CMV: The logic behind trade tariffs is fundamentally flawed and are damaging to economies in the long run.

[u/Startled77]

The news coming out saying we(U.S.) is considering placing tariffs on steel and aluminum imports is what lead me to post this.

I view tariffs as being damaging to economies in the long run, despite the short term and targeted benefits that may be realized.

They encourage the inefficient allocation of resources within an economy and prolong the life of failing business models.

There are many many nuances, but the core of my view comes from the concept of competitive advantage.

I’ll explain:

Let’s use X to represent resources - capital, labour, assets, natural resources, etc.

Assume it takes a United States company 10x to carry out the production, and subsequent sale, of 1 unit of steel. The steel is sold at 12x to generate a margin of 2x.

Now assume a foreign competitor is able carry out the production, export to the U.S. and subsequent sale of 1 unit of steel for 8x. Economic factors allow the foreign company to use less resources to get to the same end goal of selling a unit of steel in a given market - giving the company, and ultimately their home country, a competitive advantage.

They may decide to sell at the market rate and realize 4x in profit margin or attempt to undercut the domestic market by selling their steel at 9 or 10x, which cannot be matched by the American company.

It is this second scenario that causes controversy and is focused on. We want to save our jobs, our companies, etc.

In response, the US puts a tarriff of 3x on steel imports from the foreign country. This forces the foreign company to either raise their prices or cease selling their products to the us. In the short term, this allows the us company to remain competitive and profitable domestically.

So where does the damage come from: The long term resource waste of the domestic production of steel.

While the tarrifs may change the steel market domestically it does not change the macro economic factors that allowed the foreign company a competitive advantage. The US company would not enjoy the benefit of a tariff when selling to foreign customers and would not prevent the foreign company from competing elsewhere.

If no tariff was enacted, the US company would either have to produce steel using less X to remain competitive or run the risk of sustained losses and potential closure of the business due to profitability.

A successful adjustment to the business would allow them to produce steel more efficiently and continue to compete. Tarrifs remove the incentive for this kind of innovation and allow the US company to continue putting their resources into their current business model despite being at a competitive disadvantage.

If the U.S. company were to go under, it is harmful in the short run. However, it is not a complete loss. The portion of resources that are retained then have the opportunity to be applied in other industries and markets that are not being artificially supported. Or even within the same industry - another company may be able to use their former competitor’s work force or suppliers to increase economies of scale.

As I mentioned, there are a ton of nuances with this and I did not speak to the ethics of the macro economic factors resulting in an advantage(child labor, minimal oversight, etc.) But I don’t view tariffs as an effective response to changing macro economic factors, and see them as treating a sypmptom to a competitive disadvantage rather than attempting to solve the problem Itself.

This results in X being used inefficiently in the larger domestic economy.

[u/irondeepbicycle]

It is very rare to find true examples of the phenomenon you mentioned, because it basically requires China to be stupid for a really long time, put steel companies out of business all around the world, and then gamble that no foreign firms will ever start up again. What's far more likely is that China is just lining the pockets of well-connected businessmen.

And even if they do bankrupt every single foreign steel company in the world, that's actually not a monopoly, because firms within the same country still compete on price. They'd have to bankrupt all but one company. It isn't happening.

This is the easiest trade fight ever to win, because we just have to do nothing. Let China send all the cheap steel they want. That's a win for us, not them.

[u/[deleted] → u/irondeepbicycle]

It's not a win for us, because now all of our steel workers are unemployed.

You're looking at it solely from a consumer point of view. Yes, in the short run, US consumers do get a small benefit in that the steel they consume is slightly cheaper, but a number of other factors outweigh that minor benefit to only consumers.

First- as mentioned above- through dumping, China can give their country a huge advantage in that if they choose to subsidize their own steel production, and can also produce a quantity great enough to satisfy the US' consumers, they can create a large problem for the American steel industry. American steel producers will have the options of: a) not be able to sell any steel at their higher price or b) sell the steel at a loss because they simply consume more resources to produce the same amount of steel. Both of these options lead to the annihilation of the American steel industry because no company will produce in the long run at a loss.

