Friday, April 26, 2019

Washing Machine Tariffs: Who Paid? Who Benefits?

When import tariffs are proposed, there's a lot of talk about unfairness and helping workers. But when the tariffs are enacted, the standard pattern is that consumers pay more, profits for the protected firm go up, and jobs are reshuffled from unprotected to protected industries. Back in 1911, satirist Ambrose Bierce defined "tariff" this way in The Devil's Dictionary: "TARIFF, n.A scale of taxes on imports, designed to protect the domestic producer against the greed of his consumer."

Back in fall 2017, the Trump administration announced worldwide tariffs on imported washing machines. Aaron Flaaen, Ali Horta├žsu, and Felix Tintelnot,  look at the results in “The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines.” A readable overview of their work is here; the underlying research paper is here

One semi-comic aspect of the washing machine tariffs was that "unfairness" of lower-priced washing machines from abroad has been hopscotching across countries for a few years now. Back in 2011, South Korea and Mexico were the two leading exporters of washing machines to the US. They were accused of selling at unfairly low prices. But even as the anti-dumping investigation was announced, washing machine imports from those countries dropped sharply. China became the new leading exporter of washing machines to the US--essentially taking South Korea's market share. 

China was then being accused of selling washing machines to US consumers at unfairly low prices. But by the time the anti-dumping investigation against China started and was concluded in mid-2016, China's exports of washing machines to the US had dropped off. Thailand and Vietnam had become the main exporters of washing machines to the US. Tired of chasing the imports of low-priced washing machined from country to country, the Trump administration announced worldwide tariffs on washing machines late in 2017, and they took effect early in 2018. 

If one country is selling imports at an unfairly low price, one can at least argue that this practice is unfair. But when a series of countries are all willing to sell at a lower price, it strongly suggests that the issue a country-hopping kind of unfairness, leaping from one country to another, but instead reflects a reality that there are a lot of places around the world where washing machines that Americans want to buy can be produced cheaply. 

The results of the washing machine tariffs were as expected. Prices to consumers rose. As the authors write: 
Following the late-2017 announcement of tariffs on all washers imported to the United States, prices increased by about 12 percent in the first half of 2018 compared to a control group of other appliances. In addition, prices for dryers—often purchased in tandem with washing machines—also rose by about 12 percent, even though dryers were not subject to a tariff. ... [T]hese price increases were unsurprising given the tariff announcement. ... One revealing finding in this work is the tight price relationship between washers and dryers, even when washers, for example, are the product that is subject to tariffs. Among the five leading manufacturers of washers, roughly three- quarters of models have matching dryers. When the authors compare only electric washers and dryers, they show that in about 85 percent of the matching sets, the washers and dryers have the same price.
Yes, the domestic makers of washing machines with factories in the US like Whirlpool, Samsung and LG announced plans to hire a few thousand more workers in response to the tariffs. But a substantial share of the higher prices paid by consumers just went into higher corporate profits for these companies. For example, the most recent reports from Whirlpool suggest that the overall pattern is selling fewer machines, with higher profits margins per machine. 

When Flaaen, Horta├žsu, and Tintelnot estimate the total in higher prices paid by consumers, and divide by an estimate of the number of jobs saved or created in the washing machine industry, they write: "The increases in consumer prices described above translate into a total consumer cost of $1.5 billion per year, or about $820,000 per new job."  

You can tell all kinds of stories about tariffs, full of words like "unfairness" and "toughness" and "saving jobs." But the economic effects of the tariffs aren't determined by a desired story line. As Nikita Khrushchev is reputed to have said: "[E]conomics is a subject that does not greatly respect one's wishes." The reality of the washing machine tariffs is that consumers pay more for a basic consumer appliance and company profits go up. Some workers at the protected companies do benefit, but at a high price per job. The higher prices for washing machines means less spending on other goods, which together with tit-for-tat retaliation by other countries for the tariffs, leads to a loss of jobs elsewhere in the US economy. This story plays out over and over: for example, here's a story from the steel tariffs earlier in the Trump administration or the tire tariffs in the Obama administration. It is not a strategy for US economic prosperity.