The economics of tariff

The economics of tariff

From mainstream economics, tariffs hurt all parties, including the ones imposing tariffs. If so, tariffs will disappear over time, through competition and adaptation. But the new rounds of tariffs from US show that tariffs are alive and well. We need a more realistic analysis of tariff.

In 2001, more than twenty years ago, US imposed tariff on Canadian softwood lumber. We will look at the relevant data in 2000 and 2002 to understand the impacts of tariff. First, the change of output of softwood lumber from Canada. Standard economic theory predicted a decline of output. But the actual output increased. Second, softwood lumber price in US. Standard economic theory predicted a price increase, thereby harming US consumers. But the actual price dropped sharply.

From our theory, the results are easy to understand. A tariff greatly reduces the marginal profit of a product. To stay afloat, one has to increase output to breakeven. Therefore, output increases. The increase of output makes a product more abundant, and less valuable. Therefore, prices decrease for US consumers. Tariffs do harm Canadians but benefit Americans. That is why Americans impose tariffs. Americans could be hurt only because they could face retaliative counter tariffs.

The solution for predatory trade policy is simple, diversifying your customer base. For years, Alberta attempted to build Northern Gateway Pipeline, so they can sell oil in the international market at market price. But this effort was aggressively blocked by many parties, including Canadian federal government and many Canadians, on a supposed moral high ground.  

A more detailed analysis on trade policies is presented in Chapter four of our book.

https://www.amazon.com/Entropy-Economics-Living-Basis-Production/dp/0226827194