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AEIdeas

On a recent CD post, I summarized some empirical evidence on the costs of US trade protectionism based on case studies in a 1986 book Trade Protection in the United States: 31 Case Studies by Gary Clyde Hufbauer, Diane Berliner and Kimberly Ann Elliot. The lead author of that book, trade expert Gary Clyde Hufbauer of the Peterson Institute for International Economics was also the lead author on a more recent 2012 study (“US Tire Tariffs: Saving Few Jobs at High Cost“) that investigated the economic impact of tariffs on Chinese tires in 2009. In response to a petition from the union that represents tire manufacturing workers, the Obama administration imposed punitive tariffs on tires imported from China from the normal rate of 4% all the way up to 35% in September of 2009 (for a full year), followed by a 30% tariff in 2010 and then a 25% tariff in 2011. Here’s the introduction of Hufbauer’s paper (emphasis mine):

In his 2012 State of the Union address, President Obama claimed that “over a thousand Americans are working today because we stopped a surge in Chinese tires.” The tire tariff case, decided by the president in September 2009, exemplifies his efforts to get China to “play by the rules” and serves as a plank in his larger platform of insourcing jobs to America. However, our analysis shows that, even on very generous assumptions about the effectiveness of the tariffs, the initiative saved a maximum of 1,200 jobs. Our analysis also shows that American buyers of car and light truck tires pay a hefty price for this exercise of trade protection. According to our calculations, explained in this policy brief, the total cost to American consumers from higher prices resulting from safeguard tariffs on Chinese tires was around $1.1 billion in 2011. The cost per job manufacturing saved (a maximum of 1,200 jobs by our calculations) was at least $900,000 in that year (see table above). Only a very small fraction of this bloated figure reached the pockets of tire workers. Instead, most of the money landed in the coffers of tire companies, mainly abroad but also at home. The additional money that US consumers spent on tires reduced their spending on other retail goods, indirectly lowering employment in the retail industry. On balance, it seems likely that tire protectionism cost the US economy around 2,531 jobs, when losses in the retail sector are off set against gains in tire manufacturing. Adding further to the loss column, China retaliated by imposing antidumping duties on US exports of chicken parts, costing that industry around $1 billion in sales.

Here’s a summary of the main findings on the cost per tire job saved from the tariffs:

Adding together the $817 million price increase from the shift to non-Chinese tire imports and the $295 million price increase in US-made tires, we conclude that the gross annualized cost of the safeguard tariff s to American consumers in 2011 was around $1,112 million. The arithmetic in Box 2 (above) shows that, if this cost is divided by the maximum of 1,200 jobs saved since the safeguard tariff s took effect, the total cost to American consumers exceeded $900,000 per job saved. While this figure seems extravagant, it is consistent with prior research. Studies repeatedly show that the consumer cost of trade protection typically exceeds, by a wide margin, any reasonable estimate of what a normal jobs program might cost. Of course only a small fraction of the bloated cost reaches the pockets of factory workers. Most of the money extracted by protection from household budgets goes to corporate coffers, at home or abroad, not paychecks of American workers. In the case of tire protection, our estimates indicate that fewer than 5% of the consumer costs per job saved reached the pockets of American workers ($48 million out of $1,112 million). When consumers spend more money on tires, then they have less money to spend on other retail goods. By dividing the total number of workers employed in the retail services at the end of 2011 by annual sales (not including food services) in that year, Table 6 calculates that 3,507 retail sales jobs are created in the United States for every one billion dollars spent in the domestic retail market. The tire safeguards extracted an estimated $1,112 million annually from US consumers; at the same time, the safeguards put $48 million in the pockets of otherwise unemployed tire workers. The net effect was to reduce consumer spending on other retail goods by about $1,064 million, indicating that the safeguard tariff s probably cost around 3,731 jobs in the retail sector. This loss of employment in the retail sector is admittedly widely disbursed and therefore politically unnoticed. But when the retail job loss figure is offset against the highly visible figure of a maximum of 1,200 manufacturing jobs saved, it appears that safeguards actually cost the American economy around 2,531 jobs. A net loss of jobs may surprise many observers (including those in the White House), but in fact trade protection often takes more jobs from the retail sector than it saves in the manufacturing sector.

From the paper’s conclusion:

The big winners from the 2009 safeguard tariff s were alternative foreign exporters, primarily located in Asia and Mexico, selling low-end tires to the United States. Domestic tire producers were secondary beneficiaries. The members of the labor union that petitioned the ITC’s investigation received only a small share of the money extracted from the pockets of American households. US car and light truck tire consumers are paying higher prices regardless of whether they purchase a Chinese or non-Chinese tire. Jobs created in the tire manufacturing industry were more than offset by the loss of jobs in the US retail sector. As an added consequence, US chicken firms lost export sales in the wake of Chinese retaliation.

