A twist on protectionism

Donald Trump probably has a brain which can only carry 140 characters at once. It would explain many of his policy statements, where the consequences of what he says gets missed out of his thought process. (Apologies, but he is such an easy target.)

The latest policy 'burp' from Trump is that he will impose a 35% tariff on the goods made by any American firm which has switched production out of the USA to another country.

The aim is to reduce the price competitiveness that the move will bring to the firm and so make it less attractive to move. This, Trump believes, will keep more jobs in the USA.

Analysis of this protectionist policy measure might be quite useful. Many points to make so I'm going to dot point them.

• If 100% successful the measure would keep uncompetitive (inefficient) jobs in the USA - this means everyone is worse-off in the long run.
• The firms remaining in the USA will therefore loose their overseas markets to firms that do move (possibly from EU countries).
• The loser from this policy is the USA consumer, wherever the goods are made. They either pay more for goods made in the USA or more for goods made abroad, reducing consumer surplus.
• The obvious problem might be that the firms move export sales production overseas while keeping domestic sales production in the USA. All the gains go overseas in this scenario.
• There is likely to be retaliation from the country which hosts the firms, as their exports are now being taxed.
• This policy breaks the WTO rules and therefore is illegal.
• The policy misses the really important point that the USA needs to move to industries that are high value and knowledge based, not try to hang on to low value manufacturing jobs.
• The cost advantage of moving abroad may well be more than 35%, so it still pays to move abroad.

CNN covers the story here

This topic comes under the International Economics topic for IB and is a good example of the new protectionism (economic nationalism) which is becoming popular. The problem is it goes against hundreds of years of economic knowledge on the gains from trade. An IA on this could look at the impact of a tariff, resource allocation or the impact on the various stakeholders.

The problem with protection

There has been a surge in the popularity of ''economic nationalism" among politicians recently. Talk of tariffs to 'level the playing field' has become common in Europe, the US and Australia. It's a really dumb idea.

The arguments run something like this. "Imported goods are replacing domestic goods, our industries can't compete and that means they shrink or close leading to unemployment. We should put a tariff on imports to save jobs."

This thinking led to disastrous rounds of tariffs being imposed in the 1930's making the Great Depression much worse than it otherwise would have been.

Today Donald Trump wants a tariff to protect US jobs from China, there is a danger of a steel 'tariff war' and in Australia it's not just steel which raises the protectionist instincts of opportunist politicians.

Tariffs will raise prices and reduce imports. But the implications are much wider than this. While tariffs will be popular with those who might keep their jobs for a little longer they impose costs on the rest of the population, cause inflation and restrict growth, so lowering the long term standard of living.

The New York Times article below goes through the implications of the imposition of a tariff. This is an excellent analysis on the dynamic effects of a tariff and provides multiple evaluative points.

The New York Times article is here

IB students will find this an excellent resource for evaluating tariffs and understanding how the simple tariff diagram is only a static analysis. VCE students will be able to apply this to the idea of placing a tariff on imported steel to protect Australia's unprofitable industry.