Democrats Do Not Understand Economics

Obama has just slapped a 35% tariff on incoming tires from China. This is a perfect example of why protectionist legislation does not work.

For starters, the tariff will simply drive tire production to other countries. The US is simply not competitive in this market segment. So, the obvious beneficiaries are countries such as Brazil and India. Since the US does not have the tooling to make the cheap sorts of tires sold by the Chinese, as that market hasn't really been contested by American tire makers in a long time, we don't expect any production to be driven to the US. So, unless Obama plans a blanket tariff at some point, there is no real hope of increasing production in the US.

Of course, the immediate problem is that China most likely will retaliate in some way. What this means is reduced exports for the US, most likely chickens. So, one of the problems with protectionism is immediately evident, and that is that other sectors will lose employment. So, to recap, tire manufacturers will not be helped, but, say, chicken farmers, will be hurt.

Here at the bureau, we try to dig deeper. As we have said before, various protectionist legislation over time has had unintended consequences. This is no different. If Obama has not slapped a similar tariff on Chinese car imports, it is likely that this tariff will provide the Chinese with an excuse to enter the US car market, because their tires may not have a tariff if put on a US-bound car.

Certainly, other trading partners, such as Japan, will start using more Chinese tires, as China now has to sell their production elsewhere. So, US-bound Japanese cars may see Chinese tires. If the tariff actually applies to assembled product, expect the Japanese to use Chinese tires for domestic product and ship their tires to the US. Brazil et. al. will do the same. The market will shift some, new players will get a boost, but the American tire maker won't get any help.

However, domestic car production should take a nice hit. The tire price isn't that great, but margins are already razor-thin, and this is maybe a hundred or so off the bill of materials for a foreign car. So, the US manufacturer has to drop their prices a bit to stay in line, or the foreign car maker makes a few bucks more per car. Either way, the US car manufacturer is at a disadvantage. This is only unexpected to those who do not comprehend economics. It is, hopefully, unintended by the current administration.

And, let's not forget the poor consumer. One effect, in the short term, at least, will be driving up the prices of tires. This will hit families short on income the most, as they try to keep their cars operating. This will mean they will put off tire purchases, with the common result of increased accidents. So, an unintended (hopefully) side effect of this protectionist act will be to reduce the safety for everyone due to people putting off tire purchases.

So, to recap: protectionist tariffs will 1) not help anyone in the US, 2) cost US jobs in other sectors that export to china, 3) drive production to other countries, 4) hurt the US automobile industry and 5) reduce safety on the highway. You may pooh-pooh the bureau's conclusions, but the fact remains that activity is at the margins; a change of 35% in the price of the cheapest tires is actually enough to do all these things simply by pushing the cost of something past a tipping point. For instance, if a set of four tires cost $100, and a family can afford $100, they would replace all four tires. However, with a 35% tariff, the tires now cost, presumably, $135, and the family can only afford two, at $67.50. Imagine that writ large all over the economy, lots of situations where the decision maker suddenly finds himself on the other side of a decision from where he expected to be. Quixotically, this may actually lower tire sales in the US and thus hurt domestic tire manufacturing.