Yesterday, there was a significant news story that may not have gotten the attention that it deserves. As you may remember from my previous posts, I was highly critical of the 2009 trade tariffs imposed by the Obama Administration on tires being imported from China. Well, it is now obvious that the chickens have finally come home to roost as I fully expected. China, the world's largest automobile market, has just slapped the U.S. with punitive tariffs on auto imports to the tune of 21% which will have an estimated $2.5 to $4.5 billion impact on ailing U.S. auto manufacturers.
Historically, tariffs have never resolved any trade disputes; they did not during the Great Depression as with the over studied case of Smoot Hawley Act (which arguably contributed greatly to turning a recession in to a painful and prolonged depression), or in any other time (remember the Tariff of 1828 and others?) in history. In fact, they have almost invariably always hurt trade and, as a natural extension, prosperity.
Tariffs are punitive, anti-free trade, actions (usually pushed by labor unions) that inevitably lead to retaliatory actions by those countries they are levied against. They destroy the mechanism of free trade that is supposed to keep in place efficiencies (translation: favorable cost structures) enjoyed by nations which hold comparative advantages in either labor, technology, or capital. At the end, although it may look like a victory for local manufacturers, the indisputable loser is the public in general because they lead to higher costs and even shortages of goods.
It took the world, led by the U.S., well over a century to abandon its relatively protectionist stance. Although GATT was established in 1947, it was finally in the post Reagan era that the U.S. fully embraced free trade with establishment of NAFTA and Canada-U.S. Free Trade Agreement. As a direct result, global wealth increased dramatically in those countries engaging in free-trade over the past thirty or so years. Now it seems, after a three decade trade renaissance, we are back to square one. What a shame!