Archive for the ‘#tariffs’ Tag

Who’s “Protected” by Tariffs?   1 comment

The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.

This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.

 

What a brilliantly timed topic, given who is about to be president. Hazlitt admitted that government have scary economic policies that scare the snot out of actual economists.

What is the use of talking about refinements and advances in economic theory when popular thought and the actual policies of government haven’t even grasped Adam Smith’s 200-year-old message.

Present-day tariff and trade policies are not only as bad as those in the seventeenth and eighteenth centuries, but incomparably worse.

The case for free trade has been stated thousands of times in the past 240 years, but people still don’t seem to grasp it. This confusion rests on a whole network of fallacies, the chief of these being that the immediate effect of a tariff on special groups somehow negates the long term effects on the whole community.

Image result for image of protective tariff

An American manufacturer of cars goes to Congress and asks for an imposition of a tariff on imported cars so that the foreign car manufacturer cannot “undercut” the American companies prices. By imposing a duty (or tariff) of x %, the lower priced foreign car magically costs as much as the domestic car and mysteriously makes the two cars “competitive”. Of course, the manufacturer is not thinking of profits when he asks for this. He’s trying to prevent the unemployment of his workforce and the loss of their “purchasing power.” Wink, wink, hint, hint.

Of course, there’s that fallacy again of merely looking at this manufacturer and his employess and not at the economy as a whole.

But suppose Congress didn’t buy the argument and repealed the tariff, or didn’t put it in place at all. The manufacturer might go out of business and thousands of workers would be laid off (think Detroit) and all the businesses they patronize would be hurt. This is the immediate result, but there are other results that are more beneficial, but harder to trace, so we ignore than. The consumers now can buy cars cheaper and these cars might be of better quality. They may have several hundreds or even thousands of dollars left over, which would mean they could buy something else.

By buying Japanese cars, they furnish the Japanese with money to buy American goods here, which employs more Americans in other industries. American employment on net balance has not gone done, but American and Japanese production on net balance has increased. Labor in each country is now more fully employed because of our trading relationship. Consumers are able to buy what they want where they can get it the cheapest.

Theoretically, if the tariff on Japanese cars is high enough, American manufacturers would find it profitable to compete against Japanese cars, but American consumers would be forced to subsidize the American auto industry. More Americans would be employed in the American auto industry, but there would be no net addition to the country’s industry or employment. American consumers would be paying for higher priced cars, which would mean they would have less money to spend on other things.

Of course, it’s easier to make the argument for the visibly auto industry than for the beleaguered American wallet and the cost to hundreds of other seemingly unrelated industries. It’s harder to quantify it, unless the tariffs are so egregious that they cause widespread unemployment.

Think Smoot-Hawley. This is a primary example of the real effect of a tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results in the net loss to the country in the form of wages. The American car manufacturer doesn’t see any actual increase in profit because the tariff goes into government coffers, so he has no incentive to raise wages. And, yet, the consumer has less money to spend because of the overall increase in car prices.

Only minds corrupted by generations of misleading propaganda can regard this conclusion as paradoxical. What other result could we expect from a policy of deliberately using our resources of capital and manpower in less efficient ways than we know how to use them? What other result could we expect from deliberately erecting artificial obstacles
to trade and transportation?

Tariffs have been described as a means of benefiting the producer at the expense of the consumer. This is only partially true. It hurts all consumers, but it doesn’t necessary benefit all producers. It only helps protected producers at the expense of all other American producers. It benefits certain special interests, which is what makes them attractive. Lowering an existing tariff might, temporarily, damage the protected industry and its employees.

Hazlitt paid special attention to the subject of tariffs as a means to collect revenue … which is how the American government was funded prior to the general income tax.  A broadly applied, relatively low tariff of this sort tends to have limited effects on the economy as a whole. These should not be confused with protective tariffs that protected specialized industries. These are qualitatively different.

Posted January 24, 2017 by aurorawatcherak in economics, Uncategorized

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Chicken Tax Makes Trucks Expensive and Unavailable | Marco den Ouden   Leave a comment

The other day my daughter, who is moving to Canada, and I were car-hunting at a Volkswagen dealership. During our conversation with a salesman, he told us that the Australian VW sells a superb high-end pickup truck called an Amorak that is not sold in Canada or the United States.

