Page 125 - Economics

CONFIRMING PAGES

PART ONE
96
Introduction to Economics and the Economy
Indeed, the public may be won over by the apparent Multilateral Trade Agreements
plausibility (“Cut imports and prevent domestic unem-
ployment”) and the patriotic ring (“Buy American!”) of and Free-Trade Zones
the protectionist arguments. The alleged benefits of tariffs When one nation enacts barriers against imports, the na-
are immediate and clear-cut to the public, but the adverse tions whose exports suffer may retaliate with trade barriers
effects cited by economists are obscure and dispersed over of their own. In such a trade war, escalating tariffs choke
the entire economy. When political deal making is added world trade and reduce everyone’s economic well-being.
in—“You back tariffs for the apparel industry in my state, The Smoot-Hawley Tariff Act of 1930 is a classic exam-
and I’ll back tariffs on the auto industry in your state”— ple. Although that act was meant to reduce imports and
the outcome can be a network of protective tariffs, import stimulate U.S. production, the high tariffs it authorized
quotas, and export subsidies. prompted adversely affected nations to retaliate with tar-
iffs equally high. International trade fell, lowering the out-
Costs to Society put and income of all nations. Economic historians
Tariffs and quotas benefit domestic producers of the pro- generally agree that the Smoot-Hawley Tariff Act was a
tected products, but they harm domestic consumers, who contributing cause of the Great Depression. Aware of that
must pay higher than world prices for the protected goods. fact, nations have worked to lower tariffs worldwide. Their
They also hurt domestic firms that use the protected goods pursuit of free trade has been aided by powerful domestic
as inputs in their production processes. For example, a tariff interest groups: Exporters of goods and services, import-
on imported steel would boost the price of steel girders, thus ers of foreign components used in “domestic” products,
hurting firms that construct large buildings. Also, tariffs and and domestic sellers of imported products all strongly sup-
quotas reduce competition in the protected industries. With port lower tariffs.
less competition from foreign producers, domestic firms Figure 5.5 makes clear that while the United States
may be slow to design and implement cost-saving produc- has been a high-tariff nation over much of its history, U.S.
tion methods and introduce new or improved products. tariffs have generally declined during the past half-century.

FIGURE 5.5 U.S. tariff rates, 1860–2005. Historically, U.S. tariff rates have fluctuated. But beginning with the Reciprocal Trade Agreements Act of 1934,
the trend has been downward.

70 Wilson-Gorman Tariff (1894) Underwood Tariff (1913)
Duties collected as a percentage of dutiable imports 50 McKinley Tariff (1890) Payne–Aldrich Tariff (1909) Fordney-McCumber Tariff (1922) Kennedy Round of GATT (1967) Tokyo Round of GATT (1979) Uruguay Round of GATT (1993) Doha Round of WTO begins (2001)

60

40

30

20

10 Morrill and War Tariffs (1861–1864) Dingley Tariff (1897) Smoot-Hawley Tariff (1930) Reciprocal Trade Agreements Act (1934) GATT (1947)

1860 1880 1900 1920 1940 1960 1980 2000
Year
Source: U.S. Department of Commerce data.

8/21/06 4:25:54 PM
mcc26632_ch05_084_103.indd 96 8/21/06 4:25:54 PM
mcc26632_ch05_084_103.indd 96