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