“Why not?” I asked. “That,” said the salesman, “is a long story. Google Volkswagen and Chicken Tax to get the answer.”

I did and here is what I discovered.

The Great Chicken War

The German Chancellor reported that half of his correspondence with President Kennedy was over chickens.

According to Wikipedia, the Chicken Tax is a 1963 tariff imposed by the United States on potato starch, dextrin, brandy and light trucks. It was a tit for tat response to tariffs imposed by France and West Germany on U.S. chickens. The period from 1961-1964 was actually known as the Chicken War.

Chicken was expensive delicacy in Europe up until the sixties when cheap American chickens changed the status quo. Consumption rose, the American chicken, which accounted for almost of all chicken sales, dominated the market, and the price dropped.

The Dutch claimed that U.S chickens were being priced below the cost of production. The Germans accused the Yanks of “fattening chicken artificially with arsenic”. Tariffs were imposed, first by France and then by Germany. This resulted in a 25 percent decline in U.S. chicken exports.

You’ll remember that the early 60s was the time of a festering cold war, the Bay of Pigs fiasco, and the Cuban missile crisis. Yet Senator William Fullbright interrupted a NATO nuclear disarmament debate to raise the far more important issue of the “trade sanctions on U.S. chicken” and threatened to cut troops out of NATO. German Chancellor Konrad Adenauer later reported that half of his correspondence with U.S. President John F. Kennedy was over chickens.

After diplomacy failed, “President Johnson imposed a 25 percent tax (almost ten times the average U.S. tariff)” on the aforementioned items. The tariff took effect in January of 1964.

How did trucks get into the mix you might ask. Politics!

Lyndon Johnson wanted support from the United Auto Workers union for his civil rights plans, and he wanted to avoid a strike before the 1964 election. UAW chief Walter Reuther wanted the President to stifle import of Volkswagen trucks into the U.S. They high-fived and the rest is history.

Or Is It?

Foreign automakers found ingenious ways to circumvent the tax. First “Japanese manufacturers found they could export ‘cab-chassis’ configurations (which included the entire light truck, minus the cargo box or truck bed) with only a 4% tariff.” So they sold cab-chassis to the U.S. and had a truck bed added in America with the finished vehicle sold as a light truck. Many of these sales were sub-contracts to Ford and Chevrolet. Not to be outsmarted by private interests, the government closed that loophole in 1980.

In 1978, Subaru discovered they could add two extra seats to a truck (a crew cab in effect) and the vehicle would be classified as a tariff free passenger vehicle, not a light truck.

Major Japanese manufacturers eventually built plants in the U.S. and Canada. But Mercedes found a different way to get around the Chicken Tax. “From 2001 to 2006, cargo van versions of the Mercedes and Dodge Sprinter were manufactured in assembly kit form in Germany and shipped to a factory in South Carolina for final assembly with a proportion of locally sourced parts complementing the imported components.” Complete units would have been subject to the tariff, but in kit form they were tax exempt.

But the real kicker was Ford’s response.

Ford imported all of its first generation Transit Connect models as passenger vehicles by including rear windows, rear seats, and rear seatbelts.

The vehicles are exported from Turkey, arrive in Baltimore, and are converted back into light trucks at [an American] facility by replacing the rear windows with metal panels and removing the rear seats and seatbelts. The removed parts are not shipped back to Turkey for reuse, but shredded and recycled in Ohio.

The process costs Ford hundreds of dollars per van but saves thousands in taxes.”

Chrysler announced plans to do the same in 2015.

Harvard’s Robert Z. Lawrence, a professor of International Trade and Investment, states that “the chicken tax crippled the U.S. automobile industry by insulating it from real competition in light trucks for forty years.”

The Cato Institute called it “a policy in search of a rationale” in its 2003 study, Ending the Chicken War: The Case for Abolishing the 25 Percent Truck Tariff. In this study, author Daniel J. Ikenson notes that domestic producers control “87 percent of the U.S. pickup truck market.” Its only usefulness now, says Ikenson, is as a bargaining chip in trade negotiations. But since the Japanese already manufacture in the States because of the tariff, that point is virtually moot.

