Sunday, December 18, 2011

Trade tariffs, protectionism and the damage done

Recently I have heard many folks make an argument for saving or restoring America’s manufacturing base by erecting protective tariffs. I believe we need to resurrect manufacturing in the U.S., but trade barriers is not the way to go about it.

Here’s why:

If American industry can manufacture a widget that would sell for $20, but a foreign competitor can manufacture an equivalent widget to sell for $10, frequently the widget industry (or an allied trade union) will ask Congress to put a tariff on imported widgets to "level the playing field."

So, let's see what that does to our economy.

This action means that every American now has to pay $20 for every widget. If it is made in the U.S., then some lucky Americans might get a better wage as a result. However, every American pays the price. The extra $10 that goes to the widget industry means there is less money for every other industry—less money for Americans to spend on fuel, food, housing, clothes, movies, and so on. So, a very small number of American benefit at the expense of every other American who wants or needs to buy a widget.

But, the case is even worse if the Americans actually prefer the foreign-made widgets. If the widgets are imported to meet demand, every American still has to pay $20 for a widget. Some of that money goes back to the foreign country where the widget was made; but the other $10—the tariff money—simply goes to the U.S. government and adds nothing to the producing economy at all.

And, since raising the price here in the U.S. means sales will be lower to the foreign country, the foreign country now has less money to buy American goods that it might otherwise buy from us. This, too, damages the U.S. economy and workers in every American industry.

Again every American is a loser as a result. Prices are higher on the products we buy and we can sell fewer goods and services to foreign nations. The size of our economy is diminished—all to protect one small group (a “special interest”), not Americans, in general, or the American economy.

It's a loss for everyone in the long run.

For another view on what is really driving manufacturing jobs out of the U.S., read this article on how and why we pay the CEO’s of our nation’s publicly-held companies. We have met the enemy, and it is us!

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