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. Economics

    These Will Be the World's Top Economies in 2020

    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
  2. Stock Analysis

    The Biggest Oil Producers in Asia

    Learn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
  3. Forex Fundamentals

    Buying Yuans as a Long-Term Investment: Risks and Rewards

    Examine the current state of the Chinese currency, the renminbi/yuan, and learn whether it is considered a good long-term investment.
  4. Economics

    Is the U.S. Economy Ready for Liftoff?

    The Fed continues to delay normalizing rates, citing inflation concerns and “global economic and financial developments” in explaining its rationale.
  5. Economics

    Benefits of China Changing It's One Child Policy

    China's one-child policy is changing, and investors are looking for ways to cash in. The reform might not have the effects that many anticipate, however.
  6. Investing

    China's Top Trading Partners

    A slowdown in China, the largest trading nation in the world, will have significant impacts on major trading partners: the U.S., Hong Kong, and Japan.
  7. Investing News

    High-Speed Rail to Vegas: A Good Bet or Long Odds?

    The Chinese want to build a high-speed rail line from L.A. to Las Vegas. Can it work? Or do other attempts presage failure?
  8. Economics

    The 5 Countries That Produce the Most Solar Energy

    Discover which countries are taking advantage of solar power and how they are implementing systems to use solar as a viable source of energy.
  9. Investing News

    Monday Intel: Markets Struggle With China and VW

    More troubling news came out of European car makers over the weekend: German car makers BMW and Audi also reported that their cars may also be affected by the same software that evaded emissions ...
  10. Economics

    Explaining Economic Integration

    Economic integration reduces or eliminates trade barriers among nations, and coordinates monetary and fiscal policies.
  1. When do I need a letter of credit?

    A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a financial institution, ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

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!