The Econtrarian
October 7, 2016
Legacy’s Senior Economic and Investment Advisor Paul L. Kasriel
The Imposition of Import Restrictions
Is a Recipe for a Declining Standard of Living
Both 2016 U.S. presidential candidates of the two
major political parties are, to greater and lesser degrees,
advocating the imposition of restrictions on U.S. imports
if foreign exporters engage in “unfair” trade practices.
Regardless of whether foreign exporters engage in perceived
unfair trade practices, I believe that the imposition of
restrictions on U.S. imports would result in a decline in the
standard of living of Americans in the aggregate.
and Frigidaire workers would find employment in those
industries experiencing increased demand as a result of the
lower-cost imported refrigerators. As a result of the Chinese
government’s subsidy to Haier, we in the U.S. would be able
to consume more refrigerators and more of other goods
and services at a lower general price level, all else the same.
That is, in the aggregate, the American standard of living
would rise.
The benefit to an economy from trade is
imports, not exports. When U.S. workers
produce goods and services that are exported,
neither those U.S. workers nor other U.S.
residents get to consume those exported goods
and services. Rather, the foreign recipients,
the importers of these goods and services,
consume them. Exports are what we have to
give up in order to obtain imports. The fewer
exports we have to give up to obtain a given
amount of imports, the better off we are.
I can hear you now. This is typical
ivory-tower analysis. In the real world,
a lot of those laid-off would not be
able to get re-employed in other
industries quickly or at a comparable
wage rate because of inadequate skills
or geographical-mobility issues. Let’s
assume that this is the case for all laidoff workers in industries related to the
domestic production of refrigerators.
Let’s also assume that there are
many more families that purchase
refrigerators than there are families
involved in the domestic production of refrigerators. Under
these circumstances, the U.S. government could impose a
tariff on imported Haier refrigerators at a level such that
the revenues from this tariff could be transferred to the
displaced workers, leaving them monetarily no worse off
while leaving everyone else better off. This tariff would
result in the price of U.S. refrigerators being higher than
$1 but less than what the price was before the Chinese
government started subsidizing Haier.
The benefit to an
economy from trade is
imports, not exports.
The fewer exports
we have to give up to
obtain a given amount
of imports, the better off
we are.
Let’s run a little thought experiment.
Suppose that the Chinese government,
embracing the mercantilism that Adam Smith excoriated
way back in 1776, provided Haier Group, a Chinese-based
home appliance manufacturer, a subsidy such that enabled
Haier to offer refrigerators for sale in U.S. for $1 each.
Should the U.S. jump on this deal of $1 dollar refrigerators
or impose a tariff on Haier refrigerators so that their U.S.
price was closer to those of Whirlpool and Frigidaire
refrigerators? If you were a worker at or a stockholder of
U.S. Whirlpool and Frigidaire, you would lobby for the
tariff on Haier refrigerators. But those of us who do not
earn income from Whirlpool or Frigidaire would most
likely opt for the $1 Haier refrigerators.
If we allowed imported Haier refrigerators to be sold in
the U.S. for $1 each, would workers and stockholders
associated with Whirlpool, Frigidaire and their suppliers be
economically harmed? Yes, initially. Would U.S. residents,
in the aggregate, benefit from the imported $1 Haier
refrigerators? Yep. We could purchase more refrigerators
and still have a lot of income left over to purchase other
goods and services. Our increased demand for other
goods and services would result in additional hiring,
production and profits in industries not directly related to
Whirlpool and Frigidaire. Some of those laid-off Whirlpool
Who are the real losers in the $1 Haier refrigerator
deal? Chinese taxpayers. They end up subsidizing U.S.
consumers of Chinese-produced refrigerators. Moreover,
China will be using more of its resources to produce
refrigerators for U.S. consumption. This leaves fewer
Chinese resources to produce other goods and services
for Chinese residents to consume. In effect, the Chinese
taxpayers would be providing “foreign aid” to U.S.
residents. How do you say “thank you” in Mandarin?
