Why are tariffs inefficient? listening, economic, Chinese, about, world

rosemary2011

I know the answer (i think). I was listening to the Planet Money podcast and they were talking about the Chinese Tire Tariff and then dove into the economic intricacies about tariffs and their externalities.

I want to hear some real world words about why tariffs are inefficient.

Finalnub

because they reduce supply to below equilibrium level, driving prices up and lowering output quantity, thus creating a deadweight loss

rkapoor

If you believe that pure supply and demand intersection create a perfect market, than intuitively, you must believe that government-imposed price distortions make the market less efficient. Consider a simplified scenario in which there are only foreign and domestic tires, domestic tires are 34.5% more expensive than foreign tires, and 10% of the domestic population is comprised of tire manufacturers. Let's say that the government then imposes a 35% tariff that causes all domestic consumers to buy domestic tires.

The implications are simple. 90% of the domestic population loses, since they must now buy expensive domestic tires. Only the domestic tire makers gain in this scenario. Also, the domestic consumers just spent a higher proportion of their income on tires, as opposed to clothing, computers, food, etc. So all domestic industries other than tires get less business. Furthermore, the foreign people who relied on the domestic tire market are suddenly bankrupt and can no longer import good produced by the domestic company. This hurts the domestic industries that rely on exports.

Londonrocks

cfagoal2 Wrote:
-------------------------------------------------------
> because they reduce supply to below equilibrium
> level, driving prices up and lowering output
> quantity, thus creating a deadweight loss



Are they reducing supply, or increasing demand for a certain product in a broader category.

For the record I only use Michelins.

manasib

+1 with Hello Mister Walrus and cfagoal1.

For example, assume Silicon Valley is a country and they are importing tires from Detroit. Now, govt of Silicon Valley bars imports of tires from outside by imposing high tariffs on them.

In that case, Silicon Valley will have to produce their own tires. This takes their resources / man power away from technology, which they are more productive at. This diversion of resources to less productive work increases inefficiency in the economy as a whole.

Assumption: productivity of Silicon Valley workers is higher in technology than in tire making.

nitoha

Is the US govt trying to encourage local US tire manufactures by imposing import duty on Chineese tires....beacuse as soon as the import duty is levied....the supply is reduced and prices go up....and the local tire manufacturers will now ask for a price greater than if the import dutty is levied....is this correct?

shootingstar

Protectionism too.

draz

by Protectionism u mean...the US govt is protecting the local tire manufacturers?

Kiakaha

varundarji Wrote:
-------------------------------------------------------
> by Protectionism u mean...the US govt is
> protecting the local tire manufacturers?


Yes. This is an umbrella term, though. Protectionism can be driven by campaign contributions from industry lobbies.

kamara5

you guys are correct that tariffs create a " subsidy" for domestic producers- giving them an advantage

but i would hesitate to answer the question ' why do they create inefficiencies' with the response " because domestic prices will go up " which seems to be the common conclusion in this thread.

but - for exam purposes - i think ' inefficiency' in this context ( an economic concept) refers to the idea that tariffs - due to the ' protection' they afford domestic producers - cause a certain hidden disincentive for them to use resources in the most efficient way possible. In other words, tariffs naturally reduce competition - competition forces firms to keep costs down, invest in " better and easier ways of doing things' etc etc.

So - tariffs foster inefficiency in domestic firms because it ' protects ' them from it. price increases are a result to be sure - but not necessarily the answer they'd be looking for

just my thots