Saturday, September 12, 2009

Simple Economic Analysis of the Tire Tariff: Americans Will Be Punished By the Punitive Tariffs

Economic analysis of the tire tariff:

1. Pw is the tire price in the U.S. before the tariff and Pw+t is the higher tire price after the tariff.

2. As a direct result of the tariff protection for inefficient domestic producers, their output expands from Q1 to Q3, and imported tires decrease from Q2 to Q4.

3. As a result of higher tire prices and fewer tires purchased, American consumers as a group will be worse off by the area (-a, -b, -c, and -d), which represents the loss of "consumer surplus" from the tire tariff.

4. American tire manufacturers will be better off by an amount represented by the area +a, because they have both increased sales (to Q3) and raised prices (to Pw+t) as a result of their protection from more efficient Chinese tire producers.

5. The U.S. government will collect tariff (tax) revenue on imported Chinese tires by an amount represented by the area c, which is the product of tire imports (Q4-Q3) times the tariff (t). If we can assume that the tariff revenue in area c will be redistributed efficiently to the economy, we can treat that as a net gain to the economy (this could obviously be argued).

So when you add it all up:

Costs of Tire Tariffs: American consumers are made worse by the area (-a + -b + -c + -d). (Note: This area could be quantified as a specific dollar amount if we had information about the supply and demand for tires.)

Benefits of Tire Tariffs: U.S. producers are better off by area +a, and the government is better off by area +c.

Net Loss: The costs of the tire tariff (-a + -b + -c + -d) are greater than the benefits of the tire tariff (+a + +c), for a net welfare loss of (-b + -d), which will be the "deadweight loss" of the tire tariff (costs to the economy that are NOT offset by benefits).

Bottom Line: America will be worse off with the tire tariff, not better, and we will suffer from higher tire prices, a net loss of jobs, lower economic growth, and a reduction in our country's standard of living. That is why economists almost universally support free trade and oppose tariffs and trade protection - economic analysis and empirical evidence clearly show that there are always net welfare losses from tariffs. Therefore, it will be Americans in the end who will be punished with the punitive tire tariffs.


At 9/12/2009 9:42 AM, Anonymous gettingrational said...

Will there be a graph that shows the economic destruction from China's Non-Tariff Barriers to americans? "The trade deficit is the single most important reason why the private sector has failed to add a single job since 1999."

China and Oil imports account for almost all of the trade deficit for the U.S.

At 9/12/2009 10:10 AM, Anonymous Anonymous said...

Special interests win again...It's the Chicago way..

And by the way, drill, drill, drill...

At 9/12/2009 1:04 PM, Anonymous CompEng said...

True. Unless of course the price on Chinese tires is the result of a (temporary) Chinese subsidy with intent to drive the American company out of business. If that occurs, the net loss to the American economy is Pw * Q1 plus any monopoly profts achieved until equilibrium occurs.
This might be a greater loss depending on the figures involved, unless you assume the money the consumers saved would fund new and more efficient new enterprise. Unfortunately, creating good new jobs is one of the trickiest propositions in economics.

At 9/12/2009 5:53 PM, Anonymous Anonymous said...

Consumers will delay purchasing new tires due to the higher prices, and will use existing tires past the point where they remain safe. As a result, I would expect higher rates of accidents, resulting in loss of life and the costs associated with medical bills, automobile repairs, lost time at work, etc.

At 9/12/2009 7:51 PM, Blogger save_the_rustbelt said...

I'm in rural area, and within 20 miles I found six tire sales with a few minutes work (newspaper and phone). I even called a Wal-Mart and a Sams, deep discounts and plenty of variety. With a little more work I could find more I am certain.

Checked a few urban newspapers in the midwest and appears to be the same deal.

It would appear supply is considerably higher than demand at this moment, and is likely to remain so for the time being.

No charts or graphs, just reality.

At 9/12/2009 9:54 PM, Anonymous Anonymous said...

Nowhere in the graph does it account for the increase of american production that will offset less imports. . . .that extra increase in production will not be as cheap as china imports but will still add supply to that side of the equation.

Besides. . my dunlop tires are made in japan. . if tires go up 5 bucks each. Thats just the way it is.

At 9/12/2009 9:57 PM, Blogger Mark J. Perry said...

Anonymous: Not true. Q1 to Q3 represents the increase in domestic production.

At 9/12/2009 11:08 PM, Blogger progutopian said...

It's about time we reinstated tariffs. This economy needs demand and wages are the primary factor creating demand (no Mr. Greenspan, demand is NOT created by continually giving out more credit). The first US tariffs were enacted in the 1790's and we grew into a great nation with tariffs in place. Reagan, Bush Sr & Shrub, Clinton and to some degree Carter embraced radical ideas from Ayn Rand, Milton Friedman & the Chicago School of Economics as well as the theory of Complex Interdependence. Before Reagan, we were the world's largest creditor nation. By the time Reagan was done hollowing out our industrial base, we were the world's greatest debtor nation. Reagan also got rid of our energy independence programs begun by Nixon and Carter so he could enrich Bush's oil buddies and Saudi partners, weakening us as an independent nation while he pretended to be Mr Patriotism. Every great economy in the world was built on protectionism. The nations who recently have practiced protectionism - China, Japan, Korea, Germany have all seen their economies rise as we Americans get duped into giving our industry away. Free trade has never worked. It is a lie, a scheme to enrich the corporations and the investment class while making the middle and lower classes demoralized, scared and passive (Ayn Rand follower Alan Greenspan has even admitted that creating worker insecurity was part of his plan).

At 9/12/2009 11:19 PM, Anonymous Six Ounces said...

Great chart. Great explanation.

Information on market share is hard to find. This article sheds some light. Apparently the top ten tire manufacturers control more than 70% of the global market. This market power means that the market in monopolistically competitive and, if anything, the tariff will increase market share for these giants and raise prices higher than your perfect competition model would predict.

China has hundreds of independent tire manufacturers, but the market share data suggests much of that is consumed domestically, in Asia, or outsourced to other brands. If outsourced, the larger manufacturer presumably monitors quality since it bears the risk of torts.

At 9/13/2009 4:17 AM, Blogger misterjosh said...

What nobody has seemed to mention is this is another case of redistribution of wealth. From consumers to union employees in the form of higher tire prices.

At 9/14/2009 11:39 AM, Anonymous a said...

This kind of analysis suffers from missing-variable fallacy. For instance, there's less transportation with tarrifs (less shipping from China to the US), so the environment benefits - nothing about that in the analysis. One could go on and on. But economists continue to think they're the smartest guys in the room, so what's the point?


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