Monday, June 11, 2018

Protection or Aggression?

There has been a lot of ink lately about the tariffs that our current administration is trying to impose on imports of steel, aluminum, and various other commodities that impact the personal wealth of people who donated to their election campaigns. Measures like this are generally referred to as Trade Protectionism, and are generally enacted to protect domestic producers from unfair foreign competition – cases where a foreign company can use cheaper labor, lower raw material costs, looser environmental regulations, or subsidies from their national government to achieve a price level American firms can’t match. In theory, import tariffs protect domestic companies and their employees, but in practice there are a number of issues with such measures that make their use risky, or even counterproductive…

The obvious problem with import tariffs is that other companies can impose them, too. In cases where we need the imports more than they need our exports, their tariffs can be more effective than ours, and the overall effect on our economy will wipe out whatever advantages our import tariffs might have given the “protected” industries. That’s not easy to determine in advance, either. In the case of the oil wars in the 1970s and 1980s, for example, many people assumed that the US could retaliate for the (seemingly) arbitrary price increases for petroleum with similarly punitive raises in the price of food products. Unfortunately, it turned out that we did need oil as much as the OPEC countries needed food – given that we were using petroleum-based fertilizers, petroleum-fueled farm equipment and delivery trucks, and oil-burning ships to export the crops in the first place…

In the current iteration of trade tariffs, it is harder than usual to see these measures as anything other than political, due as much to the fact that there have been no major changes in those industries or pricing structures in recent years as to the countries being targeted by the tariffs. There have been occasional cases of Chinese and Russian companies dumping cheap steel imports on the US market over the last decade, but our domestic steel industry has been declining for much longer than that, and even if those imports were a factor it’s hard to see how erecting tariffs against Canada or any of the other G7 countries would help. Even if those countries weren’t going to retaliate for our random imposition of tariffs, and they’re already doing so, there would still be negative effects within the US to explain away…

Consider, if you will, the case reported in March of this year by Reuters, about the impact of the steel tariff on a company called Novolipetsk Steel PAO, in Mercer County, Pennsylvania. Novolipetsk Steel imports large amounts of bulk steel from the company’s mills in Russia, which it then rolls and processes in plants in the US. The steel tariffs are expected to have a positive effect in the vestigial American steel industry, with a few idle steel mills being put back into operation, but it will have a much larger negative impact on companies like Novolipetsk’s US subsidiaries, wiping out as many as three times the number of jobs created. And that doesn’t even consider the jobs that will be lost in the American industries that actually still export goods…

It would be nice to think that these tariffs were really intended to protect American workers in general, or even that the effects would be a net positive for the country. As noted above, trade protectionism is generally not a viable long-term strategy, but if applied carefully and limited to cases where unfair competition (low-cost product dumping, for example) really is occurring, it can have some positive effects. In most cases, however, actual trade negotiations between countries involved will be more effective and generally more mutually beneficial. In cases where there are no such trade wars in effect, where the country attempting to erect the tariffs can’t begin to supply its own needs for the relevant commodity regardless of import price, or where the administration in power owes significant favors to people who own companies in the relevant industry, however, it’s difficult to see these actions as protecting anything in the public interest…

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