Tariffs
and the Future of the Job Market
Before the Coronavirus, the killing of George Floyd and the “shenanigans” surrounding the current presidential election together eclipsed virtually every other issue, I began a data visualization project examining the comparative benefits and demerits of levying tariffs for the purpose of raising revenue versus protectionism. In this article, I will revisit that project, and share the insights I gained from it.
Theory
Before jumping into the project itself, I think that it would be prudent to review what classical economic theory has to say about levying tariffs. The 19th century French economist and legislator, Frédéric Bastiat (pictured above), satirized the practice of enacting tariffs to protect local industries from competition in his now famous Economic Sophisms. In Chapter VII of the Sophims, Bastiat relates the Candlemakers’ Petition to blot out the sun in order to create a greater demand for artificial light. If this sound familiar, Mr. Burns actually realizes this comical proposition in a Simpsons Episode of the same premise.
In practice, Economists at the International Monetary Fund (IMF) have empirically confirmed what Bastiat communicated by means of satire: increased tariffs lead to a contraction in economic activity, often ultimately harming those they are intended to protect.
Bastiat, however, was not completely opposed to levying tariffs. In his Essays on Political Economy, Bastiat draws a distinction between enacting tariffs for the purposes of raising revenue versus doing so to prop up local industries. The former, Bastiat argues, practiced prudently can be beneficial in that it can be used to finance the maintenance of public goods. Public goods such as roads and schools can net a macroeconomic return on investment by facilitating commerce and equipping workers with the human capital they need to generate wealth and create new jobs.
Data
Using data from the Heritage Foundation’s Index of Economic Freedom, I compared the the Tariff Rate with the GDP Growth Rate and Per Capita GDP of a selected sample of countries and one territory to get an idea of the short-term effect of tariffs on national income. Due to limitations in the data, the time window is relatively short, only 2013–2017. Despite the shortness of the time window, the fact that it falls in an inter-recessionary period makes it still usable. Due to the sheer size of the data, a sample was taken comprised of 10 countries and 1 territory based on their average tariff rate in the time period 2013–2020. The countries included are as follows:
America and Its Trading Partners:
- America
- Canada
- Mexico
- Mainland China
High Tariff Countries:
- Maldives
- Iran
- Kiribati
Low Tariff Countries:
- Singapore
- Switzerland
- Georgia
No Tariff Territory:
- Macau
Tables
America and Its Trade Partners
╔═════════════════╦═════════════╦═════════════╦═════════════╗
║ Country ║ Minimum ║ Average ║ Maximum ║
╠═════════════════╬═════════════╬═════════════╬═════════════╣
║ America ║ 1.50 ║ 1.80 ║ 2.60 ║
║ Canada ║ 0.80 ║ 1.14 ║ 1.60 ║
║ Mexico ║ 1.02 ║ 2.18 ║ 4.30 ║
║ Mainland China ║ 3.41 ║ 3.78 ║ 4.10 ║
╚═════════════════╩═════════════╩═════════════╩═════════════╝ High Tariff Countries
╔═════════════════╦═════════════╦═════════════╦═════════════╗
║ Country ║ Minimum ║ Average ║ Maximum ║
╠═════════════════╬═════════════╬═════════════╬═════════════╣
║ Maldives ║ 11.2 ║ 17.1 ║ 21.2 ║
║ Iran ║ 15.2 ║ 17.8 ║ 21.8 ║
║ Kiribati ║ 15.9 ║ 18.9 ║ 28.1 ║
╚═════════════════╩═════════════╩═════════════╩═════════════╝ Macau and Low Tariff Countries
╔═════════════════╦═════════════╦═════════════╦═════════════╗
║ Country ║ Minimum ║ Average ║ Maximum ║
╠═════════════════╬═════════════╬═════════════╬═════════════╣
║ Macau ║ 0.00 ║ 0.00 ║ 0.00 ║
║ Singapore ║ 0.00 ║ 0.04 ║ 0.10 ║
║ Switzerland ║ 0.00 ║ 0.60 ║ 1.70 ║
║ Georgia ║ 0.30 ║ 0.63 ║ 0.72 ║
╚═════════════════╩═════════════╩═════════════╩═════════════╝
Findings
After collating the data in Python with the Pandas to create the above tables, I moved to R and used the ggplot2 package to create the visualizations below:
In each of the above graphs, the previous year’s tariff rate is displayed on the x-axis. Examining the left graph, we see that there is no direct correlation between and increase in the tariff rate and the subsequent year’s GDP Growth Rate. Due to the small sample size, and the choice to limit our analysis to a single year, it is difficult to draw any solid conclusions from this. We can infer, however, that an increase in the tariff rate, insofar as it is not drastic, will not likely result in a huge jump or fall in the GDP Growth Rate. This inference is consistent with IMF economists’ findings that these changes wait till the medium term to manifest themselves. Note also that developing countries, such as Mainland China and Kiribati tend to have higher growth rates compared to more developed nations such as the United States, Canada, and Switzerland. This is a manifestation of the fact that are catching up to their more developed counterparts. The case of Iran is unique due to the effects of sanctions against it imposed by the United States and other countries.
Examining the Graph on the right, a clearer picture begins to emerge in which low-to-medium tariff rate countries are shown to generally have higher Per Capita GDPs than their high-tariff counterparts. The direction of this trend seems to indicate each country and territory’s reasons for enacting tariffs. Developed countries with economies that rely more on activities such as retail and financial services tend to have fewer manufacturing-based industries to protect compared with developing countries. In the cases of Macau and Singapore, these locales’ size, lack of natural resources, reliance on trade and emphasis on investing in human capital have been a recipe for their high per capita national incomes. In the case of developed countries such as the United States, with a few notable exceptions — Trump’s protectionist tariffs on Mainland Chinese imports and his threat to levy political tariffs on Mexico to secure border-wall funding — these tariffs have primarily served to generate revenue rather than constrict trade.
Are Protectionist Tariffs Really Necessary?
The short answer is no…at least not if your goal is to encourage economic activity. Businesses in the developed world have often been derided for outsourcing jobs to developing countries to cash in on cheap labor, but this is not their only option. Automation reduces the per-unit cost of producing goods and services often driving costs even further down than outsourcing, all while keeping jobs domestic. This is evidenced by the fact the Indian car manufacturer Tata has petitioned the Indian government for tariffs to protect it against Chinese competition while Chinese workers wages continue to rise.
The answer, therefore, is not tariffs, but education. According to the World Economic 2018 Forum’s Future Jobs report, artificial intelligence will have generated a net increase of 58 million jobs worldwide. The distinction, however, is that many of the jobs created require a different skill set or higher level of education than the jobs displaced. The solution, therefore, is not tariffs, but for each country’s educational system to evolve to meet the needs of this new job market.
GitHub Repo: Tariffs
