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Thursday, May 23, 2019

ANALYSIS/OPINION:

Make no mistake, tariffs don’t help markets or make for lower prices. And, trade wars are no friend to consumers. But, with all the convoluted media analysis flying about, and the lack of apparent benefits to a trade war, why engage in one or more of them at all? Why would the current administration — self-proclaimed protector of all that makes America Great — embark on such a shaky path?

Adding to the rhetoric, we hear questions like, “who really pays the tariffs?” And these questions are often followed by armchair media economists making back-of-the-envelope calculations about how much more the average washing machine will cost Americans, or how much the tariffs are reducing the U.S. GDP. So: why?


To understand the logic — political and economic — a little story needs to be told. Imagine that a fine company in, say, Ohio, manufactures children’s sports equipment and toys. The firm is environmentally conscious, has an excellent workplace safety record and pays its union employees well while providing generous benefits. Further, let’s imagine that you want to purchase one of their playground kick balls for your niece for her birthday.

When you wander into Walmart, you find that the Ohio kick ball costs 10 bucks. That seems like a fair price to you, but next to it on the shelf you see an almost identical one for only $6. The difference is the $6 ball was made in Guangzhou, China. The company that made it spews toxic rubber fumes from its factory, its workers face debilitating injuries due to unsafe conditions and their pay is — even for China — meager and without benefits. Add to this, the Chinese government keeps its currency exchange rate artificially low compared to the U.S. dollar.

As a consumer, you now have a choice. First, you may not know the working environment of the Chinese factory. Second, you, like all of us, live on a budget and like to save a few dollars whenever you can. And third, you don’t even really like your niece. You just have to send her a birthday gift to keep your brother off your back. Considering all of these factors, you grab the $6 Chinese ball and head for the checkout stand.

You are no different than millions of Americans making purchase decisions for thousands of products in thousands of stores every second. And the conclusion to our little story is that over time, the factory in Ohio sees declining sales, earns lower profits, pays less in taxes to its community and is forced to lay off some or all of its workers. The company just can’t compete with the “unfair” competition from China.

Tariffs are a tax on imported items. The idea isn’t to punish the lower-cost country or its firms. The goal is to increase the price of their goods so that domestically manufactured products are competitive on price. It doesn’t matter who pays the tariff — actually, regardless of who writes the check to government, consumers really pay it. What matters is that the Chinese kick ball now also costs $10, and, all things considered, you buy the one from Ohio and keep American workers working and American factories humming.

Yes, you paid a higher price because before the trade war you would have bought the Chinese ball for $6. Yes, your personal budget has been negatively affected. And yes, China will retaliate and put tariffs on some American goods — mostly agricultural — reducing our exports to them. But the tariff monies collected in the U.S. on kickballs can be used to subsidize the farmers and make them whole by essentially using your inflated purchase price to pay for the reduced soybean exports.

Economists hate this type of plan. It messes up the equilibrium of markets and artificially sets prices based on the highest-cost manufacturer. Politically it isn’t well received either. It disaffects industries producing goods for export and creates other diplomatic tensions that politicians despise. But remember, the goal of tariffs isn’t world peace or efficient markets. It’s to protect domestic industries from competition considered unfair and protect American jobs. Take a look at the current low rate of unemployment and the high rate of GDP growth. Is it working?

• Kevin Cochrane teaches business and economics at Colorado Mesa University, and is a visiting professor of economics at the University of International Relations in Beijing.


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