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.

Related Articles
  1. Markets

    The Origins of the Chinese Stock Market Collapse

    Learn about some of the reasons for the volatility in the Chinese stock market, including expansion of margin lending and governmental support.
  2. Mutual Funds & ETFs

    Top 5 Chinese Mutual Funds

    Learn about some of the most popular and best performing mutual funds that offer investors exposure to the important emerging market economy of China.
  3. Investing News

    China's Government to Stop Intervening in Stock Markets

    China’s stock market, measured by Shanghai Composite Index, lost about 17% of its value in the first three days of week ending August 28, 2015 before recovering its value by 11% in the last two ...
  4. Investing News

    Monday Intel: China, The Fed and Jackson Hole

    This weekend followed some of the most volatile market action in recent history as world markets were roiled by the Chinese market crash and its attempts to devalue the yuan. The past week also ...
  5. Investing Basics

    Explaining Trade Liberalization

    Trade liberalization is the process of removing or reducing obstacles that impede the exchange of goods and services between nations.
  6. Economics

    Explaining Strategic Alliances

    A strategic alliance is a business relationship between two or more entities that share recourses for a common goal.
  7. Forex Education

    China's Devaluation of the Yuan

    Just over one week ago the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the yuan, knocking over 3% off its value.
  8. Markets

    Moral Hazard in the Chinese Market

    The Chinese government faces the issue of balancing its desire to maintain stable markets through manipulation with the danger of a looming bubble if stock prices run up too much.
  9. Investing News

    U.S. Stock Markets Rebound

    After a string of losses in the past week amid declining oil prices, economic slowdown in China, U.S. and timing uncertainty interest rates hike by Fed, US Stock markets came back with a bang ...
  10. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
RELATED TERMS
  1. Cost, Insurance and Freight - CIF

    A trade term requiring the seller to arrange for the carriage ...
  2. Brazil, Russia, India And China ...

    An acronym for the economies of Brazil, Russia, India and China ...
  3. International Monetary Fund - IMF

    An international organization created for the purpose of standardizing ...
  4. Delivered Duty Unpaid - DDU

    A transaction in international trade where the seller is responsible ...
  5. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  6. Asian Infrastructure Investment ...

    The Asian Infrastructure Investment Bank (AIIB) is an international ...
RELATED FAQS
  1. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  2. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
  3. What is the difference between cost and freight (CFR) and cost, insurance and freight ...

    The difference between cost and freight (CFR) and cost, insurance and freight (CIF) is essentially the requirement under ... Read Full Answer >>
  4. What is the difference between Cost and Freight (CFR) and Free on Board (FOB)?

    The difference between cost and freight (CFR) and free on board (FOB) lies in who has responsibility for various shipping ... Read Full Answer >>
  5. How can tariffs cause inefficiencies in domestic industries?

    Any government regulation naturally creates inefficiencies in a pure supply and demand marketplace. When it comes to the ... Read Full Answer >>
  6. What role does a correspondent bank play in an international transaction?

    A correspondent bank is most typically used in international buy, sell or money transfer transactions to facilitate foreign ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!