Monday, September 14, 2009

Beyond the classroom basics on tariffs

Today my students in MBA 505 will be handing in an assignment where one of the problems asks them to explain the effects of a hypothetical tariff on textiles. Now they are getting the opportunity to witness the economic and political impact of a real tariff -- the one imposed by the Obama administration over the weekend on Chinese tire imports. In my previous post I emphasized the impact on consumers, which reflects our in-class discussion. That analysis assumes the US passes a tariff and nothing else happens.

Today's NYT reports that China has responded with its own tariffs on American tires and chicken. This creates an additional cost with the impact being felt primarily by American producers. With world trade talks coming up plus the usual tensions over Iran and North Korea plus the fact that China buys a lot of Treasury debt, one has to wonder about more than the simple economics.

Economic research has shown that trade tensions were a major contributing factor to the duration and severity of the Great Depression. After a financial market meltdown (admittedly one much worse than the one we have been experiencing), the economy took a further hit as the US and its trading partners used tariffs to "protect" jobs. With the recent fall in the dollar, exports are poised to be a big contributor to economic recovery. Don't expect auto and chicken sales to China to lead the way.

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