Recently, the Obama Administration imposed a 35% tariff (tax) on tires imported from China. The International Trade Commission exercised its authority to to impose tariffs if imported goods represented a major "market disruption." China prediciatdily responded in kind by slapping a tax on chicken exports from the United States.
In some cases, such moves can be justified on the grounds of "unfair" competition such as massive government subsidies which make it impossible to compete against a government sponsored enterprise. More often such tariffs (taxes) come about since the party being protected has political influence and uses its power to eliminate the competition through government policy rather than a superior product. End result is that consumer looses the benefits that competition offers. For example, look how US based automobiles improved with the competition from Japan in 70s and 80s.
Not only do consumer suffer from taxes designed to eliminate competition, the response of the trading partner is to institute their own taxes to "protect" their import sensitive markets. These "tit for tat" moves generally escalate into a trade war in which consumer and business in both countries end up loosing.
The most well know of these tariffs that lauched a trade war is the Smoot-Hawley tariffs of the 1930. After the market crash of 1929, President Hoover and Congress passed one the highest tariffs in history despite the objection of close of hundreds of economists. Predictably, our trading partners passed their own tariffs which ultimately shut down the export sector of the US economy. Many analysts of the period cite these tariffs as one of the policy actions which converted the the recession caused by stock market crash into the Great Depression.
Today, we have a fragile economic which struggling to recover from the Panic of 2008 and the resulting Great Recession. Like it or not we know live in the era of globalization and have many sectors of the economy whose biggest markets are overseas. Today, exports are nearly ten times larger than they were in 1930s and has been some what stable. If a full scale trade war should break out the doom and gloomers about our economic future would be correct.
Both the New York Times
and Wall Street Journal
Op-Ed pages have warned about the dangers of protectionists policies. Rarely are these organizations of the same page about much of anything. In addition, these is one of those areas that economics profession is in agreement on for the most part.
- The Professor
Labels: economic outlook, economics, economists