Last Friday, President Obama made the decision to place a three-year tariff on imported tires for cars and light trucks from China, starting at 35%. The decision was prompted by a complaint from United Steelworkers and it is supported by the A.F.L.-C.I.O, the largest organization of unions in the United States. There is, however, absolutely no excuse for placing barriers on trade, particularly when the world economy has been shaky due to the financial crisis. Labor unions are just about the only organizations supporting such tariffs, arguing that the tariff will increase production of tires in the United States and will protect or create American jobs.
Tariffs, though they are often supported in the name of jobs, always have the effects of destroying trade, specialization, international cooperation, and ultimately economic wealth for all nations. The extent to which they “create jobs” is really their effect of creating a need for more work to produce the same amount of goods and services as the economy was producing before the tariff was enacted. This creates waste, inefficiency, and poverty, while also being entirely unnecessary and counterproductive with respect to employment levels; and when one considers the fact that tariffs are often responded to with retaliatory tariffs from other countries, the effects often end up being much more devastating than one would predict from the enactment of a single tariff. Such “trade wars” can devastate the world economy or make existing economic problems even worse, such as the one which occurred after the Smoot-Hawley Tariff was passed in the US in 1930 during the Great Depression. In response to the current act, for example, China has made threats that it might respond with retaliatory tariffs on chicken and auto parts. If a trade war were to break out between the US and China, it would probably be the end of the modern economy and would truly bring about another Great Depression.
The reason why tariffs result in lower economic productivity and welfare is that they reduce trade by placing additional costs, added by the government enforcing the tariff, on trading certain goods or services between certain countries. When trade is reduced, economic welfare follows because trade is the basis of virtually all of the wealth that we enjoy in our modern economy. Trade increases when specialization through the division of labor increases, because when two individuals specialize in certain productive activities, they become more productive than they could if they could not specialize and had to produce more of what they needed for themselves. And once two individuals are more productive through specialization, trade enables them to have the variety of goods and services they desire while also benefiting from the increased production acquired through specialization. In addition, David Ricardo’s Theory of Comparative Advantage shows how an individual or country can gain from trade even when much less productive overall than a potential trading partner.
However, this still leaves the question of employment unanswered. Even if we know that economic productivity is higher with unrestricted trade, that doesn’t necessarily mean that it is desirable if it means high unemployment and no gains for a significant part of the population. However, the causes of unemployment are separate and unrelated to how much trade occurs in the world economy. Long-term unemployment is caused by restrictions imposed by the government on the movement of labor in the economy, and cyclical unemployment, which accompanies recessions and depression, is caused by government distortions in the economy’s structure of production, which eventually have to correct, causing many people to be unemployed. There is no reason, however, why these unemployed people should be so for long. Like all goods and services, the supply of labor in the world is limited, and uses for it unlimited, as human wants are not bounded. Therefore, a market emerges for the exchange of labor. In this labor market, there is both the supply of labor and demand for that labor. And also like other markets, the price of labor adjusts to clear the market, because consumers of labor (the firms) have an interest in using more labor, while providers of labor have an interest in selling their labor. No one benefits from being unemployed when they want to sell their labor, and the price paid for labor adjusts so that producers can fully utilize the available amount of labor. If there is a large surplus of labor, or unemployment, then the price of labor is too high for producers to value employing more labor, and if there is a shortage of labor, then producers raise prices for labor to attract workers to their businesses. Regardless of trade, so long as people value goods and services that require labor (and all of them do), there will be a market for labor and there will be pricing system, which can ensure full employment. And so the labor unions have no ground for claiming that tariffs are needed to “protect jobs.” The argument is absurd on its face. Their real interest in supporting these tariffs is because the workers who work in industries that get special tariffs on the goods they work to produce can benefit at the expense of all of the consumers of the product the tariff is on.
However, there is yet another fatal flaw in the arguments in support of this tire tariff. Even if the United States enacts a tariff against China, that does not mean that suddenly American companies and workers will get more of the market for tires, the reason being that there are many other countries other than China that would be willing to produce tires for less of a cost than the United States: Brazil or India, for example. And so there would be absolutely no benefits, not even the supposed benefit of protecting American jobs.
The tariff on tires, or tariffs of any kind for that matter, have no benefits and can end up costing a lot, mostly to consumers. Free trade and a free market would maximize economic welfare and ensure full employment for all people in all nations, where protectionism breeds poverty and want for nations. Obama’s move against trade has set the nation back economically in the midst of a recession and has damaged trade relations with China, all to please the unions, who themselves hurt the economy and cause unemployment. The damage could be prevented, but to hope for such an outcome would be optimistic to the point of foolishness.
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