The trouble with tariffs

The stated logic behind tariffs is that they protect domestic jobs against international competition. That's the justification behind the recent tariffs on Chinese tire imports imposed by the Obama administration. Many people think this is a laudable goal; but is it worth the cost? As Brad DeLong explains, probably not:

"Let's see... 250 million cars in America... need 4 tires per car... need new tires every 2.5 years. 400 million tires a year... $1.4 billion dollars a year... 10,000 worker jobs saved... $140,000 dollars per worker-job per year.

Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.

But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.

That's the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid."

We should not ignore or diminish all concerns about free trade. But the trouble with tariffs is that they usually cost more than they're worth in terms of protecting domestic jobs*.

Some have suggested that this tariff is designed to boost support for healthcare reform among labor groups. In that case, the cost/benefit calculation changes depending on the desirability of the proposed legislation. However, the point is that tariffs are rarely justified by their overall economic impact.

*Not everyone would agree that protecting domestic jobs is a worthwhile public policy goal. Assuming that it is, however, we need to consider whether it's a cost-effective policy.

"Buy American" debate

Over at the New York Times "Room for Debate" blog, a number of commentators take up the "Buy American" provision in the stimulus. There are some interesting points on both sides:

• Jagdish Bhagwati: "The buy-American provisions unravel previous trade agreements unilaterally and in violation to the concessions we made."
  
  
• Ha-Joon Chang: "Some people worry that this will lead to a 1930s-style all-out trade war. But in the short run, there is actually no danger of that. Now we have the World Trade Organization, the European Union and many other regional trade agreements that limit protectionism. Of course, in the longer run, if veiled protectionism continues, we run the risk of making a mockery of these agreements and destroying the global trading system....the solution to this problem should not be an adherence to the principle of free trade, which is not workable in practice anyway, but instead to establish a new international agreement that allows a transparent, forward-looking and time-bound protectionism as well as more infant-industry protection for developing countries. In other words, by allowing more protectionism now in a controlled way, we will be able to preserve the international trading system better in the longer run."

• Anne Krueger: "The buy-American measure in the stimulus package would do little, in part because few imports are used in construction projects. But the signal that it would send to other countries would invite protective measures to the detriment of American exports and employment. Once protectionist measures are adopted, they are difficult to remove. In the long run, choking off through protection the integration of the world economy reduces productivity and prospects for future growth of all economies. It does not make any sense to sacrifice longer term growth prospects for measures that, even in the short run, offer very little prospect except for the very few at the cost of many others."
  

• Robert E. Scott: "When the government buys steel for a bridge, for example, it has several objectives. Minimizing costs is one, but when the economy is in recession, there is added incentive to stimulate domestic employment. And when steel is purchased from a domestic producer the workers’ wages generate further spending, which supports yet more jobs in the domestic economy."

Bhagwati and Kreuger are ardent free trade supporters, while Chang and Scott support selective protectionism, particularly for developing countries.

I agree with Kreuger that this won't have a huge economic impact and I agree with Chang that this probably won't cause a trade war, given our international institutional structure. Chang is also right about the dangers of "veiled protectionism", but I disagree that infant industry protection is the right solution.

Scott's argument breaks down if there's a big difference between domestic and foreign components. As I've said before, if we pay a lot more for inputs to construction projects, we can't do as many projects and can't hire as many workers. My feeling is that this is a gift to domestic steel producers. It could ultimately end up costing jobs and impeding the stimulus.

Is Fair Trade Really Fair?

Fair Trade coffee is a great example of the moral and ethical crisis we as citizens and consumers face on a daily basis. Let's fly to the Nic for a moment.

Marlon is the leader of his remote jungle community in Nicaragua. A gentle-hearted 35 year old who has two children of his own and cares for another teen who lost her parents in recent conflicts.



He has organized the coffee farmers in several of the surrounding areas in a cooperative so that they may share knowledge, shipping costs, and the price of purchasing Fair Trade certification. The great thing about Fair Trade certification is that it allows for this small cooperative to make a reasonable wage for their produce which they would be unable to without both the organic and fair trade stamps on their coffee which sells for a premium in the US.

The idea is that this certification allows for the protection of workers' collective rights and to sooth consumers' anxieties for a fixed cost.

Now the pickle here is that this is a certification that protects the rights of the collective workers rather than the individual farmers and is being dictated by consumers rather than big government.

"I don't know if we're going to be able to comply with the regulations this year," explains Marlon.

"You see, our kids have school only twice a week because it is so far away. The rest of the time they work picking coffee."

"This year, they are demanding that no child under the age of 16 works in the fields. There are 16 year old here with wives and homes already. How are they suppose to manage? Our children help pick the coffee during harvest. We cannot afford to hire workers like the large plantation. How are we suppose to manage?"

Child labor is a human rights violation, we can all agree on that. The idea with this regulation is to protect the collective rights of children, but it comes at the expense of individuals like Marlon and the members of his communities. Continuing on this path, Fair Trade coffee will drive his community in a helpless situation where they will have to work on someone else's farm to survive.

Is Fair Trade better than not? Probably. But as long as it is a system dictated by Western consumers presupposing other people's plights and transposing Western standards of development without the support to protect the individuals, that coffee should taste just as bitter as any other mass-produced gruel.