The Hidden Costs of Tariffs

By Josh Reini 6 years ago

After reading my Halloween post, you might be wondering: why do countries pass tariffs when they come with such ghastly effects? You may have been lying awake all night trying to weigh the costs and benefits of President Trump’s tariffs on Chinese imports. If either of these apply, this post is for you! Today, I will discuss the hidden costs of tariffs and how a mismatch of incentives can lead to policies that create a negative shock to the economy as a whole.

While tariffs hurt the country that imposes them overall, the domestic producers affected by the tariffs see a huge windfall. With fewer competitors in their home market, producers can raise their prices, hire more workers and increase production. With benefits like these, it is easy to see why many would rally around Trump’s ten percent tariff on $200 billion worth of imports from China.

With these benefits concentrated amongst a relatively small number of producers, producers have large incentives to lobby the government and push these tariffs. With a receptive executive branch, lobbyists have responded. According to analysis from the Center for Responsive Politics, 496 companies or groups trying to lobby on tariffs in 2018, a sharp increase from the less than 200 in each of the three years prior.

On the other hand higher prices for the tariffed goods effectively reduce consumer income. Consumers are forced to either buy less of the tariffed good or less of some other good. Since consumers are purchasing less, domestic producers in other industries are harmed. Economists working on behalf of the Consuming Industries Trade Action Coalition estimated the impact on tariffs passed by the Bush administration and found that for every steel job saved as a result of the tariff, eight jobs will be lost in all sectors of the economy. Additionally, the steel producing industry would save between 4,400 and 8,900 jobs at a cost of between $439,485 and $451,509 per steel job saved. Higher prices for steel products and related inefficiencies would decrease the U.S. national income from between $500 million and $1.4 billion.

While these costs to the economy as a whole are enormous, the costs to any individual consumer are very small. With the population of the United States sitting at 281 Million in the when Bush’s tariffs were passed, the cost to each consumer sits at less than five dollars! For five dollars, it is not worth the time and effort for any American to solicit donations for the cause and lobby congress to change the import laws. Since the domestic producers have huge incentives to lobby for the tariffs while consumers have no time to lobby against the issue, tariffs will be passed even though they come with huge costs to the economy as a whole.

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