A recent study by Lydia Cox showed that the steel tariffs imposed back in 2002-03 ended up doing more harm than good:
In this paper, I study the long-term effects that temporary upstream tariffs have on downstream industries. Even temporary tariffs can have cascading effects through production networks when placed on upstream products, but to date, little is known about the long-term behavior of these spillovers. Using a new method for mapping downstream industries to specific steel inputs, I estimate the effect of the steel tariffs enacted by President Bush in 2002 and 2003 on downstream industry outcomes. I find that upstream steel tariffs have highly persistent negative impacts on the competitiveness of U.S. downstream industry exports. Persistence in the response of exports is driven by a restructuring of global trade flows that does not revert once the tariffs are lifted. I use a dynamic model of trade to show that the presence of relationship-specific sunk costs of exporting can generate persistence of the magnitude that I find in the data. Finally, I show that taking both contemporaneous and persistent downstream impacts into account substantially alters the welfare implications of upstream tariffs.
And the same sort of result occurred when the US imposed high tariffs on Chinese imports. Here’s The Economist:
One reason why America levied tariffs was to encourage manufacturers to relocate there. Yet trade friction has in fact depressed business investment in America, suggests research by Mary Amiti of the Federal Reserve Bank of New York and others. The share prices of companies trading with China fared especially badly after tariff announcements. This reflected lower returns to capital and, by extension, weaker incentives to invest. All told, the annual investment growth of listed American firms was likely to have shrunk by 1.9 percentage points by the end of 2020. Aaron Flaaen and Justin Pierce of the Federal Reserve Board estimate that exposure to higher tariffs was associated with a decline in American manufacturing employment of 1.4%. The burden of higher import costs and retaliatory levies outweighed the benefits of being sheltered from foreign competition.
READER COMMENTS
Alan Goldhammer
Jan 19 2022 at 10:06am
This is somewhat tangential to your post. We moved into a condo at the beginning of the month and as a result have been purchasing quite a number of new things. It is my observation that close to 100% of what we have bought are made in China. We are getting a new induction range ‘soon’ (ordered on November 12 and still not in the warehouse) and as a result need to ditch some of our older aluminum clad pots and pans as they won’t work. Other than certain All-Clad items it is almost impossible to find a US manufacturer. Stuff is either made in China (almost all non-stick items are) or France in the case of Le Cruset.
It didn’t use to be this way.
David S
Jan 19 2022 at 1:05pm
Congratulations on your recent acquisition of real estate. I hope that your neighbors and condo board are not sociopaths and/or idiots. I’m also sympathetic to your supply chain woes with appliances–welcome to my world for the past 2 years. A phenomenon that I’ve observed for the past 20 years or so is a deterioration of the relationship between cost and quality. I don’t associate this with trade policy per se, but I think there is a connection. Domestic and foreign manufacturers seem to have gradually shed low cost products and have focused on the design and marketing of fancier stuff that seems to be plagued with reliability issues. Low end, mass manufactured items have shifted to places like China, but quality control is inconsistent.
In addition to dumb trade policies like Scott outlines above, I also have a beef with the proliferation of bad advice and product marketing on the internet and home improvement shows.
MarkW
Jan 20 2022 at 9:53am
It didn’t use to be this way.
No it didn’t, it used to be a lot worse where we had to work far more hours to purchase inferior goods. We, and the world as a whole, are much wealthier when we allow international trade and comparative advantage to work their magic.
BTW, induction cooktops are awesome–the carbon steel pan sauce pan I use for frying eggs is up to temperature in about 10 seconds (perfect for an impatient cook like me). I have a countertop model that cost all of $40 (yes, probably made in China). I gotten so used to the convenience, I just picked up another one for the cottage. We did have to buy a few new pans. Cast iron works great on induction cooktops and you can quite easily buy U.S. made cast iron cookware if you like. I have a lovely Lodge pan that I use on the induction cooktop to sear steaks after they come out of the sous vide bath. My immersion circulator comes from an American division (Annova) of a Swedish conglomerate (Electrolux) and is assembled in China. That’s wonderful, too, in an ‘I, Pencil’ sort of way.
Richard A.
Jan 19 2022 at 11:19am
Here is an interesting graph (fig 1) that shows the massive increase in the tariff rate on Chinese imports thanks to Trump (and with the blessing of congress).
Trump’s tariff on solar is due to automatically expire Feb. 2022. Something to watch for in the next few weeks–will Biden attempt to hold on to Trump’s solar tariff?
Richard A.
