Tariffs and the Poor

Introduction
Tariffs are taxes placed on imported goods, often intended to protect domestic industries by
making foreign products more expensive. However, tariffs can have unintended consequences,
especially for low-income households. Research shows that tariffs are regressive, meaning they
disproportionately impact poorer households. This part explores why tariffs are regressive, how
they affect low-income families, and the difference in tariffs on basic necessities versus luxury
items.
Why Are Tariffs Regressive?
Higher Spending on Imports
Poorer families spend more of their income on imported goods than richer families. When tariffs
are added, these families feel the impact more because a larger part of their budget goes to
paying these taxes.
Higher Tariffs on Necessities
Everyday items like clothes, shoes, and household goods often have higher tariffs. These are
essential for low-income families, who end up paying more in tariffs as a percentage of their
income. Wealthier families spend less of their income on these items, so they are less affected
by the tariffs.
Reduced Affordability
Tariffs make imported goods more expensive, which means low-income families struggle to
afford essential items. This reduces their purchasing power and lowers their standard of living
because they have to spend more of their limited income on necessities.
Examples of Regressive Tariffs
1. Young, single mothers: They often pay much higher tariffs on affordable clothes and
shoes from stores like Walmart than wealthier families do when shopping at high-end
stores.
2. Common items with high tariffs: Inexpensive clothing, luggage, shoes, watches, and
silverware can have tariffs ranging from 10 to 32 percent, while high-tech products and
luxury goods usually face tariffs of less than 5 percent.
Why Do Basic Necessities and Luxuries Have Different Tariffs?
Basic Necessities
Items like clothes, shoes, and household goods often have higher tariffs because they are
mass-produced and imported in large quantities. Governments may impose higher tariffs to
protect local manufacturers from foreign competition. Since these goods are essential, people
continue to buy them even if prices go up due to tariffs.
Luxuries
Luxury items and high-tech products usually have lower tariffs for several reasons:
 1. Less Competition: These products often have less direct competition with local goods,
so there is less need to protect local industries.
2. Smaller Market: Luxury goods cater to a smaller, wealthier market. The government
imposes lower tariffs to encourage importation and maintain good trade relations.
3. Innovation and Investment: High-tech products are crucial for technological
advancement and economic growth. Lower tariffs encourage their importation, fostering
innovation and investment in the economy.
Conclusion
While tariffs aim to protect local industries, they disproportionately burden low-income
households. This happens because poorer families spend a larger share of their income on
imported goods, which often have higher tariffs. Policymakers should consider these unequal
impacts when making trade decisions to avoid worsening economic inequality. Reducing tariffs
on basic necessities or providing financial help to low-income families could help lessen these
regressive effects.

Understanding Trade Restrictions

Arguments for Trade Restrictions
Trade restrictions, such as tariffs, are put in place for various economic, social, and political
reasons. Here are the main arguments for these measures:
Job Protection
Objective: Protect local jobs by limiting competition from foreign industries.
Explanation: Cheaper foreign goods can hurt local companies, leading to job losses. Tariffs
make imported goods more expensive, encouraging people to buy local products and
preserving local jobs.
Example: The U.S. has imposed tariffs on steel imports to protect American steelworkers and
keep the domestic steel industry strong.
Protection Against Cheap Foreign Labor
Objective: Shield local workers from competition with foreign workers who are paid much less.
Explanation: Companies in countries with lower labor costs can produce goods more cheaply.
Tariffs help balance the price differences, preventing local industries from being undercut by
cheaper foreign labor. This practice ensures that domestic workers are not disadvantaged by
the lower wages in other countries, helping to maintain local employment levels and wage
standards.
Example: The European Union imposes tariffs on certain textiles from developing countries to
protect its textile industry from being overwhelmed by cheaper imports.
Fairness in Trade - Level Playing Field
Objective: Ensure fair competition by addressing unfair trade practices.
Explanation: Some countries subsidize their industries or manipulate their currency to make
exports cheaper. Tariffs counteract these unfair advantages, leveling the playing field for local
producers.
Example: Anti-dumping duties are tariffs on imports sold below fair market value, like the U.S.
imposing such duties on Chinese solar panels.
Protect Domestic Standard of Living
Objective: Maintain the quality of life by supporting local industries and wages.
Explanation: Cheap imports can lower wages and living standards by forcing local companies
to cut costs. Tariffs help sustain higher wage levels and better working conditions.
Example: Japan's tariffs on agricultural products help ensure that local farmers can sustain
their livelihoods, supporting rural communities and maintaining higher standards of living.
Equalization of Production Costs
Objective: Adjust for differences in production costs between countries to ensure fair
competition.
Explanation: Differences in regulations, environmental laws, and labor protections can create
cost disparities. Tariffs equalize these costs, ensuring local producers are not disadvantaged by
higher production costs.
Example: The U.S. imposes tariffs on imported aluminum to account for higher environmental
and labor standards American producers must meet compared to some foreign producers.
Infant-Industry Protection
Objective: Support the growth of new or emerging industries until they can compete globally.
Explanation: New industries may struggle to compete against established foreign competitors.
Temporary tariffs provide these industries with the protection they need to develop and become
competitive.
Example: South Korea used tariffs to protect its nascent automobile industry, allowing
companies like Hyundai to grow and compete internationally.
Non-Economic Arguments
National Defense
Objective: Safeguard national security by reducing dependency on foreign goods or
technologies.
Explanation: Countries may restrict trade in critical industries to ensure they can produce
essential goods domestically, especially during times of conflict or geopolitical tension.
Example: The United States restricts the importation of certain advanced technologies from
potential adversaries to prevent dependence and protect sensitive information vital to national
defense.
Cultural Considerations
Objective: Preserve cultural identity and diversity by protecting local cultural industries.
Explanation: Nations may impose trade restrictions to support local arts, media, and heritage
industries, ensuring they can thrive amid global competition. Example: France imposes quotas
and subsidies to promote French-language films and music, aiming to preserve its cultural
heritage and diversity in media.

