For those who are unaware, the United States has recently levied a 35% tariff on Chinese made tires. An administration which has actively avowed its support of free international trade has surprised all and infuriated many with this ill-advised movement toward protectionism. Such a simplistic mistake at so critical a time for our nation’s stability could have dire costs, with few long run benefits. To say that Americans will soon feel the pressure and consequences of this political ploy would be a gross understatement.
It is first important to understand why this outwardly simple notion of a tariff can have such terrible outcomes for all involved. In this case, the concepts of comparative advantage and specialization and trade must be cited. In most basic form, these theories state that when comparing the productive possibilities of two nations, one nation will always be able to produce a certain good at a lower opportunity cost than the other nation. If this is true, which logically it must be, then the nation producing this good (tires) at a higher cost in fact would be better off not producing tires at all. The nation in question should instead produce a good which its resources allow it to produce more efficiently, then trade this good for foreign tires. This process will actually, through simple mathematics, allow two nations to produce a combined amount of goods greater than what would have been without specialization.
How, though, to go about ensuring this efficiency gain? If left to their own devices, international market forces will rather quickly force high-cost, inefficient producers of a certain good out of the market. The simple workings of competition, when unregulated, will necessarily result in efficiency. In this, one can see the heart of the problem at hand: efficiency loss due to international trade regulation (a tariff). Chinese manufacturers can produce tires using less costly labor and manufacturing equipment than those of the United States, so why not let them?
What does this mean for the average American, however? As American tire producers become isolated from market forces, the prices of tires, automobiles, and all related goods will rise. Contrary to the beliefs of some, protective tariffs such as these often do little to allow the improvement of domestic firms, which will simply become more inefficient in the long run. In essence, end results will hold higher prices with no benefits to show for it.
Of further concern is the Chinese and world response to this American attack on industry. The Chinese government has already filed a formal complaint with the World Trade Organization for American protectionist movements, and threatens further countermeasures which have the potential to escalate into a customs war. This will mean even higher costs of imports from one of America’s most active trading partners, something American’s who purchase Chinese goods can ill afford. It is also likely that this movement by the United States will not bode well at the upcoming G20 summit, where further consequences can be expected.
The worst part in the matter is that those responsible for the tariff are fully aware of the dangers it incurs. However, many underestimate the potential and near-certainty of dire consequences when taking unsound economic action for political motives. The WTO and G20, for instance, care little for the influences of organizations such as the United Steelworkers and Autoworkers Unions, which are most likely (though not surprisingly) at the head of this tariff movement. Retaliation can be expected, and it seems as though American’s will soon learn of the problems incurred when politicians forget the Smoot-Hawley chapter of basic economics.
