Now a days, it is more evident than ever that protectionist policies can not know other path than failure. Nevertheless, many people, including economists, still believe that protectionism can be the solution to many national problems. Recently, I have read an article about how higher import tariff can pay for medicare and get the U.S.A. out of debt. How can this be possible?
Here is the reasoning of the author: ''you'd like to hike tariffs back up to 15 percent. Let's see...that's roughly 8
times the current rate. Right now, the government raises something like $30
billion a year from tariffs, basically. So multiply by 8 and you'd get an
additional $240 billion or so, assuming that imports didn't decline drastically
if they went up in price by 15 percent, a cheeky assumption.''
In other words, the author assumes that the fortune of the U.S.A will rise 8 times if the import tariff is increased to 15%. However, can this be realistic, and what are the consequences of rising import tariff?
First, from a global standpoint, despite of increasing the GDP by 8, rising import tariff will lead to a great economic drop. In point of fact, rising import tariffs to other countries will cause the anger of the affected countries who will in their turn rise their import tariffs (retaliatory action). Consequently, the consumption of American products in these countries will go down. Later, the total of goods and services exported in these countries will go down, which will directly lead to a decrease in the American GDP.
Let's suppose that retaliatory action won't take place, is it possible that the economy of the U.S.A. remain safe?
Actually, the trading partners of the U.S.A. depend on their exports to increase their wealth. if the U.S.A. limits these imports, then the purchasing power of the trading partners will go down. As a result, these countries won't be able to purchase American products, which will lead to a decrease in the American exports, and then the American GDP.
Therefore , it is clear that decreasing imports leads to a decrease in exports, and thus a decrease in GDP.
Second, the import tariff increase will have a great effect on the poor classes. Generally, the import tariff affects low cost products, that are mainly purchased by the poor classes. If the import tariff goes up, the price of these products will go up as well, and the poor classes won't be able to purchase the products. Clearly, then the level of consumption will go down, and so will the productivity. An other undesired result of the price increases can be strikes and manifestations.
Finally, history has proven that protectionism is a failing system and one of the major causes of war. The failure of Smooth-Hawley Tariff Act of 1930 is the best example of how protectionism can lead to crushing economic downturns. This dynamic remains valid, and is supported by the most up-to-date economic evidence. In fact, the static economy of North Korea is a great example of this failed economic ideology. An example of how protectionism lead to war is the European countries in 17th and 18th. In this period of time, European governments were predominantly mercantilist and protectionist. These protective policies were preceding both World War I and World War II. According to a slogan of Frédéric Bastiat (1801-1850), "When goods cannot cross borders, armies will."*
In conclusion, rising import tariff will lead to a wide economic crash and have a great effect on the poor classes. Thus, it is important to consider these two "side effects" before initiating such a decision. Yet, how can U.S.A. pay for its tremendous debt? This is a good subject for an other blog.
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