The Political Economy of Protectionism

Protection-Biased Sector
 Who they are: Companies, workers, and suppliers in industries competing directly with
imported goods.
 What they want: Tariffs to make foreign products more expensive than domestic ones.
 Why: Protection helps them keep their jobs and businesses safe from foreign
competition.
 Connection: These sectors push for tariffs through lobbying efforts because they fear
losing market share and jobs to cheaper foreign producers.
Free-Trade-Biased Sector
 Who they are: Industries that export goods and their workers and suppliers.
 What they want: Fewer trade barriers like tariffs to make it easier to sell their products
in global markets.
 Why: By reducing tariffs, they can expand their market reach and increase profits by
selling more abroad.
 Connection: These industries advocate for lower tariffs to enhance their global
competitiveness, which boosts economic growth at home by increasing exports.
U.S. Policy Influence
 Dominance of Producers: Special interest groups representing producers have a
strong impact on U.S. trade policies.
 Effect: These groups use their lobbying power to push for protectionist measures that
protect domestic industries.
 Connection: U.S. trade policies often favor protecting domestic markets from foreign
competition, benefiting producers but not always aligning with consumer interests who
might face higher prices due to limited competition.
Consumer Impact
 Who they are: Regular people who buy goods, along with wholesalers and retail
merchants who sell them.
 Challenge: Consumers lack the organized influence that producer groups have on trade
policy.
  Effect: Protectionist policies can lead to higher prices for consumers because they limit
cheaper imports from entering the market.
 Connection: Consumers often end up paying more because their interests are not as
organized or represented in policy-making compared to producers.
Tariff Escalation Effect
 What it is: Higher taxes on finished products compared to raw materials or intermediate
goods.
 Why it happens: Producer groups lobby for higher tariffs on finished goods to protect
domestic industries from foreign competition.
 Connection: This pattern encourages domestic production of intermediate goods but
can raise costs for consumers buying finished products, disrupting supply chains and
leading to overall higher prices in the economy.
Conclusion
 Summary: The political economy of protectionism shows how different economic
sectors influence trade policies.
 Impact: Producers often drive protectionist policies to shield domestic industries,
resulting in higher prices for consumers.
 Understanding: Knowing these dynamics helps explain why tariffs are imposed and
their diverse impacts across various parts of the economy.

A Supply and Demand View of Protectionism

Protectionism, including tariffs, can be analyzed using supply and demand concepts. The
government supplies protectionist measures, while domestic companies and workers demand
them. Here are the factors influencing the supply and demand for protectionism.
Supply of Protectionism
Protectionism is supplied by domestic governments and is influenced by several factors:
1. Costs to Society: Government officials consider the societal costs of protectionism,
such as higher consumer prices and reduced import volume. When these costs are high,
the government is less likely to implement protectionist measures.
2. Political Importance of Industries: Industries with significant political representation
have a better chance of receiving protection. For example, industries employing a large
workforce, like the auto industry, have more political clout compared to smaller
industries.
3. Adjustment Costs: When domestic firms and workers face high costs in adjusting to
increased import competition, such as job losses or wage cuts, the government is more
inclined to provide protection to delay these impacts.
 4. Public Sympathy: Greater protection is supplied when there is high public sympathy for
the affected industries or workers, particularly those with low wages and limited job
alternatives.
Demand for Protectionism
The demand for protectionism comes from domestic companies and workers, driven by:
1. Comparative Disadvantage: Industries facing a comparative disadvantage against
foreign competitors demand protection. For instance, the U.S. steel industry has sought
protection against lower-cost producers from Japan and South Korea.
2. Import Penetration: Increased competition from imports leads domestic producers to
demand protection. A notable shift occurred in the late 1960s when the AFL-CIO began
supporting protectionism due to rising import penetration in industries like electrical
goods and footwear.
3. Industry Concentration: Highly concentrated industries, such as the U.S. auto industry
dominated by a few large firms, are more capable of financing and benefiting from
protectionist measures. Conversely, industries with many small producers are less likely
to demand protection due to the distribution of benefits.
4. Export Dependence: Industries that rely heavily on exports are less likely to demand
protection, fearing retaliation that could harm their export markets. For example, a
company like Boeing, with substantial foreign sales, would be wary of supporting
protectionism.