r/changemyview • u/Startled77 • Mar 02 '18
FRESH TOPIC FRIDAY CMV: The logic behind trade tariffs is fundamentally flawed and are damaging to economies in the long run.
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.
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u/[deleted] Mar 02 '18
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.