Page 111 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 9: Economic Effects of Tariff and Quotas on National Income, Output and Employment

lumber dispute, it is estimated that recent American tariffs have cost Canadian lumber producers Notes
1.5 billion Canadian dollars. Producers cut production due to this reduction in demand which causes
jobs to be lost. These job losses impact other industries as the demand for consumer products decreases
because of the reduced employment level. Foreign tariffs, along with other forms of market restrictions,
cause a decline in the economic health of a nation. The next section explains why tariffs also hurt the
economy of the country which imposes them.
Except in all but the rarest of instances, tariffs hurt the country that imposes them, as their costs
outweigh their benefits. Tariffs are a boon to domestic producers who now face reduced competition
in their home market. The reduced competition causes prices to rise. The sales of domestic producers
should also rise, all else being equal. The increased production and price causes domestic producers
to hire more workers which causes consumer spending to rise. The tariffs also increase government
revenues that can be used to the benefit of the economy.
There are costs to tariffs, however, now the price of the good with the tariff has increased, the consumer
is forced to either buy less of this good or less of some other good. The price increase can be thought
of as a reduction in consumer income. Since consumers are purchasing less, domestic producers in
other industries are selling less, causing a decline in the economy.
Generally the benefit caused by the increased domestic production in the tariff protected industry
plus the increased government revenues does not offset the losses the increased prices cause consumers
and the costs of imposing and collecting the tariff. We haven't even considered the possibility that
other countries might put tariffs on our goods in retaliation, which we know would be costly to us.
Even if they do not, the tariff is still costly to the economy. In my article The Effect of Taxes on
Economic Growth we saw that increased taxes cause consumers to alter their behavior which in turn
causes the economy to be less efficient. Adam Smith's The Wealth of Nations showed how international
trade increases the wealth of an economy. Any mechanism designed to slow international trade will
have the effect of reducing economic growth. For these reasons economic theory teaches us that
tariffs will be harmful to the country imposing them. That's how it should work in theory. How does
it work in practice?
9.2 Empirical Evidence on the Effect of Tariffs

Study after study has shown that tariffs cause reduced economic growth to the country imposing
them. A few of examples:
1. The essay on Free Trade at The Concise Encyclopedia of Economics looks at the issue of international
trade policy. In the essay, Alan Blinder states that "one study estimated that in 1984 U.S. consumers
paid $42,000 annually for each textile job that was preserved by import quotas, a sum that greatly
exceeded the average earnings of a textile worker. That same study estimated that restricting
foreign imports cost $105,000 annually for each automobile worker's job that was saved, $420,000
for each job in TV manufacturing, and $750,000 for every job saved in the steel industry."
2. In the year 2000 President Bush raised tariffs on imported steel goods between 8 and 30 percent.
The Mackinac Center for Public Policy cites a study which indicates that the tariff will reduce U.S.
national income by between 0.5 to 1.4 billion dollars. The study estimates that less than 10,000 jobs
in the steel industry will be saved by the measure at a cost of over $400,000 per job saved. For
every job saved by this measure, 8 will be lost.
The cost of protecting these jobs is not unique to the steel industry or to the United States. The National
Center For Policy Analysis estimates that in 1994 tariffs cost the U.S. economy 32.3 billion dollars or
$170,000 for every job saved. Tariffs in Europe cost European consumers $70,000 per job saved while
Japanese consumers lost $600,000 per job saved through Japanese tariffs.
These studies, like many others, indicate that tariffs do more harm than good. If these tariffs are so
bad for the economy, why do governments keep enacting them? We'll discuss that question in the
next section.
Study after study has shown that tariffs, whether they be one tariff or hundreds, are bad for the
economy. If tariffs do not help the economy, why would a politician enact one? After all politicans

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