President George W. Bush this week announced an effective reversal of his desire to create a "free-trade hemisphere," and to raise taxes only "over [his] dead body" by hiking tariffs from between 8 and 30 percent on the majority of steel products imported into America. This move not only constitutes a flip-flop on the president's original position, it also will result in lost jobs and higher costs to consumers. How is this so?
First, by definition "free" trade implies trade that is unencumbered by demands of third parties. When government imposes tariffs on products, it reduces the ease with which they cross borders. Second, tariffs are just taxes by another name. Steel tariffs raise the cost of buying products that contain steel—cars, and refrigerators, for instance—just as raising the sales tax on these products would.
The new Bush tariff is expected to hike the cost of steel products by 6 to 8 percent in the next 12 months—and Michigan citizens will be hit hardest. Here's why: There is an inverse relationship between the price of anything and the quantity demanded of it. When the price of some good—steel, in this case—rises, less of it will be demanded. The result? Fewer sales of products containing steel and fewer jobs for people who make finished goods with steel.
Economists Joseph Francois and Laura Baughman, working on behalf of the Consuming Industries Trade Action Coalition, have estimated the impact of the Bush tariffs on the American economy in terms of their economic benefits and costs. For instance, they found:
- Every state in the union will suffer net job losses as a result of the tariffs;
- Ironically, the biggest job losses will occur in "steel belt" states such as Pennsylvania and Michigan.
- For every steel job "saved" as a result of the tariff, eight jobs will be lost in all sectors of the economy;
- The steel producing industry would save between 4,400 and 8,900 jobs at a cost of between $439,485 to $451,509 per steel job saved;
- Higher prices for steel products and related inefficiencies would decrease U.S. national income from between $500 million and $1.4 billion at a time when policy-makers are talking about ways to improve the U.S. economy.
Michigan, in particular, will suffer from the negative consequences of tariffs. Francois and Baughman also found that
- Michigan will lose more jobs in steel-related industries than every state in the union, save California.
- Under the most conservative scenario, Michigan will lose almost five jobs in steel consuming industries for every job that is saved in Michigan's steel producing industry.
Why would President Bush risk his reputation as a free trader when the net effect of his policy will hurt more people than it helps? The answer is simple: self-interest. Unfortunately, the marriage of highly concentrated political benefits and diffused (often hidden) economic costs can produce every sort of mischief. Bush has weighed the benefits of pleasing a politically active, powerful special interest group—the domestic steel lobby—against the cost to his reputation and to consumers and decided the benefits more than make up for the costs.
Consider this scenario. Bush is eager to please influential groups in states like Michigan and Pennsylvania because he lost them, and a passel of electoral votes, in the presidential election. He also knows that Florida, a state he barely won, is home to 300,000 retired steel workers. In addition, he also knows that tariffs raise the cost of products but are not as obvious as, say, increasing the sales tax on those products. Furthermore, voters have terribly short memories. The likelihood is remote that voters in 2004 will link their paying $5.00 more for a refrigerator in 2002 with George Bush's steel tariffs and punish him for it at the polls.
Harmful policies are often foisted on the public as a matter of political self-interest. Public servants often consider self-service first and the needs of their constituents second. Why? Because even the best officials delude themselves into believing that their retaining office is more important than their doing right.
These steel tariffs are contrary to every principle of sound economics. In enacting them, President Bush may be doing the right thing for political expediency, but he is doing a wrong and harmful thing for American workers and consumers.