By Shafiq Kyazze.
A tariff is a tax on imports and exports. The most popular reason for imposing tariffs is to protect the domestic producers of a certain product, however, this protection comes at a high cost that outweighs the benefits of enacting tariffs. President Trump is making the same mistake that Obama and many of his predecessors succumbed to; the mistake of instituting tariffs.
Let’s take steel as an example, when steel imported from China is cheaper than steel produced in USA, tariffs may be imposed. These tariffs will make steel from China more expensive hence forcing American businesses to buy the now less expensive steel from USA steel manufacturers. The price and demand for steel from US manufacturers will go up leading to an increase in the number of people employed in the steel industry. This point is where a lot of politicians stop to self-congratulate themselves on increasing employment in a given industry.
But the story never ends here, as the price of steel goes up the American industries that need steel as a raw material will find it more expensive to operate due to an increase in the costs of production: these industries range from small scale industries such as cutlery manufacturers to large scale industries such as vehicle and oil rig industries. Since businesses won’t increase prices as it normally makes them lose customers and reduce their profits, they cut costs of production by reducing the people employed and some may move to different countries where they can import cheaper steel (with little to no tariffs). Moreover, for the country as a whole, businesses are lost, unemployment increases and income among the general population decreases as well. The country is singularly worse than it was before it enforced tariffs.
This is exactly what happened during the great depression in 1930. The unemployment in America fell from 9% to 6% from December 1929 to June 1930. When the Smoot- Hawley tariffs were enacted by Herbert Hoover, unemployment decline trend was reversed Unemployment rose to 11.6% in the subsequent 5 months and later increased to 15% a year after and hit 26% the following 2 years after the tariff imposition.
In the 1980s when steel tariffs were levied, they led to a $240 million profit and saved 5000 jobs in the steel industry but they led to a loss of $600million in profits and 26,000 jobs in other industries that depended on steel as a raw material.
It’s invariably imperative to look at the whole picture of a policy as compared to jumping to first effect as many politicians and people have done in the past. Saving jobs in the steel industry is important, but life as we know it puts costs on everything and the cost of saving steel jobs is losing a lot more jobs in different sectors. There are simply no solutions in life but trade-offs.
Shafiq has a strong background in philosophy and history having been exposed to such issues at a very tender age. He has a voracious interest in economics, history, politics, philosophy and social issues. He is a Chemical engineering student at The University of Manchester. Shafiq is also an avid Barcelona fan and is currently a writer at TCS network.
