TARIFFS VS FREE TRADE?
By Wayne Locke- CFP®
I’m sure many of you have heard about the tariffs President Trump has implemented on steel, aluminum, and other products. The United States has implemented tariffs in the past, often with the goal of protecting American industries. Most recently, George W. Bush enacted tariffs of 30% on steel sheets and 15% on steel bars and rods in March of 2002. Domestic steel producers were unable to meet the sharp increase in demand due to the increased cost of foreign steel. As a result, steel prices rose by more than 60% over the course of a few months after the implementation of the tariffs. According to a study prepared for the Consuming Industries Trade Action Coalition (CITAC) by Dr. Joseph Francois and Laura M. Baughman, 200,000 Americans lost their jobs as a result of higher steel prices during 2002. This number represents more American workers than the total number of workers employed by the steel industry itself… the trickle-down effect.
During the 1980’s, President Reagan enacted a number of trade policies as a reaction to the growing trade deficit the United States had with Japan. In response to pressure from domestic automobile manufacturers, the US government negotiated a “voluntary restraint agreement” with Japan which limited the number of vehicles that could be exported to the United States from Japan. These restraints were ultimately lifted by President Clinton in 1994. President Reagan also implemented a 100% tariff on Japanese computers, laptops, color TV sets, and rotary drills, amounting to $300 million in total tariffs. Despite these strict trade measures, the bilateral trade deficit between the two countries did not go away.
Given these lessons from recent history, it appears unlikely that these trade restrictions imposed by President Trump will be positive for the economy. Some speculate that the President’s goal is likely to bring China to the negotiating table in order to work out fairer trade conditions. China has been notorious for intellectual property infringements on US companies, which allows them to ignore copyright law and benefit from the innovation of US businesses. A 2017 Intellectual Property Commission report estimates that the cost of counterfeit goods, pirated software, and theft of trade secrets could be as high as $600 billion. Though most economists and political leaders disapprove of the President’s methods on China, some action is needed to address the growing imbalances between the two countries.
Impact of 2002 Steel Tariffs - http://www.tradepartnership.com/pdf_files/2002jobstudy.pdf
Reagan Tariffs - https://www.nytimes.com/1987/04/18/business/president-imposes-tariff-on-imports-against-japanese.html
Japanese Voluntary Export Restraint - http://econofact.org/do-trade-restrictions-work-lessons-from-trade-with-japan-in-the-1980s
Chinese Intellectual Property Theft - http://www.ipcommission.org/report/IP_Commission_Report_Update_2017.pdf