Another great piece here Nominal News. Tariffs are one of those things in economics that are “counterintuitive.”
Put simply: tariffs are taxes on trade.
When we tariff imports, we also tend to reduce exports, even when we do not account for retaliatory tariffs. Everyone loses, except for a few special interests.
They are just all-around bad policy, most of the time. There can be rare exceptions, of course.
The fee on the carbon content of imports would be the correct instrument to accompany the taxation of net CO2 emissions. It's hardly a "tariff" as the word is usually understood, but that's nomenclature. It's worth pointing out that the fee would be applied only to imports from countries that do not have the same tax on net CO2 emissions. And it's application woud be as much to encourage others to join the net CO2 tax emissions club as to prevent "leakage" of demand for items with CO2 emission content.
Economists have been developing and refining arguments for and against tariffs (import restrictions; bans and quantitative restrictions are generally worse) for decades.
In general only two passes muster: the "optimal tariff" (which would apply as well and generally better as an "optimal export tax -- a tariff and an export tax being equivalents macroeconomically). The circumstance where it works is imports/exports of item X by Country A are a large share of the world market for X and X is imported/exported into/from A by many perfectly competitive importers/exporters. IF the Government of A knowing the supply and demand curves of X can impose a tariff that will make A an optimizing monopsonist of X imports/monopolist in the export of X and this will force down/up the international price of X and A will benefit.
The other is a Pigou tax on an externality created by the import. Examples would be a risk of disruption of supply that no one importer has the incentive to optimally diversify away from or (similarly) import of a "strategic material" whose supply disruption would cause damage greater than the damage to the importers themselves. The correct response here is a specific tariff on the strategic or risky good from specific sources.
NB these "Pigou tariffs" are is not the same as "industrial policy" that seeks to increase (for some positive externality reason) domestic production of item X. THAT calls for a subsidy on production, not restriction of imports. In the first case the negative externality is located with the _consumption_ of item x from source(s) y. In the second case, the positive externality is located with the _production_ of X.
An aspect of import restriction that is generally not understood is that they "tax" exports and "subsidize" non-restricted imports by raising the value of the domestic currency relative to foreign currencies.
You raise a lot of good points! I'll separate into a two strands:
1. Tariffs and Economic/Firm Performance
Let's assume the tariffs are placed globally (on all countries) for simplicity (without this assumption, we would probably just see import substitution from one country to another). Let's also assume the tariff is on the final good (i.e. a car rather than aluminum). You are right that consumers will pay more - this will have macroecononomic impacts as consumers will have less money to spend on other goods domestically produced.
Regarding how it will impact local production - one concern of tariffs is that it protects domestic inefficient incumbents and potentially stymies innovation. The US is one of the leading (if not leading) high tech industrial producers. In part, because competing in low-tech industry disappeared and thus focus turned to innovation. Tariffs, on the other hand, have been shown to actually reduce employment and output in 'protected' industries in many countries. Part of it is lack of innovation, part of it is more expensive inputs and another part is lack of knowledge diffusion (production abroad may be more innovative and thus importing can also bring this knowledge to the local market).
2. Redistribution and Trade Policy
You bring up the valid point of increasing wages for mfg workers (it is worth noting that the number of mfg workers as a whole is relatively small to the broader number of workers). This issue also couples with the after-effects of trade-liberalization.
Manufacturing, which in part faces an employment decline due to growing automation, also without a doubt was impacted by outsourcing driven in the late 90s/early 2000s by the 'China Shock".
It is now well documented by economists that this trade liberalization impacted affected workers significantly - not just wages, but also important issues such as health. It was even shown to have influenced voting patterns in 2016. This should've been dealt with by a far more re-distributive system or by gradual trade liberalization (that is for example imposing a 30 year quota based import model).
This actually was done with clothes and fabric via the Multi-Fibre Arranagement (https://en.wikipedia.org/wiki/Multi_Fibre_Arrangement). The reason this would work is that people who were in manufacturing would still be in-demand, but new workers (younger people) would not join these manufacturing firms since in the long-run (after 30 years) the manufacturing would move abroad. This would maintain wages of manufacturing workers and give them a job opportunity. The 'shock' on the other hand immediately pushed wages down creating significant negative outcomes to many individuals. These negative outcomes were entirely preventable, in my opinion.
However, with that in mind, reversing what happened via tariffs or quotas is unlikely to restore mfg employment. And in a way it is 'rational'. If we consider a person starting out their work-life, it may seem like a big risk to join an industry that is only 'successful' because it is currently protected by tariffs. These tariffs might be removed in the future or the foreign countries will innovate even more to offset the tariffs., which could risk in the industry shutting down again. And that is also coupled with general increases automation. Thus, I would not expect manufacturing employment to rebound.
Subsidies may be a better solution (although they have the same risk as tariffs, that is the subsidies may expire). Subsidies keep the flow of technology and efficiency from abroad, while incentivizing domestic production. The payment for subsidies comes basically from the same source as revenues for tariffs (from the domestic taxpayer). They can also be better targeted towards industries that may have other welfare benefits (say environmentally better technologies). However, I have discussed that such industrial policy has its risks, as it may repeat the issue that occurred during the China Shock - https://www.nominalnews.com/p/industrial-policy-manufacturing-workers
A thorough explanation on tariffs available for consumption…who knew. Appreciate the additional links too.
