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Tariffs Weaken us Economically
Nov 2003
Revised Jan 2004
[Bin Laden must be cheering]

Nations apply tariffs (taxes) on goods imported from foreign sources for both economic and political reasons, too often the latter. The economic rational is that a nation needs to protect its economic system from unfair competition.

Free trade has been with us throughout human history. Indeed in prehistory archeologists find substantial evidence of trade between neighboring cultures. Not only does free trade provide improved welfare for the trading nations, it also encourages cross fertilization of ideas that further improve the lots of both societies.

These two concepts are frequently at odds.

Let's take a free-trade example first. Peru is a nation rich in copper and the precious metals. Venezuela has abundant petroleum reserves. Paraguay and Uruguay are much less blessed with minerals but their land is fertile. Free trade among these countries makes sense.

Iceland has none of these things to any significant extent. Icelanders can trade tourism for hard goods while living substantially off the sea.

Nations having high technology industries supply the world with aircraft, communications gear and medicine. Receiving nations supply raw materials and foodstuff in return.

The most successful trading neighbors are those where the balance remains relatively equal over time; each serving the other's unmet needs or desire for variety in goods. French, Italian and California wines can be found the world over. And each of those producers imports varieties of goods in return.

Two features upset what might otherwise be happy balances. One is simply economic.

An undeveloped country, where wages are low, can invite offshore industries to establish manufacturing operations within its borders. Those industries, and companies then have a cost advantage over their competition. The flows and balances of goods and payments change to accommodate the new arrangements. If that is all you look at, you can say that such a country "steals jobs" from developed countries. Employment picks up in the undeveloped country and factories or businesses close in their more developed trading partners.

But there is more to it. The undeveloped country now has more to spend on capital goods from the developed countries. This creates jobs to produce those capital goods. Beyond that, the companies that became more profitable by moving an operation offshore have more to spend on business expansion, creating jobs in the process. This can be progress for everyone.

But there can be stress as well. People relocating in either country may not come about smoothly. People let go from good jobs will rarely see the larger picture. They may have worked 30 years on a family farm or in a steel mill that could not meet the new competition. These people are hit hard individually; some are even radicalized by the process.

In less developed societies, people leave farms for the factories lacking high level skills to support themselves much above subsistence levels. Families are commonly disrupted. Global companies have earned a bad reputation for exploiting less developed societies in this way.

In the Middle East, less developed societies are led by royal families, dictators, or Ayatollahs. Sitting on abundant oil reserves, governors often syphon off profits for themselves, as in Saudi Arabia. This feature enriched the House of Saud to a degree hardly imaginable, at the expense of national capital reserves and their society's standard of living. Just this situation contributed greatly to bin Laden's radicalization.

In developed democracies, leaders have the tariff weapon with which to prey upon society. The words "prey upon society" were chosen carefully. Here is how it works.

In 2002 Bush applied tariffs to steel imports. The immediate hoped-for effect of increased prices occurred on schedule. Such a move was expected to strengthen the steel industry plagued by over capacity with steel mills teetering into bankruptcy. LTV and Bethlehem were already in bankruptcy, and National Steel was about to follow.

It was thought that the tariff would give the steel industry time to consolidate. But no one told the players that was what was expected. After LTV began shutting down in Dec 2001, steel prices did improve for a time. A financial entrepreneur formed ISG and bought LTV's assets. In bankruptcy and with a downsized workforce LTV was able to reach agreement with unions eager to get some jobs back, any kind of jobs. Upon restart, LTV became the low cost producer hurting the companies that had managed well under normal conditions. ISG then bought Bethlehem, also in bankruptcy, downsized the work force, and repeated the pattern. US Steel bought National only after the union agreed to wage reductions. All this is pure Plutocratic stuff.

The badly managed companies became the low cost producers. In effect, the steel industry was turned upside down. In the process, capacity actually increased, exacerbating that problem. Employment levels dropped and so did wages. That would have happened without the tariffs. So tariffs did not help the steel industry all that much. The industry claims it still needs another year of tariffs to stabilize.

Now for the downside. American businesses had to pay more for steel, hurting their profits and ability to generate new jobs. Importers and their customers were hurt. Those costs were passed on to consumers who had to tighten their belts more than otherwise to buy a new car. With reduced purchasing power, the consumers could not stimulate the economy. Doubtless all this added to the extended recession during Mr. Bush's first three years in office.

Meanwhile, the World Trade Organization ruled the tariffs illegal.

Now (Nov 2003) Mr. Bush faces the unhappy choice (personally) of continuing the tariffs and starting a trade war or rescinding them and losing votes in Pennsylvania, West Virginia, and Indiana in 2004. [Update, Dec 2003: Mr. Bush recinded the tariffs at the last minute.]

If this seems peripheral to terror, consider this. A stated goal of bin Laden is to weaken the US economically. It looks like we gave him an assist. Our steel industry became more over-capacity than ever and is still not competitive. Our economic recovery was delayed. Beyond that, we have angered our allies who threatened a trade war if the tariff stayed in place.

If bin Laden had tried, he could not have done a better job of sowing dissension in his opposition while hurting them economically.


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