The U.S. And China Play Chicken With Other People's Money

By Andrew Beattie | September 16, 2009 AAA

Two great trading nations introducing tariffs in the middle of hard economic times is hardly something to be happy about. The last time a president pushed a protectionist measure in like circumstances, the Smoot-Hawley tariff took world trade to a standstill. While the tariff tiff about tires, cars and car parts likely won't set off a protectionist apocalypse, these moves are a burden for the silent majority and a boon for a very vocal few. (Find out everything you need to know, in The Basics Of Tariffs And Trade Barriers.)

World "Trade"

The most frustrating thing about protective and retaliatory measures - and the WTO in general - is that they divert money from trade to politics. If a country protects its tire industry, it usually costs in another area either through higher prices or retaliation job loss. A retaliatory tariff on chicken hurts U.S. producers, as just one example of the harm.

This would be all right if the gain for the small percentage of workers making American tires outweighed the losses to the general public paying more for tires, due to less competition. This is near impossible, however, because the political protection costs money as well. Companies divert large sums of money to convince politicians that vital domestic business requires protection from those vile foreigners trying to sell us goods at a lower price. In this case, it's tire manufacturers, but almost all companies grease legislative wheels with lobbying funds. (The World Trade Organization has its share of detractors. Find out why this international entity has such harsh critics in The Dark Side Of The WTO.)

Political Reasoning

When countries approach trade politically, they stifle trade that would enrich us naturally - more people benefit from cheap tires than those who suffer from job loss. Instead, we lose trade and we have extra costs added, because we need a system to enforce the tariffs (bureaucratic oversight is famously expensive). In the political equation, however, sure votes from workers helped by the tariff outweigh the potential damage on a larger, but harder to detect, scale. (Flooding the market with cheap products can mean job losses and even market collapse - but dumping isn't as threatening as it seems. Find out more in Do Cheap Imported Goods Cost Americans Jobs?)

What Does This Mean to Investors and Consumers?

For consumers, tariffs of any kind mean higher prices at the store – again, not the best timing with people already struggling. For investors, however, a tariff has subtler effects. One would think that investors in tire manufacturers would be happy because their company now has less competition and a 30% margin to increase prices. Overall, however, these same investors suffer because tariffs slow down international sales and limit future growth to the much smaller domestic market. The clearest argument against tariffs is a real-world example. If tariffs, stopping overseas job flow by stepping up protectionism, and killing trade was the path to wealth, North Korea and Cuba would be among the richest nations on earth and heartily thanking all the other nations for placing sanctions on them and saving them the administrative costs of tariffs. To the best of my knowledge, this is not the case.

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