Jan 19 2022 at 12:24pm
While protectionism does not protect jobs in aggregate, it does cause lower real GDP when compared to free trade.
MarkW
Jan 20 2022 at 11:21am
Unfortunately, it’s popular enough to be effective in protecting politicians’ jobs.
Mark Z
Jan 19 2022 at 2:32pm
The ‘steelmanned’ case for tariffs is, I believe, not that it protects jobs, but that it boosts productivity, and therefore wages, specifically by protecting infant industries whose growth leads to domestic workers accruing experience at higher-skill level jobs, until eventually there are enough skilled and experienced workers that the country’s workforce can actually compete in the global market (I think the argument is there are positive externalities that firms don’t capture in creating a skilled labor market; e.g., the first firms to ‘establish’ Silicon Valley didn’t capture all the gains from building that highly skilled labor pool from which all their successors would benefit). In practice of course tariffs are more often deployed for old and decrepit industries like steel or agriculture where this argument isn’t really applicable.
‘Steelmanned,’ ah, just realized I made a pun.
Jon Murphy
Jan 19 2022 at 2:44pm
The “infant industry” argument is one justification for tariffs. But, as you rightfully pointed out, it’s used here for steel which is an “old a decrepit” industry. I did see one person try to make the argument for steel tariffs on infant industry grounds. That outlier aside, I don’t think anyone used it to justify US steel tariffs. National defense (which I refuted here) and “bring back jobs” were the main arguments. There was a brief claim of “optimal tariff” but that fizzled out, too.
Thomas Lee Hutcheson
Jan 20 2022 at 8:30am
A “national defense” tariff like an “employment” tariff fails becasue it is not the least cost way of achieving the objective. If it is optimal to produce more X for some reason (employment, national defense, aesthetic) it is hard to see why taxing the users of X to raise the resources with which to subsidize the production of X.Only an “optimal tariff” has a chance of being, er, “optimal.”
Jon Murphy
Jan 20 2022 at 11:47am
As I argue in my article, that’s not the only reason it fails.
vince
Jan 20 2022 at 5:56pm
From Jon Murphy’s link to the interesting article “Does National Security Justify Tariffs?”: “If China is dumping, then it means that the product is being sent to the United States rather than being used in Chinese markets; for every unit of steel sent to the United States, that is one less unit that could be used for a Chinese war machine and one more for a U.S. war machine. The logical action for the U.S. government would be to purchase a lot of low-cost steel from China and simply stockpile it, thus depriving China of war materials while maximizing U.S. steel stockpiles. In the event of war, the United States would have a large stockpile from which to draw, while China’s would be reduced.”
Sounds more theoretical than practical, and like a speculative investment in steel based on war as a fundamental factor. Is that really the best use of those dollars?
Jon Murphy
Jan 21 2022 at 5:41am
Yes, my argument is theoritical, but I think practical as well given the logic of the national security argument for tariffs.
Further, the question you ask is a good one. Is the best marginal use of dollars to stockpile steel? Probably not. But it would depend on the likelihood of war. If war is sufficiently a significant threat to justify tariffs, then it likely is also sufficient enough to justify stockpiling. Consequently, the best use of the marginal dollar is to purchase at the lowest cost possible.
vince
Jan 21 2022 at 1:24pm
I suppose a related question is whether the best marginal use of dollars instead would be to invest in the domestic industry. There should be some satisfaction and benefit in self sufficiency. It would also have value as a real option, which is difficult to quantify.
Jon Murphy
Jan 21 2022 at 1:59pm
Indeed. But, if we are slapping tariffs on things, then the answer is “no.” Tariffs reduce domestic investment
vince
Jan 21 2022 at 2:48pm
OK, in the short term. Let me impose another impossible condition: What about the real option value of promoting our own industry?
A recent example is production of masks. When we desperately needed them, we had to get them from China, who wouldn’t provide what we needed. Even our healthcare workers were inadequately protected. Many have now left the profession, maybe permanently.
Jon Murphy
Jan 21 2022 at 3:02pm
And long run. Despite almost a century of protection, the US shipbuilding and steel industries continue to shrink.
That’s not quite true (I’m actually writing a paper on this as we speak). The Feds forbade imports for much of the pandemic. Coupled with price controls, a (predictable) shortage arose. In fact, domestic manufacturers were ready to ramp up production, but the Trump Administration would not allow it.
vince
Jan 21 2022 at 4:00pm
I look forward to your paper. Maybe I chose the wrong example, but my general point is the same: real options should not be ignored and might have tremendous hidden value.
vince
Jan 21 2022 at 4:10pm
https://www.courthousenews.com/trump-orders-companies-to-ramp-up-production-of-ventilators-masks/
The article also points out:
Peter Navarro, Trump’s economic assistant turned National Defense Production Act policy coordinator, emphasized the pandemic has taught the U.S. a dangerous lesson about being overly dependent on global supply chains.
