Monday, February 2, 2009

Trade Protectionism and Economic Welfar

Almost 79 years ago in the face of another economic down turn the United States government passed the Smoot-Hawley Tariff Act that greatly increased the tariffs on over 20,000 imported goods. As result of this act a number of other countries adopted tariff laws and trade restrictions that greatly reduced world trade, helped to worsen the economic down turn that would become the Great Depression, and was one the causes of World War 2.
Now that we are in the middle of another economic downturn we should not repeat the same mistake of putting special interest groups ahead the general public. As in 1930, protectionist trade policies and trade restriction will only worsen our current economic problems. Tariff laws and trade restriction only benefit the businesses and industries that are protected while placing an added cost on everyone and everything else in the economy. Higher tariffs would raise the cost of many goods and services in the United States placing an additional hidden tax on the public that will fall the heaviest on the poor and middle class. Since consumer will have to pay more for imported goods, or goods that were previously imported, the real buying power of their wages will fall and they while have less money to spend on other goods and services reducing demand in other industries too. Since many American businesses use a mixture of imported and domestic inputs to produce their products and an increase in tariffs or trade restriction will raise their costs of doing business and probably raise the prices of the products that they sell adding to burden placed on the larger economy. For example the US steel industry has been given trade protection a number of times and this measure ended up harming a number of other domestic businesses, for example the auto industries, by raising the cost of their inputs. So the cost of the protectionist trade policies cascade through out the economy raising cost and reduce economic activity across the board. For this reason the added economy value of the jobs “saved” by any tariff and/or trade protectionist policies are always smaller than the total cost of the tariff and/or trade protectionist measures to the entire economy. In the middle of an economic downturn do we want to place an added burden on the consumer that will fall mainly on the poor and the middle class ?

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