Saturday, October 3, 2009

New Tariff On Tires: A Help To Labor Or A Roadblock To Recovery?


After everyone went home on a Friday night and the news industry geared down for the weekend, the White House increased the tariff on tires, imported from China, by 35% on top of the existing 4% tariff.

Why? The Steelworkers Union (the union for tire workers) “convinced” the White House that they needed to increase the tariff on tires imported from China to “protect” 5,000 jobs in the tire industry. China has 18% of the low-cost tire market.

This may be good party politics (supporting your base) but it is poor economic policy and it is another roadblock the administration has put in the way of economic recovery. Lets look at who is helped by this policy and who is hurt.

The union is helped in the short-term. This will increase tire prices (some guesses are $30 to $90 per tire), which will generate money that can be used to keep employment at current levels or increase employment. Unfortunately, this help may be short lived because low cost tires can also be imported from Indonesia and Mexico or other low cost producers.

The policy will also help the tire companies in the short term. They will be able to raise prices on the 82% of the market not imported from China (you are not going to sell higher quality tires at prices below low quality tires.)

This helps the government in the short term because it raises revenues with a 39% tariff plus the higher excise taxes that go along with it.

Looks good so far: short-term, it saves jobs, increases revenues and profits for tire companies and raises badly needed revenues for the Federal government. But the problem is that it does more damage than good.

The problem is that these short-term effects also have some very negative effects.

First, it signals protectionism. Exactly what we did in the depression that resulted in extending and deepening the depression. This single act will be a speed bump in the economy but if it is the start of more protectionism, it will be devastating to the economy. China is already talking about putting tariffs on poultry and auto parts after an agreement last year to export to China $2 billion in autos and parts (much of which comers from Michigan.)

Second, it raises the price of all tires so we will have to pay significantly more for the same quality product. This will hit the “working poor” especially hard (for example about $140 for a $100 tire) and right after the cash for clunkers program raised the price and availability of all used cars. It’s a double whammy for those who can afford it the least.

Third, the extra money paid for all these tires (100% of market share times 35% tariff) means that consumers would have to reduce that same amount of spending on other products and services. This means GDP will not increase and employment will have to decline –in other industries—equal to the loss of revenues to the tire industry. Therefore there will be no gain in employment only other employees displaced. The political focus should be on helping the displaced tire workers get through this pain and get retained.

Fourth, the American economy will be worse off because productivity (how wages are increased) will decline because we are subsidizing an unproductive industry as we take money away from more productive industries. This is not how you create wealth.

Fifth, union tire workers will suffer long-term because they will not be trained for non-subsidized jobs in the future. In my opinion, unions should be “guaranteeing” its members that they will be employable in the future not that they can keep their exact job in the future.

Regardless of the union’s arguments or political games, the net of this mis-directed protectionist program does not help tire workers. It does not create jobs or raise wages. But it does hurt consumers and cause long-term damage to the economy and the dollar. Plus, it opens the door to reduced trade and increases the fear and uncertainty in the capital markets.

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