Jon Murphy
Jan 21 2022 at 4:16pm
Yes, the NDPA is precisely the mechanism. De facto, it forbade increased production by not allowing the price of masks to rise.
Agreed. And it is through free trade, not protectionism, that those options are discovered.
vince
Jan 21 2022 at 4:27pm
Free trade, yes, but that’s not the world as it is. A cheating country can supplant an industry of the cheated country. It’s not a level playing field.
vince
Jan 21 2022 at 4:58pm
Yes, the NDPA is precisely the mechanism. De facto, it forbade increased production by not allowing the price of masks to rise.
For your paper, have you asked Navarro to explain his approach?
But the world doesn’t have free trade, and that changes the game. It’s not a level playing field.
Thomas Lee Hutcheson
Jan 20 2022 at 8:06am
Even the “infant industry” argument for tariffs is not really an argument for tariffs. It is an argument for a subsidy to the output of an industry financed by a tax of some kind. It would be quite odd if the best tax to use for this purpose was a tax on the consumers of the goods of that industry.
Thomas Lee Hutcheson
Jan 20 2022 at 8:20am
I’m slightly suspicious of a result that is “too good” from a neoliberal perspective. It is possible that a tariff could even including all the general equilibrium effects increase “jobs” but would still be inferior to a general wage subsidy; the deadweight loss would be smaller. Second, even if true for this particular sector, I’d suspect that it is an artifact of the particular parameters of the model (assuming they are correctly estimated) and highly unlikely to be the case for industries in general. Would the model yield a gain in “jobs” if the tariff was replaced with an import subsidy?
vince
Jan 20 2022 at 5:39pm
Big surprise, tariffs increase cost of imports. The paper didn’t seem to consider what was done with the tariff collections.
If free trade were so great, cheating wouldn’t be so popular.
Jose Pablo
Jan 20 2022 at 8:53pm
Well, democracy is pretty great (at least compare to other systems), and “cheating” on it is very popular among rulers all over the world.
There is always some beneficiaries of cheating on things that are great. Bastiat’s “What is Seen and What is Not Seen” come in handy to understand this well stablished tendency.
vince
Jan 20 2022 at 9:50pm
At some point it’s better to retaliate if only to negotiate a fairer arrangement.
Jon Murphy
Jan 21 2022 at 12:38pm
If a fairer arrangement is possible through retaliation, then that may be a good policy. But, if there is no likelihood of such an outcome (or it is very unlikely), then such retaliations will only make things worse. This is especially true if it leads into a trade war.
Jon Murphy
Jan 21 2022 at 5:35am
This comment needs to be expanded upon. It’s not clear what you mean by “cheating”. Who is cheating? What is cheating? Be more precise in your criticism
vince
Jan 21 2022 at 1:27pm
How about any country that does not have completely open and free trade? That’s probably every country in the world.
Jon Murphy
Jan 21 2022 at 2:00pm
You create an impossible condition. We must compare the world as it is to the worlds as it is. Not the world as it is to some Nirvana.
vince
Jan 21 2022 at 2:15pm
That’s my point. Free trade is fantasy. No country truly wants it for themselves.
Jon Murphy
Jan 21 2022 at 3:03pm
If that’s your point, then it is true but trivial. We don’t live in the Platonic world of the “pure.” We live in the real world. Thus, we must compare relatively free trade to relatively unfree trade.
Jon Murphy
Jan 21 2022 at 3:37pm
This may be where the confusion lies. You are confusing governments with the people who actually trade. People do, indeed, want free trade. That’s why it is the natural state of things. Protectionism, by definition, is artificial; it is overriding people’s wants.
It is quite true that governments (and special interests within) do not want free trade. But countries qua individuals do want it.
vince
Jan 21 2022 at 3:52pm
Governments and special interests are the people too. Seems we have circled back to your Nirvana comment.
Jon Murphy
Jan 21 2022 at 4:17pm
No? Not sure what you mean by this.
vince
Jan 21 2022 at 5:12pm
Here’s another omission in the free trade argument. Beneficial regulations. Our FDA regulates our food supply, ideally to protect it. Do we want to import foods that don’t have the same standards? Another example is medication. Do we want to import drugs whose quality and ingredients lack US oversight?
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