Tuesday, May 1, 2012

Tire Tariffs: Saving Jobs at $900,000 Apiece

In September 2009, President Obama approved a special tariff on imports of tires from China. In his 2012 State of the Union address, he stated that the policy had saved "over a thousand" jobs. Gary Clyde Hufbauer and Sean Lowry look at what happened in "US Tire Tariffs: Saving Few Jobs at High Cost," written as an April 2012 "Policy Brief" for the Peterson Institute for International Economics.

The basic economic lessons here are the same as ever. There's never been any question that imposing tariffs on foreign competition could dissuade imports, and thus allow U.S. manufacturers to keep production and prices higher than they would otherwise be. As a result, U.S. consumers pay more, the firms make higher profits--and workers for those firms get some crumbs from the table. In this case, Hufbauer and Lowry estimate that consumers paid $1.1 billion in higher prices for tires in 2011. This saved a maximum of 1,200 jobs, so the average cost of the tariff was $900,000 per job saved. But of course, the worker didn't receive that $900,000; instead, most of it went to the tire companies. And in an especially odd twist, most of it contributed to profits earned by non-U.S. producers.

The story starts before in September 2009, when U.S. tariffs on tire imports were in the range of 3.4-4.0%. "Starting on September 26, 2009, Chinese tires were subjected to an additional 35 percent ad valorem tariff duty in the first year, 30 percent ad valorem in the second year, and 25 percent ad valorem in the third year." The higher tariffs did reduce tire imports from China.  For example, "radial car tires imported from China fell from a high of approximately 13.0 million tires in 2009Q3 to 5.6 million tires during 2009Q4—a 67 percent decrease."

Employment in the U.S. tire industry rose from 50,800 in September 2009 to 52,000 by September 2011, which is the basis for a rough estimate that 1,200 jobs were saved by the tariffs. (Of course, one could argue that jobs would have declined without the tariffs, so more than 1,200 jobs were saved, or one could argue that some of the job increase came from other forces, so less than 1,200 jobs were saved by the tariffs.)The average salary of a tire builder was $40,070 in 2011. So multiplying this income by 1,200 jobs, the total additional income received by tire workers would be $48 million.

Data from the Consumer Price Index shows that prices of tires from U.S. companies jumped after the tariff was imposed. This is totally expected, of course: the reason that import tariffs benefit U.S. firms is that it allows them to charge higher prices than they would otherwise be able to do. Hufbauer and Pauly calculate that the import restraints on Chinese tires led to additional higher prices for tires cost U.S. consumers about $295 million per year.

As U.S tire imports from China declined, tire imports increased from other countries. Indeed, the U.S. was importing about 27 million tires in the third quarter of 2009, when the tariff took effect, but was importing about 30 million tires by the third quarter of 2009. The tariff on Chinese-produced tires cut imports from China, but tire imports from places like Mexico, Indonesia and Thailand rose. The tariffs on China allowed these producers to raise prices for tires paid by U.S. consumers to the tune of about $800 million.

When tariff policy is laid out in this way, it looks literally insane. No one would ever advocate a policy of imposing a tax worth $1.1 billion on all U.S. purchasers of tires, with $48 million to go to actual workers who produce tires, $250 million to go to U.S tire companies, and $800 million of the revenue from that tax to go to foreign tire producers.

Moreover, any jobs saved in the tire industry were almost certainly more than offset by losses of jobs elsewhere in the economy. Hufbauer and Lowry do a back-of-the-envelope illustrative calculation that if the additional money spent on tires was diverted from other retail spending, it would cost something like 3,770 jobs in the retail sector. Also, China retaliated against the U.S. decision by imposing tariffs on U.S. exports of chicken parts. Hufbauer and Lowry report: "The Chinese tariffs reduced exports by $1 billion as US poultry firms experienced a 90 percent collapse in their exports of chicken parts to China. Given the timing of the Chinese government’s actions, many trade policy experts view the trade dispute over China’s imports of “chicken feet” from the United States as a tit-for-tat response to the US safeguards on Chinese tire exports." Even as an attempt to save U.S. jobs at exorbitant cost,  President Obama's tariffs on Chinese tires were a failure.