Winners and Losers in the Game of Tariffs

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2/8/22

As of this week, the Biden administration lowered tariffs imposed on solar energy products from China, exempted tariffs on solar products from Canada and Mexico, and lowered tariffs on steel purchased from Japan. These reductions are a step in the right direction, but they’re too little and too late. The better policy adjustment would have been to phase out all tariffs, across the board.

At a time when inflation has been worsening, tariffs make an unnecessary contribution to upward price pressures. Beyond that, they also create an incentive to choose cheaper alternatives. In the particular case of raising the price on solar energy components, we make fossil fuels more attractive options, thereby slowing the progress we would otherwise make on retarding the progress of climate change.

Despite the absurd claim by former President Trump that our trading partners would pay these tariffs, tariffs make the affected goods more expensive not for them, but for us, the US consumers. It’s true that the intended supplier would be expected to face lower demand due to the tariff, and in that way, the counterparty would be adversely affected; but the party most directly impacted by a tariff is the customer who necessarily faces the higher price.

At least some of the motivation for instituting or maintaining a tariff is to protect a domestic producer by helping to make foreign suppliers less competitive. While that outcome certainly benefits the domestic suppliers, we should at least recognize that what’s going on is an income transfer from US consumers to US producers. It’s not exactly a free lunch. Using tariffs to protect these industries, however, is the wrong solution.

What is to be done, then? My bias is that we should let the market do its magic. We shouldn’t institute a national policy that props up businesses that aren’t sustainable. As hard-hearted as it may sound, these businesses must be allowed to fail. Keeping them operational may seem to be beneficial in that jobs are maintained, but for how long and for what cost? For unsustainable industries, the costs would seem to be unbounded. Beyond that, the assistance to business owners is considerable. I believe this benefit to owners is both unfair and inappropriate, and this feature seems to be largely ignored.

The nature of being an owner in a capitalist system is that your capital is at risk. You have the prospect of getting hugely rich if the stars line up, but the downside is that you can lose it all if the company you buy or create goes belly up. This is as it should be, assuring that capital gets directed most efficiently, for the greater good. Tariffs tilt the playing field unfairly to insulate selected companies from this market risk exposure, while others don’t get to enjoy this same protection.

That said, the concern about jobs — or more specifically, workers — is valid, and it deserves governmental intervention. Rather than tariffs, however, the response should be to provide a safety net to help affected workers cope with a transition to new employment. Let’s focus on this need and let the business owners face up to the risks that they signed up for as company owners. Toward that end, among the initiatives deserving additional resources are (a) more generous unemployment benefits, (b) some form of guaranteed income payments, and (c)expanded spending for education and job training.

In a broader context, tariffs are a form of corporate welfare; and we’d be better off doing without them. While it’s appropriate for the government to promote the general welfare, it should do so in a manner that is fair and equitable. That means assisting workers who find themselves employed in unsustainable businesses. Businesses unable to compete or survive in the current global environment, on the other hand, should be expected to adjust to changing economic realities on their own, without federal support. Capitalism is high on the list of factors that have made America great, and having unprofitable firms close their doors is part of the rules of the game.