I know the answer (i think). I was listening to the Planet Money podcast and they were talking about the Chinese Tire Tariff and then dove into the economic intricacies about tariffs and their externalities. I want to hear some real world words about why tariffs are inefficient.
If you believe that pure supply and demand intersection create a perfect market, than intuitively, you must believe that government-imposed price distortions make the market less efficient. Consider a simplified scenario in which there are only foreign and domestic tires, domestic tires are 34.5% more expensive than foreign tires, and 10% of the domestic population is comprised of tire manufacturers. Let’s say that the government then imposes a 35% tariff that causes all domestic consumers to buy domestic tires. The implications are simple. 90% of the domestic population loses, since they must now buy expensive domestic tires. Only the domestic tire makers gain in this scenario. Also, the domestic consumers just spent a higher proportion of their income on tires, as opposed to clothing, computers, food, etc. So all domestic industries other than tires get less business. Furthermore, the foreign people who relied on the domestic tire market are suddenly bankrupt and can no longer import good produced by the domestic company. This hurts the domestic industries that rely on exports.
because they reduce supply to below equilibrium level, driving prices up and lowering output quantity, thus creating a deadweight loss
cfagoal2 Wrote: ------------------------------------------------------- > because they reduce supply to below equilibrium > level, driving prices up and lowering output > quantity, thus creating a deadweight loss Are they reducing supply, or increasing demand for a certain product in a broader category. For the record I only use Michelins.
+1 with Hello Mister Walrus and cfagoal1. For example, assume Silicon Valley is a country and they are importing tires from Detroit. Now, govt of Silicon Valley bars imports of tires from outside by imposing high tariffs on them. In that case, Silicon Valley will have to produce their own tires. This takes their resources / man power away from technology, which they are more productive at. This diversion of resources to less productive work increases inefficiency in the economy as a whole. Assumption: productivity of Silicon Valley workers is higher in technology than in tire making.
Is the US govt trying to encourage local US tire manufactures by imposing import duty on Chineese tires…beacuse as soon as the import duty is levied…the supply is reduced and prices go up…and the local tire manufacturers will now ask for a price greater than if the import dutty is levied…is this correct?
From an economist’s point, you are correct. Yes, domestic manufacturers will enjoy a higher price in light of reduced imported supply at the cost of domestic consumers. From a politician’s point, they are repaying election donations to domestic tires lobby and tires labor union.
Protectionism too.
by Protectionism u mean…the US govt is protecting the local tire manufacturers?
varundarji Wrote: ------------------------------------------------------- > by Protectionism u mean…the US govt is > protecting the local tire manufacturers? Yes. This is an umbrella term, though. Protectionism can be driven by campaign contributions from industry lobbies.
you guys are correct that tariffs create a " subsidy" for domestic producers- giving them an advantage but i would hesitate to answer the question ’ why do they create inefficiencies’ with the response " because domestic prices will go up " which seems to be the common conclusion in this thread. but - for exam purposes - i think ’ inefficiency’ in this context ( an economic concept) refers to the idea that tariffs - due to the ’ protection’ they afford domestic producers - cause a certain hidden disincentive for them to use resources in the most efficient way possible. In other words, tariffs naturally reduce competition - competition forces firms to keep costs down, invest in " better and easier ways of doing things’ etc etc. So - tariffs foster inefficiency in domestic firms because it ’ protects ’ them from it. price increases are a result to be sure - but not necessarily the answer they’d be looking for just my thots
rus1bus Wrote: ------------------------------------------------------- > +1 with Hello Mister Walrus and cfagoal1. > > For example, assume Silicon Valley is a country > and they are importing tires from Detroit. Now, > govt of Silicon Valley bars imports of tires from > outside by imposing high tariffs on them. > > In that case, Silicon Valley will have to produce > their own tires. This takes their resources / man > power away from technology, which they are more > productive at. This diversion of resources to less > productive work increases inefficiency in the > economy as a whole. > > Assumption: productivity of Silicon Valley workers > is higher in technology than in tire making. i think you’re thinking more of the concept of " comparative advantage’ no ? The idea that countries produce what they’re good at producing - not sure that tariffs come into that equation. No country slaps a tariff on a required product that can’t be produced domestically. it’s like choking your own baby.
At the country level, tariffs do NOT cause inefficiency in the society. Inefficiency occurs, when Price in the market is away from the equilibrium price determined by Demand and Supply for that product. In this case, by imposing tariffs on tyres, govt is restricting supply to domestic supply only. So, country’s supply curve for tyres shifts left and new equilibrium price is obtained which is higher. But this is still the equlibrium price and at equlibrium price there is never a Dead Weight Loss. Domestic firms will still compete with each other and would produce tyres as efficiently as they can limited to geographical boundaries. But inefficiency occurs at GLOBAL LEVEL. Some of the resources in China, which were efficiently producing tyres will need to be re-allocated to do something else at less than their previous efficiency levels (this is assuming they were most efficiently allocated in producing tyres). And resources in the US which could be freed up to do something else, dont get freed up. Combined, this becomes inefficiency at GLOBAL ECONOMY Level.
^^^^ +1