Okay. Let’s come down from the ivory tower to the real
world. In September 2009, President Obama imposed
additional tariffs on imported Chinese tires of 35%,
30% and 25% in years one, two and three, respectively.
Continued next page
The Econtrarian
October 7, 2016
The Imposition of Import Restrictions Is a Recipe for a Declining Standard of Living
Continued
The President was responding to a finding by the U.S.
International Trade Commission (ITC) that imported
Chinese tires were causing “market disruption” to the U.S.
domestic production of tires. A labor union representing
U.S. tire workers requested the inquiry by the ITC. A study
by the nonpartisan Peterson Institute for International
Economics (PIIE) found that the total cost of these new tire
tariffs on Chinese tires resulted in higher tire costs to U.S.
consumers of around $1.1 billion in 2011. The PIIE study
estimated that a maximum of 1,200 jobs were “saved” in
the U.S. tire-production industry by these additional tariffs.
Thus, the cost to U.S. consumers per U.S. tire-production
job saved was around $900,000 in 2011. Furthermore, the
PIIE study estimated that because of the increased cost of
tires to U.S. consumers, these consumers had to reduce
expenditures on other goods and services, which resulted in
the loss of 3,731 other jobs in the retail sector. So, the price
of tires increased to American consumers and they had to
cut back on their consumption of other goods and services
– a drop in the American standard of living by any other
name.
The $1.1 billion of additional tire costs on American
consumers via a higher tariff on imported Chinese tires in
2011 works out to $13.27 per U.S. family in that year – not
an exorbitant amount. But, instead of imposing the tire
tariff, if the U.S. government had increased taxes on every
U.S. family of 64 cents and transferred those additional tax
revenues to the 1,200 domestic tire-production workers
who would have lost their jobs without the higher tariff, the
laid-off tire-production workers would have been no worse
off monetarily in 2011 and everyone else would have been
better off than with the tariff.
Why didn’t those citizens not employed in the tireproduction industry write President Obama and/or their
federal legislators to protest the imposition of the higher
tariff on imported Chinese tires? Because $13.27 more
annually per family due to higher tire tariffs was only 0.02%
of the 2011 median family income – small potatoes. Why
didn’t the 3,731 retail workers who lost their jobs because
of the higher tire tariffs protest? Because they probably
could not connect the dots between the increase in the tire
tariffs and the decline in other retail sales. But those in the
U.S. tire-production industry could clearly see that less
expensive Chinese tire imports were adversely affecting their
livelihoods and they had lobbyists and union leaders who
were going to squawk about it.
Whether foreign governments conduct fair or unfair trade
practices, there will be certain U.S. industries harmed
economically as imports increase. But there will be more
U.S. residents who benefit economically from these
increased imports than will be harmed. If our federal
legislators took into consideration the economic well-being
of Americans in the aggregate, they could devise a system
to compensate those harmed by the increased imports so as
to leave them no worse off. Extra taxes or tariffs would be
needed to fund this compensation. But these extra taxes/
tariffs would be low enough to leave those who benefitted
from increased imports better off than before. Because the
“losers” from increased imports are easier to identify than
the more diffuse “winners”, it is politically more expedient
to argue in favor of import restrictions than a more rational
compensation program that would leave the “losers” from
imports no worse off economically and everyone else better
off.
In sum, if the trade-restriction rhetoric being voiced by the
presidential candidates of both major political parties turns
into actual trade restrictions after the election, the standard
of living of Americans in the aggregate will be adversely
affected. We will end up with slower growth in goods and
services available for us to consume and a higher rate of
consumer inflation. Adam Smith must be spinning in his
grave. n
Paul L. Kasriel, Senior Economic and Investment Advisor
The Econtrarian, LLC
Paul is Legacy’s Senior Economic and Investment Advisor and former Senior Vice President
and Chief Economist at The Northern Trust Company. Paul works across Legacy’s wealth
management initiatives, consulting on investment strategies with his innovative research.
Considered one of the best economic forecasters as measured by long term accuracy, Paul is a highly regarded,
innovative economic researcher whose work has helped form economic policy at national and global levels.
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