The Trouble with Tariffs

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President Trump recently announced tariffs on aluminum and steel. Economists almost uniformly agree that tariffs are an ineffective way to create jobs.

Tariffs subsidize inefficiency, to the detriment of the economy. As pointed out by Bloomberg View, the U.S. steel industry produced three-quarters of the world’s steel after World War II. However, the industry clung to antiquated production methods, such as using an open-hearth furnace to produce steel, rather than the modern, basic oxygen process. Failure to adopt this new process caused the U.S. steel industry to produce steel at a 25 percent higher cost than its European competitors, resulting in substantial loss of market share.

The same is true for the automotive industry, which is not the current recipient of tariff protection, but has been in the past. In 1961, General Motors, Ford and Chrysler controlled 85 percent of the auto market; by 2007, this had fallen to 50 percent. As with the steel industry, the U.S. auto industry suffered from productivity problems, in addition to quality issues.

In 1980, Toyota could build a car using half the amount of labor of General Motors, while having superior quality as a GM car, which averaged four times more customer complaints than a Toyota. This foreign competition forced GM to improve its quality and productivity to be on par with Toyota. Had tariffs protected the U.S. steel and automotive industries, they would have had no incentive to innovate, which would have resulted in higher prices and lower quality for consumers.

Consumer savings from lower prices are substantial. Since 1997, the Consumer Price Index for new vehicles has been roughly unchanged, meaning the average price of a new car has not risen over the last 20 years. The broader Consumer Price Index increased by 56 percent during the same time period. Thus, if car prices had kept up with it, which they did until around 1990, cars would cost 50 percent more than they do today.

Since much of modern manufacturing is automated, tariffs do not increase employment in the protected industries by much, while leading to higher prices. In 2009, President Obama levied a 25 percent tariff on imported tires. This tariff is estimated to have saved a maximum of 1,200 tire manufacturing jobs and cost consumers $1.1 billion in higher prices, or $900,000 per job saved. Steel tariffs are no better – it is estimated that steel tariffs in the 1980s cost consumers $1.6 million per year, per job saved. This is a bad deal, since each job saved in these industries has an annual salary of about $45,000.

Steel and aluminum are raw materials, so higher prices increase the cost to U.S. manufacturers that use them as inputs for final goods, costing jobs. One estimate found that every job saved in the tire industry cost two in the retail industry.

Many workers have had a tough time in the modern economy; however, tariffs are an ineffective way of addressing these problems.

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