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The Trouble With Tariffs

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As our country's economic downturn appears to worsen, and election year rhetoric is tossed about, many critical policy choices are being ignored. The fact that many items that poor and working people use regularly are subject to substantial tariffs, which add to their final cost, is rarely mentioned. And oddly, some of the most significant items where tariffs were imposed are not even produced in large quantities inside the United States. Upon reviewing the tariff schedule imposed by the United States International Trade Commission, it is very unlikely that most Americans would conclude that it is their interests that are being considered in this situation.

Under the General Agreements on Tariffs and Trade structure (GATT), which established the World Trade Organization, the United States agreed to establish policies for the enhancement of international commerce. While there are both vocal supporters and opponents of the concept of "global free trade," the complexities of international commerce is something that is only vaguely understood by most Americans. We frequently hear the term "global competition" tossed about in public speeches and debates, but few people fully understand what that means. Ongoing debates over free trade frequently take place in the absence of relevant and substantive explanations of what costs and benefits are actually in play.

Those who vilify global commerce rightfully point to the numerous abuses of labor and resources that occur around the world in support of it. Supporters of global commerce rightfully point to the idea that many developing nations cannot survive without the possibility of selling their products to countries with more robust economies, where the demand for such products brings maximum return on investment. It is the extent to which global trade may engender fraud, abuse, and corruption that appears to be the origin of ongoing disagreements. But, while those are important concepts to consider, they are not directly affected by the imposition of tariffs.

The imposition of tariffs is one strategy that has been devised for supposedly preventing countries from flooding the economies of trading partner countries with products and services provided at prices that businesses in the local economies, for a range of reasons, cannot match. Tariffs can be imposed on both imports and exports, but it is generally those imposed on products coming into a nation that trigger the most extreme social and political responses. Since few people appear to understand the consequences of such tariffs, it is difficult to estimate the perceptions that most people have of their effectiveness. And on the occasions when tariffs are publicly announced, they are usually promoted under the guise of "protecting domestic production," and by extension protecting American jobs.

In one recent case in point in the United States concerning the solar industry, the United States imposed tariffs on Chinese produced Photovoltaic Cells (PVs), which are silicon based panels that are mounted in sunlight to generate electric power. A tariff of 31% was imposed on most of the solar cells made in China, ostensibly to protect a body of startups in the United States that produce comparable products. Because of the low cost of Chinese labor, which is a contentious issue as well, the Chinese currently dominate world solar cell sales. Most United States based companies cannot match the low Chinese production costs, and have been reluctant to invest deeply in expanded production until either demand rises enough to cause the price of Chinese produced PVs to rise in response to normal Supply and Demand pressures, or innovations are made that automate the process to the extent that such products can be made here as cheaply.

One interesting point worth making is that, while American production of PVs has remained relatively flat in recent years, the decreased price of PVs has triggered a dramatic upswing in the number of solar power systems being installed in the Sun Belt states. This has created a boom for contracting companies installing solar power systems in homes and businesses, and the jobs created tend to be jobs with better compensation that those in other sectors of business. It has also sparked more interest in creating production innovations that would lower the production costs domestically. There is also the added benefit of lowering our overall carbon footprint, but that is difficult to translate into economic terms.

Increased costs for solar cells after the imposition of these tariffs are likely to slow the rate of growth of the solar industry domestically, from the record rates seen from 2010 to 2011. With domestic solar production rising, it is very difficult to understand how such tariffs can be considered anything but frivolous. They may perhaps be beneficial to other energy producers, such as the fossil fuel industry.

If there were any indication that emerging companies in the United States were prepared to pick up production and meet the demand for affordable PVs, then the tariffs might make more sense. Since no such situation appears to exist, it would seem that it may not be domestic solar production that is being protected. The fact that numerous good paying jobs are now at risk, and solar production is already being threatened with related subsidy reductions or eliminations, one has to ask if the interests of the American people are chief in our tariff policy? If not, who is benefiting from these tariffs?