International trade is good for the economy, barriers to trade are bad for the economy. It’s that simple. And 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. It is neither needed nor desirable.
The benefits of free trade go back to basic economic concepts such as comparative advantage — the idea 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. It’s one of the 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 wellbeing.
Certainly times arise when some intervention is needed, usually because unfair governmental subsidies or similar practices distort the market and result in imbalances that should be addressed. It’s important 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’re sold in the country of origin) or improper subsidies are appropriate. There are mechanisms to handle such cases. However, I assure you that the economics of tit-for-tat is not the appropriate approach.
In this instance, U.S. washing machine manufacturer Whirlpool filed a petition with the U.S. Department of Commerce in 2011, contending that washer imports from South Korea and Mexico were dumped and subsidized as part of an aggressive downward pricing strategy by the large South Korean firms LG and Samsung. Since then, other complaints have arisen, culminating in the recent decision to impose a tariff.
According to documentation related to the solar panel decision, in 2011 Commerce officials 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’s a tariff.
Drawback: The tariff will tend to increase consumer prices for the affected products. In addition, some industries will be negatively impacted by the decision. For example, that 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 predicts 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, yet 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 most compelling argument against these tariffs may be that the U.S. economy is doing very well, competing based on innovation and technology. Despite populist rhetoric about America somehow needing to become “great again,” the United States 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 definitely doesn’t need the artificial protection of tariffs.