Tuesday, December 18, 2018

How are those steel tariffs working out?

Now that 25% steel tariffs have been in place for nine months, what have been the consequences?  WSJ reports that so far the only major change has been that domestic steel companies are making higher profits.  There has been hardly any decrease in steel imports.

This has happened for two reasons.  First, it takes a lot of time to ramp up U.S. steel production; you cannot open new plants or reactivate closed plants overnight.  Second, no one knows how long the tariffs will last.  Without being political, any neutral observer would see that U.S. economic policy can change quickly and unpredictably.  If you were CEO of a company such as Nucor, would you bet your company's future on expanding domestic production behind a tariff wall that could vanish before or right after the next election?

The tariff raised prices of imported steel by 25%.  Domestic steel producers have raised their prices the same amount and, voila, higher prices generate larger profits.  If the tariffs are perceived to be long lasting, companies will invest and create more jobs.  But the tariffs could vanish as part of some bigger deal with China or Mexico.  Imports have not increased because domestic production has not changed.

Bottom line: the tariffs have resulted in higher prices for US steel consumers, higher profits for US steel producers and no change in wages and employment for steel workers.

Monday, December 10, 2018

Cartels in the news

Two recent cases:
1) Canned tuna: Starkist pleaded guilty in October to price fixing and paid a $100m fine.  Bumblebee pleaded guilty in 2017 and paid a $25m fine.  Presumably the third major producer Chicken-of-the-Sea will meet the same fate soon.  The price fixing took place between 2011 and 2013.
2) Generic drugs: today's WP reports that the Justice Department is investigating 16 generic-drug companies for price-fixing 300 different drugs.  One of the investigators says this is "most likely the largest cartel in the history of the United States."

Many economists complain about antitrust laws and their enforcement, but none of us have any kind words to say about cartels.  Perhaps the fines and the shame will deter future violators of section one of the Sherman Act.