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Chapter 9: Problem 14

(Related to the Apply the Concept on page 307) For several years, the United States imposed a tariff on tire imports. According to an analysis by economists Gary Clyde Hufbauer and Sean Lowry of the Peterson Institute, of the additional \(\$ 1.1\) billion consumers spent on tires as a result of the tariff on Chinese tires, the workers whose jobs were saved in the U.S. tire industry received only about \(\$ 48\) million in wages. Wouldn't it have been cheaper for the federal government to have raised taxes on U.S. consumers and given the money to tire workers rather than to have imposed a tariff? If so, why didn't the federal government adopt this alternative policy?

Short Answer

Expert verified
Yes, if considered purely from a money perspective, it would have been cheaper for the federal government to raise taxes on U.S. consumers and distribute the funds to the tire industry workers. This is because the given tariff led to higher overall costs for consumers. However, the government might have preferred tariffs over raised taxes due to reasons like protecting domestic industries from foreign competition, safeguarding jobs or maintaining economic stability.

Step by step solution

01

Understand the Situation

In the given scenario, the United States imposed a tariff on imported tires which eventually caused consumers to spend an additional \(\$1.1\) billion. However, of this amount, only \(\$48\) million was received as wages by the workers in the U.S. tire industry whose jobs were saved due to this tariff. The question at hand is whether it would have been cheaper for the federal government to raise taxes on U.S. consumers and give the money directly to the industry workers.
02

Compare Tariffs and Taxes

Firstly, let's break down the costs. If the tariff led to an additional spending of \(\$1.1\) billion by consumers and only \(\$48\) million of that went to the U.S tire industry workers, it means that the difference of \(\$1.052\) billion went to either other people in the tire industry or remained as indirect costs due to the tariff. On the other hand, if the federal government had just raised taxes and distributed the money to the tire industry workers, it would have cost the U.S. consumers exactly the amount of the wages - \(\$48\) million, which is significantly less than \(\$1.1\) billion.
03

Explain Why the Government Might Choose Tariffs

Although from a pure cost perspective taxes seem cheaper for consumers, governments may choose tariffs for a variety of reasons. Some of these reasons could include protecting domestic industries from foreign competition, shielding new industries, maintaining economic stability during times of uncertainty or protecting jobs in key industries. In this case, the tariff could have been used to protect the domestic tire industry and jobs within it, even if it was at a higher cost to consumers.

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Most popular questions from this chapter

Steven Landsburg, an economist at the University of Rochester, wrote the following in an article in the Wall Street Journal: Free trade is not only about the right of American consumers to buy at the cheapest possible price; it's also about the right of foreign producers to earn a living. Steelworkers in West Virginia struggle hard to make ends meet. So do steelworkers in South Korea. To protect one at the expense of the other, solely because of where they happened to be born, is a moral outrage. How does the U.S. government protect steelworkers in West Virginia at the expense of steelworkers in South Korea? Is Landsburg making a positive statement or a normative statement? A few days later, Tom Redburn published an article disagreeing with Landsburg. Redburn argued that caring about the welfare of people in the United States more than about the welfare of people in other countries isn't "some evil character flaw." According to Redburn, "A society that ignores the consequences of economic disruption on those among its citizens who come out at the short end of the stick is not only heartless, it also undermines its own cohesion and adaptability." Which of the two arguments do you find most convincing?

A student makes the following argument: Tariffs on imports of foreign goods into the United States will cause the foreign companies to add the amount of the tariff to the prices they charge in the United States for those goods. Instead of putting a tariff on imported goods, we should ban importing them. Banning imported goods is better than putting tariffs on them because U.S. producers benefit from the reduced competition, and U.S. consumers don't have to pay the higher prices caused by tariffs. Briefly explain whether you agree with the student's reasoning.

Briefly explain whether you agree with the following statement: "International trade is more important to the U.S. economy than it is to most other economies."

Briefly explain how international trade increases a country's consumption.

At one time, Eastman Kodak was the world's largest producer of photographic film, employing nearly 145,000 workers worldwide, including thousands at its headquarters in Rochester, New York. The firm eventually laid off most of those workers because its sales declined as it failed to adjust to digital photography as quickly as many of its foreign competitors. A member of Congress from Rochester described the many new firms that were now located in buildings that were formerly owned by Kodak. A New York Times columnist concluded, "which, of course, is precisely the way globalization is supposed to work." Briefly explain what the columnist meant. Do you agree with his conclusion?
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