Sunday, October 2, 2016

The Imposition of Import Restrictions Is a Recipe for a Declining Standard of Living

October 3, 2016

The Imposition of Import Restrictions Is a Recipe for a Declining Standard of Living

Both 2016 U.S. presidential candidates of the two major political parties are, to greater and lesser degrees, advocating the imposition of restrictions on U.S. imports if foreign exporters engage in “unfair” trade practices. Regardless of whether foreign exporters engage in perceived unfair trade practices, I believe that the imposition of restrictions on U.S. imports would result in a decline in the standard of living of Americans in the aggregate.

The benefit to an economy from trade is imports, not exports. When U.S. workers produce goods and services that are exported, neither those U.S. workers nor other U.S. residents get to consume those exported goods and services. Rather, the foreign recipients, the importers of these goods and services, consume them. Exports are what we have to give up in order to obtain imports. The fewer exports we have to give up to obtain a given amount of imports, the better off we are.

Let’s run a little thought experiment. Suppose that the Chinese government, embracing the mercantilism that Adam Smith excoriated way back in 1776, provided Haier Group, a Chinese-based home appliance manufacturer, a subsidy such that enabled Haier to offer refrigerators for sale in U.S. for $1 each. Should the U.S jump on this deal of $1 dollar refrigerators or impose a tariff on Haier refrigerators so that their U.S. price was closer to those of Whirlpool and Frigidaire refrigerators? If you were a worker at or a stockholder of U.S. Whirlpool and Frigidaire, you would lobby for the tariff on Haier refrigerators. But those of us who do not earn income from Whirlpool or Frigidaire would most likely opt for the $1 Haier refrigerators.

If we allowed imported Haier refrigerators to be sold in the U.S. for $1 each, would workers and stockholders associated with Whirlpool, Frigidaire and their suppliers be economically harmed? Yes, initially. Would U.S. residents, in the aggregate, benefit from the imported $1 Haier refrigerators? Yep. We could purchase more refrigerators and still have a lot of income left over to purchase other goods and services. Our increased demand for other goods and services would result in additional hiring, production and profits in industries not directly related to Whirlpool and Frigidaire. Some of those     laid- off Whirlpool and Frigidaire workers would find employment in those industries experiencing increased demand as a result of the lower-cost imported refrigerators. As a result of the Chinese government’s subsidy to Haier, we in the U.S. would be able to consume more refrigerators and more of other goods and services at a lower general price level, all else the same. That is, in the aggregate, the American standard of living would rise.

I can hear you now. This is typical ivory-tower analysis. In the real world, a lot of those laid-off would not be able to get re-employed in other industries quickly or at a comparable wage rate because of inadequate skills or geographical-mobility issues. Let’s assume that this is the case for all laid-off workers in industries related to the domestic production of refrigerators. Let’s also assume that there are many more families that purchase refrigerators than there are families involved in the domestic production of refrigerators. Under these circumstances, the U.S. government could impose a tariff on imported Haier refrigerators at a level such that the revenues from this tariff could be transferred to the displaced workers, leaving them monetarily no worse off while leaving everyone else better off.  This tariff would result in the price of U.S. refrigerators being higher than $1 but less than what the price was before the Chinese government started subsidizing Haier.

Who are the real losers in the $1 Haier refrigerator deal? Chinese taxpayers. They end up subsidizing U.S. consumers of Chinese-produced refrigerators. Moreover, China will be using more of its resources to produce refrigerators for U.S consumption. This leaves fewer Chinese resources to produce other goods and services for Chinese residents to consume. In effect, the Chinese taxpayers would be providing “foreign aid” to U.S residents. How do you say “thank you” in Mandarin?

