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The Good, The Bad, The Economy

Andrew Sullivan posits that Bush is doing damage to fiscal conservatism and the economy. He links to the Corner at NRO. And, most frighteningly, I say that Sullivan might be on to something. In issues of trade, Bush has gone protectionist, typically with the sorts of industries that have long enjoyed governmental protection from foreign competition. The case in that Washington Post article is steel, but the US has incredibly high duties on sugar and some chemicals as well. In this situation, the WTO was right to rule against the high US steel tariffs. Technically, the US is under no obligation to listen to a WTO ruling, because the WTO actually has no enforcement power over its members and is a completely voluntary organization. However, Bush would do well to listen, for a variety of reasons.

1) We don’t want a trade-war with Europe: It’d be nice to live in a world where there was not need of any trade protection, that ideal-but-unobtainable situation maximizes total surplus. However, there is always and incentive to run some protection if the other guy isn’t, because you can benefit your own country more that way. The other side then has an incentive to start running some sort of protection, and a game of best responses ensues. At the end, there is a Nash equilibrium. We don’t want to end up there, because it’s a terrible place to be and it’s self-sustaining. So, if we don’t listen to the WTO and remove these steel tariffs post-haste we could run the risk of a trade-war with Europe which would damage our economy greatly and for years to come.

2) Tariffs artificially inflate the price of steel above the market price: You might not buy much steel, but be sure that this gets passed on to you. Own a car? A house? Steel is a major input for all sorts of consumer durables, and if the price of an input goes up, marginal cost goes up, prices of outputs go up…higher prices mean less consumption; toss in a macroeconomic multiplier and, congratulations, you’ve just made the recession worse.

3) Protecting the steel industry impedes the structural growth and progression of the US economy: If the restrictions were lifted, a bunch of steel workers would probably lose their jobs. To that I say, “congratulations, you’re structurally unemployed, get reeducated and reenter the workforce.” The US is skilled-labor abundant, we’re a nation of great education and a highly-skilled workforce. While it is true that we also have a great many natural resources at our disposal, other nations have an advantage in the sorts of things needed to produce steel. Iceland, for instance, has energy that is practically free. And, there’s a process that some of the larger European* steel companies have perfected that uses much less energy in the production of steel and increases productivity. By protecting the steel industry, the administration is doing a disservice to the American consumer. And, in my opinion, to the steel workers themselves by delaying their incentive to adapt to the ever-changing structure of the economy.

4) Tariffs only exist due to the collective action of a relatively small number of people: Let’s take an example, in the United States sugar costs about twice as much as it does in the rest of the world. Why? Because the US has incredibly high tariffs on sugar. Why on Earth would we do that? Five Hawaiian families own most of the sugar production in the states. The ASA has a brief (very biased) look at sugar policy. And here’s a breakdown of the quota structure. In any case, a few people control most of the sugar production and it’s worth their time to make sure that the prices stay the way they are. This, on average, costs a family in the US $8 per year. However, mass consumers of sugar such as candy manufactuers are hurt in a fairly substantial way by this policy. Remember when Hershey was thinking of moving to Canada? A similar thing happens in the steel industry, the collective action of a relatively small group of people keeps a policy which benefits them, but harms the rest of the economy, in place.

So, in short, the steel tariffs (and the sugar tariffs) need to go. They hurt the American consumer, they artifically inflate prices, and benefit only a small minority of people. Why should some industries recieve special treatment? They shouldn’t.

*I cannot remember exactly where, it might be Scandanavia or Eastern Europe…someobody out there knows, I’m sure.

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