International trade is good for the economy, and barriers to trade are bad for the economy. It’s that simple. The recent decision to levy a sizable tariff on solar panels and certain washing machines is likely to cost more U.S. jobs than it creates, and it is neither needed nor desirable.
The benefits of free trade go back to basic economic concepts such as comparative advantage, which is the idea that production should flow to the regions with advantages relative to other areas such as lower costs or proximity to needed input materials. This principle was first articulated by two prominent Members of Parliament and early economists more than two centuries ago, Robert Torrens in 1815 and, more famously, David Ricardo in 1817. It is one of the truly great discoveries in intellectual history and its basic mathematics is incontrovertible. Any artificial constraints on global trade will cause resources to be used with less than optimal efficiency, decreasing overall well-being.
There are certainly times when intervention is needed, usually because unfair governmental subsidies or similar practices distort the market and result in imbalances that should be addressed. It is important that the playing field be kept level, and restrictions on practices such as dumping (selling products in other countries below marginal cost and for less than they are sold in the country of origin) or improper subsidies are appropriate. There are mechanisms to handle such cases, however, I can assure you that the economics of tit for tat is not the appropriate approach.
In this instance, U.S. washing manufacturer Whirlpool filed a petition with the U.S. Department of Commerce in 2011, contending that washer imports from Korea and Mexico were dumped and subsidized as part of an aggressive downward pricing strategy by the large Korean firms LG and Samsung. Since that time, there have been other complaints and issues culminating in the recent decision to impose a tariff.
According to the documentation related to the solar panel decision, in 2011, Commerce found that China had subsidized its producers, and that those producers were selling their goods in the United States for less than their fair market value, all to the detriment of U.S. manufacturers. The United States imposed anti-dumping and countervailing duties in 2012, but Chinese producers evaded the duties through loopholes and relocating production. Now, there is a tariff.
The tariff will tend to increase consumer prices for the affected products. In addition, there are industries that will be negatively impacted by the decision. For example, the segment of the solar power industry that involves panel installation is expected to face falling demand and job losses. The president of the Solar Energy Industries Association is predicting that the tariffs will “lead to the loss of roughly 23,000 American jobs this year.”
Ironically, the U.S. solar panel manufacturers filing the complaints are owned by Chinese and German parent companies. The tariffs may not be enough to lead to further investment in the United States, installer jobs will likely be lost, and progress in renewable energy may slow.
Reaction to the tariffs on the part of other nations remains to be seen. If they levy tariffs on U.S. goods in response, other U.S. export-oriented businesses could be affected. Such retaliation is almost inevitable and trade wars are universally detrimental. On the bright side, many market watchers had feared even higher tariffs would be instated. The 30 percent solar panel rate was lower than the 35 percent that had been considered.
It is to be hoped that negotiations will take place between the United States and China (as well as other nations) to work out the underlying problems. Solar panels have long been the object of disputes, and a productive resolution of the situation could generate significant benefits.
The bottom line is that tariffs impede growth. Period. There are clearly cases of abuse out there, but we have mechanisms to deal with that. The Office of the U.S. Trade Representative, the Department of Commerce, and the International Trade Commission are some of the federal agencies that deal with trade issues. There are also international entities such as the World Trade Organization, of which all of the relevant countries are members, to resolve such disputes. These entities can work to solve problems with the smallest possible dislocation. Tariffs, on the other hand, can cause layers of unintended negative consequences.
The most compelling argument against these tariffs may well be that the U.S. economy is doing very well, competing based on innovation and technology. Despite all of the populist rhetoric about America somehow needing to become “great again,” the U.S. is basically at full employment, has the most job openings and employment opportunities in history, and manufacturing is coming off a very good year. It is already performing quite well, and it definitely doesn’t need artificial protection.