Especially today, when almost everyone recognizes how beneficial free trade is, the Chicken Tax is wildly unreasonable.

Kicking Planks

In his classic book, Economic Sophisms, Frederic Bastiat tells a fable about the fiction character Robinson Crusoe. Crusoe was an enterprising fellow. Axe in hand, he intended to chop down a tree to make a plank, but good fortune smiled on Crusoe and a plank conveniently washed ashore on his little island.

A lucky accident? You’d think so, but Crusoe, schooled in the protectionist school of thought and the labor theory of value thought differently. He believed that retrieving the plank would only cost him “the exertion of carrying it, and the time needed to go down to the beach and climb back up the cliff.”

He thought,

If I make a plank with my axe, first of all, I shall be assuring myself two weeks’ labor; then my axe will will become dull, which will provide me with the job of sharpening it; and I shall consume my provisions, making a third source of employment, since I shall have to replace them. Now labor is wealth. It is clear that I shall only be hurting my own interests if I go down to the beach to pick up that piece of driftwood. It is vital for me to protect my personal labor, and now that I think of it, I can even create additional labor for myself by going down and kicking that plank right back into the sea!”

As absurd as that may seem, when I read about the Chicken Tax, it made me think of Bastiat’s Crusoe story. The Chicken Tax is just as absurd.

The people being hurt by this tax are American and Canadian consumers. Their options are reduced since some European manufacturers like Volkswagen don’t even bother trying to sell Amoraks or other light trucks in North America.

Furthermore, today’s prices are higher than they should be since Ford and other manufacturers are kicking figurative planks back into the sea when they engage in the destruction described above. All because of this tax.

It is absurd that, except for light trucks, all other components of this tax have been repealed. It is also absurd that the Chicken Tax is ten times that of a normal tariff. It’s absurd that even American companies like Ford are engaging in wanton destruction to avoid this tax. And it is almost criminal that the tax on light trucks came about because of graft in the Lyndon Johnson administration.

Clearly this tax is only useful as fodder for an absurdist comedy or a stand-up comedian. It deserves to be ridiculed for the ludicrous outrage that it is.

Source: Chicken Tax Makes Trucks Expensive and Unavailable | Marco den Ouden

Posted January 20, 2017 by aurorawatcherak in economics

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Why Trump’s Tariffs Scare Me   Leave a comment

We all know the story of the stock market crash of 1929, the official start of the Great Depression. But what a lot of people aren’t taught in school is that the Depression of 1929 hit most of the industrialized world, but it only lasted about two years in most other countries. Only in the United States did the Depression of 1929 become the Great Depression as it stretched on for 12 years. Officially, the Great American Depression ended in December 1941, right after the bombing of Pearl Harbor.

So why did it last so long here when it typically only lasted 18 months in other countries?

Image result for image of smoot-hawley tariffsThere were a lot of missteps that prolonged the Great Depression, but the first big one was the brainchild of Republican Senator Reed Smoot, an avowed patriot, businessman and Mormon “prophet” who decided we needed to do something about saving the country’s jobs.

Senator Smoot was convinced that the massive loss of employment in the United States was because too many countries were selling too many goods into the United States and undermining the honest, hard-working ordinary people.

He recognized that there were some complicated processes at work that would take years to reform, but he promised the short-term fix would be higher tariffs and duties. As the chairman of the Senate Finance Committee, he could do something quickly to alleviate the country’s suffering.

Image result for image of smoot-hawley tariffsOoo, does that sound familiar?

 

Working with Congressman Willis C Hawley, chairman of the House Ways and Means Committee, Smoot devised the Tariff Act, a result of months of horse trading. It became law in June 1930. Hawley hailed it as the precursor to a “renewed era of prosperity” as the Act hiked tariffs on more than 20,000 dutiable goods to an average of $59.1 percent. Duties on some items quadrupled.

Maybe Trump doesn’t read a lot of history. His campaign promises on trade sound a lot like Smoot’s promises. Trump is a protectionist who says he plans to use the bully pulpit of the Presidency to shame companies into staying in America or coming back from over seas and if they don’t cooperate, he wants to slap on a 35% traffic on their imported goods.
Image result for image of smoot-hawley tariffsSmoot was an astute businessman with interests in banking, mining, construction and agricultural goods (sugar and wool were important industries in Utah). He fancied himself an amateur economist who firmly believed that the recession of 1930 was a result of the volume of goods for sale exceeding the capacity of Americans to buy them, which was leading to a huge drop in prices.

