There’s also little evidence that the [1980s automobile] VERs [voluntary export restraints] put the U.S. auto industry onto a path of global competitiveness and financial sustainability. We now know that the Big 3 spent their protectionist windfall profits like protected industries so often do—unwisely. “Rather than investing more of their short run profits to quickly catch up with the Japanese,” Joshua Yount wrote in a 1993 paper, “auto executives purchased financial, aircraft, and computer companies, wrote books, headed monument restoration commissions, and gave themselves hefty bonuses for earning profits from a restrictive trade agreement.” The Washington Post provided a specific example in 1985: “General Motors Corp.’s well‐advertised Saturn project (a mere 200,000-car potential) will cost only $450 million, whereas GM spent five times that sum—$2.5 billion—to acquire Electronic Data Systems Corp., among other nonauto investments.” (Saturn is, of course, out of business today.)
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There’s a reasonable argument to be made that the VERs did encourage Japanese automakers to invest more in the United States (though economists debate how much of that investment was really owed to the quotas). However, most of the new Japanese auto plants in the United States were non-union facilities located in “right to work” states—and thus came at the direct expense of the UAW workers and Rust Belt communities that the VERs were intended to bolster.
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“But Scott,” I can already hear you saying, “that was decades ago and not even tariffs. This is about China and national security and climate change!!” Well, fortunately for you, a modern example can answer your (very sincere and informed) concerns: the United States’ decade-plus attempt to subsidize and protect its way to a healthy domestic solar panel industry. Alas, it’s another cautionary tale.
As part of America’s last grand industrial policy experiment, the 2009 American Recovery and Investment Act, the U.S. government doled out billions in subsidies to domestic solar manufacturers. Almost immediately after the funds started flowing, problems started emerging, with China once again being blamed for U.S. companies’ financial difficulties. So, shortly after the highly publicized failure of industrial policy poster child Solyndra, the United States in 2011 launched antidumping and countervailing duty (AD/CVD) investigations of solar panels and cells from China. That case ultimately resulted in import taxes of more than 30 percent in 2012, subsequently reducing targeted products but increasing imports of other types of solar products from China and Taiwan. So, the still-struggling U.S. industry filed another, broader AD/CVD case in 2013 and again won final duties (ranging from about 10 percent to more than 200 percent) against those imports in early 2015.
Alas, these tariffs also didn’t result in a substantial, long-term increase in U.S. solar manufacturing and employment, despite higher solar panel prices here and billions in state and federal subsidies. As one recent Bloomberg report recalls, “most of the factories built as part of that [Obama-era] manufacturing push have long since shuttered.”
Instead, global solar manufacturing investment again shifted in the wake of the U.S. import restrictions, but this time to Southeast Asia, not the United States.
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As Capitolism readers surely know by now, the Japanese automotive quotas and solar panel tariffs are not isolated examples of the problems that arise when Washington turns to import restrictions to achieve industrial policy dreams. The history of U.S. trade policy is littered with examples of “targeted and temporary” protectionism blossoming into broader and longer-term government support for companies that actually become less globally competitive and thus turn back to Washington when the tariffs, subsidies, and mandates are about to run out.
Kimberly Clausing and Mary Lovely detail some of the likely costs of Trump’s proposed higher tariffs taxes on Americans’ purchases of imports. (HT Eric Boehm) Two slices:
The scale of trade barriers proposed by candidate Trump is unprecedented, but their costs to the US economy is informed by the empirical evidence from studies of the 2017 tariffs on solar panels, washing machines, aluminum, steel and iron, and Chinese imports. Importantly, these studies convincingly find no evidence of terms-of-trade benefits for the United States from these tariffs. Rather, the data show that higher tariffs are fully reflected in higher prices for US buyers.
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[W]e estimate that the combination of new Trump tariff proposals will generate consumer costs of at least 1.8 percent of GDP, not considering further damage from foreign retaliation and lost competitiveness. This calculation implies that the costs from Trump’s proposed new tariffs will be nearly five times those caused by the Trump tariff shocks through late 2019, generating additional costs to consumers from this channel alone of about $500 billion per year.
U.S. tariffs — taxes on Americans’ purchases of imports — are touted as a means of “leveling the playing field” by protecting domestic manufacturers from foreign competition. But this view overlooks the fact that tariffs raise costs not only for consumers but also for American businesses that use imports as inputs. Further, tariffs disrupt supply chains and cause trading partners to impose retaliatory tariffs on our exports.
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In addition, making the tax code simpler and more transparent would provide a significant boost to manufacturing. In her chapter of the handbook, the Tax Foundation’s Erica York explains that our tax code is punishing capital-intensive sectors like manufacturing. Capital investments, such as machinery and equipment, are subject to overly long depreciation schedules for tax purposes. These schedules often require businesses to deduct the cost of these investments over an extended period, which can be much longer than the useful life of the assets. The result is that manufacturers might not be able to fully recover the cost of their investments in a timely manner, tying up capital that could otherwise be used for growth or innovation.
Americans may have heard that democracy is under threat from MAGA Republicans, but what about from one-party progressive states? Witness how Illinois and other Democratic-controlled states are trying to muzzle their political opponents.
Democrats in Springfield are racing to pass legislation before their legislative session concludes this week to prohibit employers from discussing “religious or political matters” at mandatory meetings. While Democrats claim to be protecting workers from intimidation, their real goal is to silence employers.
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Businesses are challenging such laws in several states. Minnesota Attorney General Keith Ellison says employers can’t sue because state officials don’t plan to enforce the law. Look ma, no handcuffs. Did he miss Gov. Tim Walz’s threat during a speech at the North America’s Building Trades Unions legislative conference last month to put violating employers in jail?
It’s hard to take seriously warnings about a Donald Trump dictatorship when Democrats threaten to persecute opponents to entrench their own power.
Gary Galles writes wisely about government spending and jobs. A slice:
The reason this issue is so important is that government spending doesn’t really create jobs, but instead moves them from where people themselves would have chosen to where the government dictates by way of its tax, spending, and regulatory policies. And the distinction between creating jobs and moving jobs makes a substantial difference, given that there are almost 3 million federal employees and roughly 20 million state and local government employees in America (13 percent of total jobs). That substitution means that many of the jobs created directly or indirectly by government policies impose net costs on society rather than producing benefits, which worsens rather than improves Americans’ wellbeing.
GMU alums Paul Mueller and Tom Savidge wonder if Texas’s resistance to ESG will be enough.
