March 13, 2002

President George W. Bush probably thought he was performing another Solomon like decision in approving a tariff to protect steel producers in the United States, but a tariff not as large nor as long as the industry wanted.  Most economists would argue that neither the length nor size of the tariff was as important as the act of levying a tariff. 

Many developing countries use tariffs to generate revenues that could not be extracted as easily from domestic economic activity.  These tariffs provide protection and create distortions in trade, but the volume of trade from developing countries is not large enough to create too many problems, although the apparel industry would object to that comment. 

The U.S. is a far cry from a developing country in the 18th century that objected to tariffs levied by a more developed nation.  The colonies eventually got so mad that we dumped tea in the ocean.  Should we be surprised that some countries today are mad at us for levying tariffs to protect our industries. 

Indeed, one of the dangers of levying a tariff is that other nations will retaliate with tariffs of their own.  The result is higher prices and lower trade.  One of the causes of the remarkable gain in productivity that we have been enjoying is the exploitation of different production capabilities (because of technology, resource costs and custom) around the world.  Tariffs will reduce the opportunity to garner trade related productivity gains. 

This is not to say that tariffs always are wrong.  We cannot deny the revenue raised by developing countries unless we are willing to provide more aid to them.  Indeed, until the Civil War, tariffs provided more revenue for the U.S. federal government than any other source (except for land sales in a few years). 

Fortunately, a more sophisticated economy allowed less distorting methods of raising revenues for the U.S. federal government as our nation developed.  One of the banes of developing countries is the need to use revenue raisers that create much more economic distortions than occurs in more advanced countries. 

Another use for tariffs is when one country will always run their production facilities at peak levels and dump on the world market any output that cannot be absorbed by their traditional customers.  This forces other countries to produce less optimally. 

In order to prevent countries from exporting their unemployment through such dumping, retaliatory tariffs may be necessary.  This is a method of being willing to hurt ourselves to prevent other countries from hurting us.  However, this is a punishment for unfair competitive practices and should only be used as long as the practices persist. 

Some economists argue that even this form of retaliation is not necessary.  They maintain that our consumers and industries who use the products dumped on world markets get benefits from the lower prices that offset the financial damage to domestic producers of the dumped goods. 

I disagree.  By damaging the returns to our investors, especially in industries where investments are lumpy (large expenditures made infrequently), dumping can undermine domestic producers who could compete if no dumping occurred.  After all, Rockefeller won control of the petroleum industry by lowering prices in selected markets to negate the investment returns of  other producers. 

Product dumping can undermine the competitive structure of world industries and should be resisted. 

Economists also concede that protection of a developing industry might be justified if the ultimate outcome is a more competitive world market.  This is the infant industry protection that students hear in their economics classes. 

Certainly, the U.S. steel industry is not a child that needs protection to blossom.  It is an old industry that is slowly being pushed out of world production. 

Is their demise being hastened by product dumping, or is the rest of the world gaining U.S. market share because of lower costs abroad?  The strength of the U.S. dollar probably accounts for some of those lower international costs.  Indeed, the steel industry is not the only manufacturing activity losing jobs.  This suggests that reduced competitiveness in the U.S., not increased dumping from international producers is responsible for much of that job loss. 

In the 1960s, tariffs were used to protect steel.  This raised the cost of producing automobiles.  Therefore, auto production from abroad began to penetrate our markets.  When we put quotas on the number of automobile units being shipped to our shores, international producers began building luxury cars for our markets (to get more profits per unit shipped). 

In other words, by trying to protect steel, we lost auto production.  The steel arrived anyway, but in the form of cars.  So to protect one industry, we undermined the competitiveness of many industries.

No Mr. President, you were not Solomon.  Not only have you hurt American producers and consumers for the temporary protection of some steel jobs, but the inflation that might follow from tariff retaliation in about 12 to 18 months rests on your shoulders.  I hope the votes are worth the economic distortions your decision will create. 


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