Thanks for adding my posting to your reading list!
Another great piece here Nominal News. Tariffs are one of those things in economics that are “counterintuitive.”
Put simply: tariffs are taxes on trade.
When we tariff imports, we also tend to reduce exports, even when we do not account for retaliatory tariffs. Everyone loses, except for a few special interests.
They are just all-around bad policy, most of the time. There can be rare exceptions, of course.
The fee on the carbon content of imports would be the correct instrument to accompany the taxation of net CO2 emissions. It's hardly a "tariff" as the word is usually understood, but that's nomenclature. It's worth pointing out that the fee would be applied only to imports from countries that do not have the same tax on net CO2 emissions. And it's application woud be as much to encourage others to join the net CO2 tax emissions club as to prevent "leakage" of demand for items with CO2 emission content.
Economists have been developing and refining arguments for and against tariffs (import restrictions; bans and quantitative restrictions are generally worse) for decades.
In general only two passes muster: the "optimal tariff" (which would apply as well and generally better as an "optimal export tax -- a tariff and an export tax being equivalents macroeconomically). The circumstance where it works is imports/exports of item X by Country A are a large share of the world market for X and X is imported/exported into/from A by many perfectly competitive importers/exporters. IF the Government of A knowing the supply and demand curves of X can impose a tariff that will make A an optimizing monopsonist of X imports/monopolist in the export of X and this will force down/up the international price of X and A will benefit.
The other is a Pigou tax on an externality created by the import. Examples would be a risk of disruption of supply that no one importer has the incentive to optimally diversify away from or (similarly) import of a "strategic material" whose supply disruption would cause damage greater than the damage to the importers themselves. The correct response here is a specific tariff on the strategic or risky good from specific sources.
NB these "Pigou tariffs" are is not the same as "industrial policy" that seeks to increase (for some positive externality reason) domestic production of item X. THAT calls for a subsidy on production, not restriction of imports. In the first case the negative externality is located with the _consumption_ of item x from source(s) y. In the second case, the positive externality is located with the _production_ of X.
An aspect of import restriction that is generally not understood is that they "tax" exports and "subsidize" non-restricted imports by raising the value of the domestic currency relative to foreign currencies.
You raise a lot of good points! I'll separate into a two strands:
1. Tariffs and Economic/Firm Performance
Let's assume the tariffs are placed globally (on all countries) for simplicity (without this assumption, we would probably just see import substitution from one country to another). Let's also assume the tariff is on the final good (i.e. a car rather than aluminum). You are right that consumers will pay more - this will have macroecononomic impacts as consumers will have less money to spend on other goods domestically produced.
Regarding how it will impact local production - one concern of tariffs is that it protects domestic inefficient incumbents and potentially stymies innovation. The US is one of the leading (if not leading) high tech industrial producers. In part, because competing in low-tech industry disappeared and thus focus turned to innovation. Tariffs, on the other hand, have been shown to actually reduce employment and output in 'protected' industries in many countries. Part of it is lack of innovation, part of it is more expensive inputs and another part is lack of knowledge diffusion (production abroad may be more innovative and thus importing can also bring this knowledge to the local market).
2. Redistribution and Trade Policy
You bring up the valid point of increasing wages for mfg workers (it is worth noting that the number of mfg workers as a whole is relatively small to the broader number of workers). This issue also couples with the after-effects of trade-liberalization.
Manufacturing, which in part faces an employment decline due to growing automation, also without a doubt was impacted by outsourcing driven in the late 90s/early 2000s by the 'China Shock".
It is now well documented by economists that this trade liberalization impacted affected workers significantly - not just wages, but also important issues such as health. It was even shown to have influenced voting patterns in 2016. This should've been dealt with by a far more re-distributive system or by gradual trade liberalization (that is for example imposing a 30 year quota based import model).
This actually was done with clothes and fabric via the Multi-Fibre Arranagement (https://en.wikipedia.org/wiki/Multi_Fibre_Arrangement). The reason this would work is that people who were in manufacturing would still be in-demand, but new workers (younger people) would not join these manufacturing firms since in the long-run (after 30 years) the manufacturing would move abroad. This would maintain wages of manufacturing workers and give them a job opportunity. The 'shock' on the other hand immediately pushed wages down creating significant negative outcomes to many individuals. These negative outcomes were entirely preventable, in my opinion.
However, with that in mind, reversing what happened via tariffs or quotas is unlikely to restore mfg employment. And in a way it is 'rational'. If we consider a person starting out their work-life, it may seem like a big risk to join an industry that is only 'successful' because it is currently protected by tariffs. These tariffs might be removed in the future or the foreign countries will innovate even more to offset the tariffs., which could risk in the industry shutting down again. And that is also coupled with general increases automation. Thus, I would not expect manufacturing employment to rebound.
Subsidies may be a better solution (although they have the same risk as tariffs, that is the subsidies may expire). Subsidies keep the flow of technology and efficiency from abroad, while incentivizing domestic production. The payment for subsidies comes basically from the same source as revenues for tariffs (from the domestic taxpayer). They can also be better targeted towards industries that may have other welfare benefits (say environmentally better technologies). However, I have discussed that such industrial policy has its risks, as it may repeat the issue that occurred during the China Shock - https://www.nominalnews.com/p/industrial-policy-manufacturing-workers