Before this election year is over, we will suffer through some pretty strange promises. How about the idea that tariffs on foreign imports would save American jobs? OK, I know, no self-respecting businessman would entertain such an idea. It violates free trade and hurts consumers. In the 2008 presidential election, several contenders were pretty close to making such a promise.
Politics aside, scores of reasons repel tariffs. Tariffs raise prices. So, the American public would either have to do without certain goods or purchase them at a much higher price. Tariffs may not really save domestic employment either. Take, for example, tires. In 2009, the US government imposed a stiff tariff on tires imported from China. According to a January, 2012 piece in Forbes, tire imports from China fell 30% from 2009 to 2011. The problem is, domestic employment did not rise. More tires were imported from Canada, South Korea, Japan, Indonesia and other nations.
Tariffs also tend to protect inefficient domestic industries. If large tariffs had been imposed on foreign made automobiles, for example, let’s just say we would be driving different cars today.
The sharp decline in tariffs also goes along with the loss of “Most Favored Nation” status. Gone are yesteryear’s emotional debates about which countries would be included. The entire concept is out of date and the term is not even used any more. Only two rogue nations did not achieve the new, less controversial “Normal Trade Relations” — Cuba and North Korea. They also lack products people want.
Given all of this, remember that myth busters are contrarian. Maybe tariffs would work. After all historically tariffs were used to protect new industries. Fears of “dumping” bring national action to protect jobs. We must have a few fledgling industries that need help. What exactly are governments doing to protect vulnerable companies?
Tariffs have gone the way of the horse and buggy, but governments helping particular industries is alive and well. Subsidies replace tariffs. These financial supports to an industry or company may be less visible than a tariff but equally potent.
Airbus and Boeing have battled over subsidies given to Airbus by various European governments. Boeing won a round with the World Trade Organization. The US could counter with its own subsidies to Boeing although that might violate trade policy. Maybe the government could help airline companies purchase airplanes. That might raise their profits and employment. Passengers might even get free peanuts again!
Here is a ridiculous fact. While Airbus gets financial assistance from European governments, the US Export-Import Bank offers low interest loans to foreign companies that buy American goods. The idea was to assist American companies such as Boeing to sell overseas. Recently, Delta wound up on the wrong end of this helpful government program. Boeing sold jets to Air India, which also received cheap Export-Import Bank financing. So, Boeing and Air India benefit, but Delta ceased its NY-Mumbai route, unable to compete with Air India’s price. The low interest loans from the US Export-Import Bank slashed the debt charges on its fleet.
One fledgling industry the government has helped is alternative energy –notably ethanol and solar. The problem is they are totally fledgling! They have no future; well, not for the next decade at least. The government rather than the market chose the industry to receive this cushy government blessing.
Let’s not give up on that well-worn shibboleth: energy independence. Subsidies were a flop. Where might a tariff work? Suppose, just suppose, the government decided to impose a tariff on foreign oil. The mere leak of such an idea would bring political rage. Yes, the cost of oil would go up. And it might go too high too quickly. But we are in the supposing business. Imagine that the new tariff on foreign oil encouraged more drilling and production inside the US. That would lower the massive negative balance of payments. In addition, this approach to energy independence would be closer to what the market wants, if farther from what the government wants.
Not entirely sold on the wisdom of tariffs? OK, maybe not. But, at least you might agree that tariffs might have some merit. Please send suggestions for more myth busting efforts. More myths forming out there.
Michael McTague, Ph.D. is Senior Vice President at Able Global Partners, a financial consulting firm in New York City.