MP: Following the results that Hufbauer found when he investigated 31 case studies of protectionism in the 1980s, these more recent results for tire tariffs in 2009 confirm a pattern of “protectionist math” that should be considered as we assess trade policies going forward from the “first authentic protectionist to win the White House since the 1920s.” Here’s a summary of “protectionist math”:

Outcome #1. The costs to US consumers from trade protection will always be greater than the benefits to protected US industries and their workers, resulting in a net economic loss of welfare and efficiency as the case above illustrates. See previous CD post for a summary of this outcome in dozens of case studies.

Outcome #2. As a result of trade protection, the number of jobs lost throughout the economy will always exceed the number of jobs saved in a protected industry, resulting in a net loss of jobs. In the case above, there were more than 3 US jobs lost from the tire tariffs for every 1 job saved (-3,731 retail jobs vs. +1,200 manufacturing jobs), resulting in a net loss of more than 2,500 jobs.

Outcome #3. The cost to US consumers per-job-saved on an annual basis from trade protectionism will always exceed the annual income of the protected workers. In the case of tire tariffs above, the annualized cost to consumers of more than $925,000 per manufacturing job far exceeded by almost 24 times the average annual income of $38,000 for a US manufacturing worker in 2011.

Outcome #4. Trade policies that protect some American industries and workers from imports and foreign competition will inevitably be followed by retaliatory trade policies enacted by other countries against the US that will harm US industries and workers that export goods overseas. In the case above, the retaliation from China came in the form of duties on US exports of chicken parts, costing that industry around $1 billion in lost sales.

Outcome #5. The benefits of protectionism for protected US industries and the workers in those industries will always be easily concentrated, immediate, visible, identifiable, and measurable. The higher costs for consumers and the loss of jobs throughout the economy from protectionism will be much less visible and much harder to identify, and the higher costs will be dispersed among millions of consumers.

Outcome #6. Given Outcome #5 that the visible benefits of protectionism are concentrated on a small group of producers and their workers (tire companies in the example above), those concentrated special-interest groups (i.e. domestic producers) will always be better organized and better financed compared to the disorganized and dispersed consumers when it comes to exerting political influence (“rent-seeking”) for protectionist trade policies. In the case above, it was the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union that represented tire manufacturing workers and filed a petition with the US International Trade Commission lobbying for tariffs on passenger vehicle and light truck tire imports from China. On the other hand, there is no consumer advocacy group for the millions of Americans who purchase new cars or tires every year.

Bottom Line: From an economic viewpoint, based on economic theory and empirical evidence, protectionism makes an economy worse off, not better off. It is just an economic reality that when both the costs and benefits of protectionism are evaluated, “protectionist math” (cost-benefit analysis) predicts a net loss of jobs and reductions in economic welfare and economic efficiency as the case of tire tariffs above clearly illustrates. Trump has boasted that “protection will lead to great prosperity and strength” for America, but that claim is completely unsupported by international trade theory and contradicts hundreds, if not thousands, of empirical studies like the one above.

From a political viewpoint, protectionism has an obvious payoff because it generates political support, votes, and financial contributions for protectionist presidents and politicians from the beneficiaries — domestic industries and their workers — who are protected from foreign competition by government fiat. Fortunately for the protected industries and their political enablers, the groups that shoulder the burdens and costs of protectionism — millions of dispersed consumers and thousands of invisible, hard-to-identify workers who lose their jobs — are unorganized and therefore completely disregarded by protectionist politicians.

For example, when have you ever heard anything from President Trump about American consumers when he talks about international trade or protectionism? We only hear about US manufacturers and US workers, and never, ever about consumers — the biggest and most important group of all economically. Sure, if you completely ignore the costs of protectionism and ignore those who pay those costs – consumers; and also ignore the economic reality that the costs of protectionism outweigh the benefits, it’s pretty easy to make a political case for tariffs and protectionism, even though that’s a guaranteed prescription for impoverishing and weakening America from an economic viewpoint.



To paraphrase Thomas Sowell: The first lesson of international economics is that free trade makes us better off and protectionism makes us worse off. The first lesson of politics when it comes to trade issues is to ignore the first lesson of international economics. And that pretty much sums up what we’re getting from the “first authentic protectionist to win the White House since the 1920s” — 0% economics and 100% politics.