This was Keysenian doctrine of “overproduction” (or sometimes, “underconsumption). Smooth wanted to solve the crisis by reducing the volume of goods on the market and bringing things back into balance by pricing foreign products out of the American market.

More than 1000 American economists wrote President Herbert Hoover pleading with him not to sign the Tariff Bill. Hoover himself had misgivings and had once damned the bill as “vicious, extortionate and obnoxious.” In the end, he signed it. Why? Probably politics.

The results were pretty immediate. As global trade dried up, most of the world’s shipping fleet went into mothballs and orders for new ships were cancelled. Steel production, fishing, farming and manufacturing of all kinds were affected.

America’s trading partners reacted in kind. An outraged Canada placed a 30% tariff on American exports. France, Germany and the British Empire follow suit, turning to alternative markets or developing their own to replace goods previously acquired from America.

Image result for image of smoot-hawley tariffsAlthough historical economists still differ about the extent of the damage caused by Smoot-Hawley, nobody doubts that it dealt a serious blow to the global economy at a vulnerable time. It deepened and lengthened the Depression, both inside and outside the United States. Between 1929 and 1933, US imports collapsed by 66 per cent. Exports plummeted by 61 per cent. Total global trade fell by a similar amount.

Franklin Delano Roosevelt railed against Smoot-Hawley  for building “tariff fences so high that world trade is decreasing to vanishing point”. FDR would go on to meddle in the economy far more capriciously than Hoover and with similar disasterous results, dragging the Great Depression out for eight more years.

As a matter of fact, economic indicators suggest that the US economy, though still in contraction following the 1929 Bank crash, was showing signs of recovery until the Smoot-Hawley tariffs were instituted. Rather than the promised new era of prosperity, Smoot-Hawley helped bring about an era of misery. Between 1929 and 1933, America’s wealth nearly halved – and the unemployment rate more than tripled from eight percent to 25 percent.

The tragedy was that the Act was a solution to a problem that didn’t exist. America had actually been in surplus on its trade account. Although food exports had been falling and were in deficit, manufactured exports more than compensated for the decline. It was true that imports of foreign manufactures were indeed rising before Smoot-Hawley, economist Jakob B Madsen pointed out in a 2002 study that exports were rising even faster.

Image result for image those who fail to learn from historyReed Smoot wasn’t a man to admit he might be wrong. As one biographer wrote: “There is no evidence that any apparent fact, any argument, any introspection even faintly disturbed him.” “The Great Protectionist”, as author James B Allen once described him, lost office in 1932. Till his dying day, the only problem he would admit to with his tariffs was that they might not have been set quite high enough.

So now Donald Trump, another man who has difficulty admitting when he might be wrong, will be president. Does that hail a new era of prosperity or are we looking at something else that will drag the economy into the pit?

Those who fail to learn from history are doomed to repeat it.

Oh my!

Posted January 3, 2017 by aurorawatcherak in economics

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Our Economic System Is Designed To Fail – Ron Paul   Leave a comment

‘Our Economic System is Designed to Fail’ – Ron Paul

Source: Our Economic System Is Designed To Fail

Posted May 6, 2016 by aurorawatcherak in economics

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Make America Great Again   Leave a comment

Make America Great Again

Donald Trump’s critics have heaped scorn on his calls for protective tariffs to deal with America’s widening trade imbalance and the resulting loss of higher–paying blue color jobs. Some have accused him of trying to turn back the clock in pursuit of a cheap populist ploy and have said that he simply refuses to acknowledge that America is now an information and service economy for which large trade deficits are the new normal. But voters are sensing that The Donald is right to sound alarm bells and that something radical needs to be done to revive manufacturing to make America great again. But his tariff solution is hardly the best medicine. To be honest, given the even worse solutions that are being offered by the left, Trump’s instincts may be preferable.

Source: Make America Great Again

Posted May 6, 2016 by aurorawatcherak in politics

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