Okay. Let’s come down from the ivory tower to the real world. In September 2009, President Obama imposed additional tariffs on imported Chinese tires of 35%, 30% and 25% in years one, two and three, respectively. The President was responding to a finding by the U.S. International Trade Commission (ITC) that imported Chinese tires were causing “market disruption” to the U.S. domestic production of tires. A labor union representing U.S. tire workers requested the inquiry by the ITC. A study by the nonpartisan Peterson Institute for International Economics (PIIE) found that the total cost of these new tire tariffs on Chinese tires resulted in higher tire costs to U.S. consumers of around $1.1 billion in 2011. The PIIE study estimated that a maximum of 1,200 jobs were “saved” in the U.S. tire-production industry by these additional tariffs. Thus, the cost to U.S. consumers per U.S. tire-production job saved was around $900 thousand in 2011. Furthermore, the PIIE study estimated that because of the increased cost of tires to U.S. consumers, these consumers had to reduce expenditures on other goods and services, which resulted in the loss of 3,731 other jobs in the retail sector. So, the price of tires increased to American consumers and they had to cut back on their consumption of other goods and services – a drop in the American standard of living by any other name.

The $1.1 billion of additional tire costs on American consumers via a higher tariff on imported Chinese tires in 2011 works out to $13.27 per U.S. family in that year – not an exorbitant  amount. But, instead of imposing the tire tariff, if the U.S. government had increased taxes on every U.S. family of 64 cents and transferred those additional tax revenues to the 1,200 domestic tire-production workers who would have lost their jobs without the higher tariff, the laid-off tire-production workers would have been no worse off monetarily in 2011 and everyone else would have been better off than with the tariff.

Why didn’t those citizens not employed in the tire-production industry write President Obama and/or their federal legislators to protest the imposition of the higher tariff on imported Chinese tires? Because $13.27 more annually per family due to higher tire tariffs was only 0.02% of the 2011 median family income --small potatoes. Why didn’t the 3,731 retail workers who lost their jobs because of the higher tire tariffs protest? Because they probably could not connect the dots between the increase in the tire tariffs and the decline in other retail sales. But those in the U.S. tire-production industry could clearly see that less expensive Chinese tire imports were adversely affecting their livelihoods and they had lobbyists and union leaders who were going to squawk about it.

Whether foreign governments conduct fair or unfair trade practices, there will be certain U.S. industries harmed economically as imports increase. But there will be more U.S. residents who benefit economically from these increased imports than will be harmed. If our federal legislators took into consideration the economic well-being of Americans in the aggregate, they could devise a system to compensate those harmed by the increased imports so as to leave them no worse off. Extra taxes or tariffs would be needed to fund this compensation. But these extra taxes/tariffs would be low enough to leave those who benefitted from increased imports better off than before. Because the “losers” from increased imports are easier to identify than the more diffuse “winners”, it is politically more expedient to argue in favor of import restrictions than a more rational compensation program that would leave the “losers” from imports no worse off economically and everyone else better off.

In sum, if the trade-restriction rhetoric being voiced by the presidential candidates of both major political parties turns into actual trade restrictions after the election, the standard of living of Americans in the aggregate will be adversely affected. We will end up with slower growth in goods and services available for us to consume and a higher rate of consumer inflation. Adam Smith must be spinning in his grave.

Paul L. Kasriel
Founder, Econtrarian, LLC
Senior Economic and Investment Advisor
econtrarian@gmail.com
1-920-818-0236



3 comments:

  1. I find a flaw here in that you presuppose the Chinese imports are subsidized by direct Chinese govt. subsidies rather than currency manipulation, which is what occurs in reality, is it not. I'm not smart enough to know if there is a difference in the final effect from currency manipulation compared to direct government subsidies, but it seems to me that currency manipulation introduces complexities that are not present with direct government subsidies. As always, you are amazingly insightful Mr. Kazriel, but I judge in this case you have a few more steps left in your descent from the Ivory Tower before you reach ground level.

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  2. "If our federal legislators took into consideration the economic well-being of Americans in the aggregate, they could devise a system to compensate those harmed by the increased imports so as to leave them no worse off. Extra taxes or tariffs would be needed to fund this compensation. But these extra taxes/tariffs would be low enough to leave those who benefitted from increased imports better off than before."

    Yes! I agree with everything you said.

    However this seems never to happen. When economists talk about trade, they concede that there will be winners and losers. They state that the losers can be compensated from some of the gains of the winners. But after the trade deals are implemented this is forgotten. When this happens repeatedly, we end up with a certain trade-bashing presidential candidate who need not be named.

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