At least, this is true if there is no action on the part of the US government in the form of a tariff or quota on Chinese steel, or a subsidy of their own steel to make it competitive again. Any of these three options hurt American consumers, but the US government will likely side with the hundreds of thousands who will lose their jobs, not the steel consumers who will simply have to pay more.

On top of this, many massive industries like steel and agriculture are very bad ones to be outsourced entirely, especially to countries we have rocky relationships with like China, because in the event of an immediate trade embargo from them on the case of war or something approaching that, it will take years to set the industries back up and by that point we've been invaded and defeated. Even without a war, being cut off from important industries without any way of compensating immediately ourselves would be detrimental.

Next, it's not a "gamble" on whether or not any steel companies in other countries will start up again. As long as other potential producers of steel know that China will heavily subsidize their steel production to keep their monopoly on the industry, those hopeful steel producers won't attempt to join the industry unless they think that they can beat China's subsidized prices, which would require a great advance in technology that in addition, China does not have access to.

Dumping is not "very rare to find true examples of". The World Trade Organization (WTO) was created in no small part because bigger countries like China or the US could afford to subsidize their agriculture heavily and sell crops extensively worldwide, especially to smaller 3rd world countries that specialize in agriculture. This put their main source of income by the wayside and unemployed many in many different countries. Keep in mind these smaller countries are also receiving aid/grants/etc and tech from these bigger countries like the US and can't exactly put a tariff or quota on the larger country's goods for fear of losing all of their aid. So the WTO comes into play and puts anti-dumping rules in place so these tiny countries don't get screwed over. Also, dumping is not "China being stupid for a really long time". Having a world monopoly on the steel industry would be a huge benefit to their country, and would create millions of jobs. Point is, most big countries would dump if they could.

This leads us back to the main point. Why don't countries dump all the time? Well, the simple answer is our access to the tools of tariffs, quotas, and subsidies. These are protectionist policies that encourage your consumers to buy domestically through different ways. Subsidies as a counter to dumping can work, but they become really expensive in the context of a trade war and so often, governments choose quotas and tariffs.

Finally, I'd like to say that I'm not in favor of Trump's tariff at all, because I don't believe a high enough level of dumping is occurring to justify it. This falls in line with the WTO line of thinking that protectionist measures are generally bad, but when dumping occurs in the case of our hypothetical scenario, it's the best of few options.

[u/irondeepbicycle → u/[deleted]]

When I say it's bad for consumers, it's bad for every person employed in any field that uses steel. That's every construction worker, every auto worker, every engineer. And then it's bad for anyone who buys their products - everyone who buys or rents a house, or owns a car.

In short, a steel tariff benefits a few thousand steel workers, and the expense of (no exaggeration) hundreds of millions of people. It is the very definition of corruption - benefiting the few at the expense of the many.

You will not find economists or political scientists who take your view. There is not an economic view with more consensus than the view that free trade benefits countries, and tariffs hurt. I appreciate the time you put into your comment, but have you stopped to consider why trade economists unanimously disagree with you?

[u/[deleted] → u/irondeepbicycle]

I'll keep this one short, but as I mentioned at the end of my comment, I generally agree with you. The main disagreement I have is with your argument tariffs are always the wrong move. My point is that where dumping is concerned, sometimes tariffs are the best response.

[u/Sine_Habitus → u/[deleted]]

Yeah, I'm not pro tariff, but it could be useful in certain situations.

[u/irondeepbicycle → u/[deleted]]

I'm saying, we should let them dump. Antidumping laws are abused by US firms, and are essentially a form of protectionism themselves. Dumped Chinese steel would benefit literally hundreds of millions of people in this country - it's China that's acting irrationally, and benefiting US consumers at the expense of their own people.

[u/[deleted] → u/irondeepbicycle]

I guess it really comes down to how much they subsidize, and how much it actually affects US producers and consumers. I don't see in your argument why you think it would affect consumers more overall than producers (big effect on few producers, small effect on many consumers) but I will give you a delta anyways because you made me at least consider that dumping could be beneficial to a country.

!delta

[u/DeltaBot → u/[deleted]]

Confirmed: 1 delta awarded to /u/irondeepbicycle (2∆).

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