930, which raised import taxes on goods from Europe to protect American industry and farmers. European governments retaliated in turn, and trade more than halved, which worsened and extended the effects of the Depression.

If you want a more modern case study, take a look at the Obama Administration’s decision in 2009 to raise tariffs on Chinese tires to protect American tire manufacturers. Following the decision to try to price Chinese tires out of the market, domestic tire manufacturers added around 1,200 jobs, a 2.4 percent increase in the workforce. While that is good news for those new workers, it was bad news for consumers: Americans spent an estimated extra $1.1 billion on Chinese tires due to the import taxes. That breaks down to about $900,000 in extra costs to consumers for each job created in domestic tire production.

While this may all seem like drab, dry economics, it is incredibly important to your checkbook. If the president implements a new 45 percent tariff on Chinese goods, the result will be a massive spike in the prices of goods produced in China. Given that we import a little shy of $500 billion worth of Chinese goods each year, the president’s proposed plan would sharply increase the cost of currently inexpensive goods that help everyday Americans stretch their budgets. Likely retaliation from China would also push the price of goods up even further. Higher prices on these items effectively count as a reduction in the purchasing power of hard-working families, especially the poor.

Some argue that these costs will be offset by a renaissance of American manufacturing — low-skill, high-wage employment that will counteract the rise in consumer good prices, but this simply isn’t likely. Even with high tariffs, many companies will still choose to do business abroad because it would still be cheaper than repatriating to the U.S. For those companies that do return to the U.S., market forces will still push them towards automation and shedding human labor.

Remember the big deal the president struck with Carrier to save jobs? The $16 million going into that plant is mostly being spent on automation. While our elected officials can vote to change the law of the land, they cannot do anything to change the laws of economics. Ultimately, protectionist policies will not only fail to bring back jobs, they will also wreak havoc on average Americans’ budgets.

First posted as an opinion column in the Greenfield Daily Reporter. The original posting can be found here.

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