Saturday, September 12, 2009

If Free Trade Is Good, Why Are We Putting a 35 Percent Tariff on Chinese Tire Imports?

In class just yesterday, we were unlocking the powerful conclusion that free trade between nations increases consumption possibilities for all--beyond what each nation would have available if it isolated itself from the rest of the world.

This happens because, with trade, each nation is free to produce goods and services in which it enjoys a comparative advantage--an ability to produce a good at a lower opportunity cost than others can.

So, for example, a nation like Canada can grow a lot of wheat, and then use their silos full of it in trade to buy the computers it needs from nations like Japan. That way both nations have computers, they are fed, and--and this is where it gets really exciting--it's possible for both nations to consume more of both goods than would be possible if they were living in isolation with no trade whatsoever, relying only upon their own workers to make all the goods they need.

Which is why it is so troubling that the United States continues to roll out antiquated trade barriers in an effort to "protect" Americans and their jobs. The last presidential administration committed this sin during its first term, imposing hefty tariffs on imported steel. And today we learned that the current administration will impose three years of tariffs on tires imported from China, in an effort to save American tire jobs. The tariff rates will begin at a whopping 35 percent.

But trade barriers such as tariffs make Americans worse off, because they don't let us enjoy the fundamental benefit of free trade in this case: cheaper tires for all. Instead we settle for propping up industries to benefit a few, at the expense of the rest of us, presumably to help our economy. Yet cheap steel and cheap tires are good for our economy, regardless of where they come from.

So that's the economic argument. But I believe there's also a moral dimension here.

In the case of the 2002 steel tariffs, we were deliberately trying to help domestic steel companies by hurting foreign ones. In effect, we were saying that steel jobs for US workers are more important than jobs for foreigners working hard to make life better for themselves and their families. Specifically, in 2002, we were--through our misguided policy actions--saying that human beings here are more valuable than our fellow human beings in China, Japan, South Korea, Ukraine and Russia. And I have a very hard time with that.

And this time it's even more personal, since we are imposing the tire protections against just one country, in an effort to prop up tire-makers in our own who apparently are "better" somehow. Sorry--I just don't buy that.

So let's not permit an "us vs. them," "USA! USA! USA!," mentality to cloud our economic judgment. Free trade makes life better for all, both domestically and globally. And we should tread lightly when our efforts to help a tiny minority cause harm to the rest of us.

12 comments:

  1. Well said, it's about time the ridiculous ideology of protectionism was ended once and for all. There's no justification for it, as it hurts the consumer, and growing industries.

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  2. That free trade makes life better for all is pure theory. Based on its application to date, it has resulted in jobs going to the country having the lowest wages, the worse labor conditions and least environmental protections.

    Yahoo.

    Hopes this makes your day.

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  3. Hey, anonymous, you had couple of typos in your post. I went ahead and fixed that for you.

    Based on its application to date, it has resulted in more and better jobs around the globe, increase in wage rates everywhere, better labor conditions for workers and more environmental awareness in the environmentally 'troubled' areas.

    Makes, at least, my day.

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  4. I know for sure that I will have to buy tires for both of my cars in the next three years. Thanks for more expensive tires, O Supreme Leader!

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  5. What I want to know is how will the Chinese react? Could this be leading to another Smoot-Hawley, and a double dip recession? I know Canada imposed some retaliation over the "Buy American" provisions in the Stimulus bill, is this a preview of things to come?

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  6. Couldn't have put it any better. Reminds of Henry Hazlitt's classic few sentences against tariffs (http://freemarketmojo.wordpress.com/2009/09/12/obama-imposes-new-protectionist-tariffs/).

    But like Thomas Sowell said, "Moral crusaders seldom have time for economics."

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  7. Granted the advantages of the principle of free-trade. There are also the advantages of the principle of subsidiarity. We profit, in manifold ways, by maintaining communities of understanding and sympathy. Sometimes, it is necessary to pay an economic price in order to maintain those communities.

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  8. RogerD: And how do you measure the value of such community building?

    Or even better: Are you sure you are building communities, and not tearing them apart? One of the biggest aspects of the "fatal conceit" is social engineering.

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  9. RogerD,

    How does robbing Peter to pay Paul build a community of understanding and sympathy? If you're going to argue that line, you need to demonstrate just how this tariff helps create such a community.

    Hell, I need new tires, but I know I can afford them even with the 35% tariff. But I'm one of the lucky ones. Where's the understanding and sympathy for the low-wage person who's looking at the disappearing tread on his tires and thinking about the fact that winter's coming soon up here in the Northern tier of states? Does he cut back on food for his kids or does he risk driving through snow on treadless tires?

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  10. Spot on as usual. Congratulations for being linked to by Don Boudreaux and Cafe Hayek, some great work by great minds over there.

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  11. Yes that's the ticket! We in the USA have found a solution to our economic problems. We can import our way to prosperity. We don't need jobs or a tax base. We can just keep sending China those wallet sized Presidential portraits and they can send us everything we need. Wake up and see that eventually they will own this country. Thank God that economics is about a real science as astrology is. Try this theory on for size you Einsteins, we buy until we go broke and then China wants either their loans back or they buy up all of our companies and move what little production is left in the USA to China and maybe they also invade Taiwan and take this over. The US reponse will be, okay as long as we can still get your cheap products. Prove Me Wrong.

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  12. We actually have two ongoing natural experiments that "Prove You Wrong."

    The first is Hong Kong. Hong Kong has no natural resources, and 60 years ago Hong Kong had nothing on it but shanties and rocks. Yet today Hong Kong is rich, due to its willingness to trade with others for its needs, rather than try to rely on itself alone to produce every good and service its people want.

    The second case study is the good old US of A. We have completely free trade among our 50 states. Some states are net exporters to the others, while others are net importers.

    Sometimes the owners and investors live inside the state where a company is located, and sometimes (most of the time, for large firms) they do not.

    So how has our 50-state experiment turned out? After 200+ years, all 50 states are rich!!

    Make no mistake: some US states are richer than average, and others poorer. But all have enjoyed tremendous growth over the last three centuries.

    The desperately poor nations of the world are ones that often resist trade. But where trade is welcomed, societies prosper and flourish.

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