Sunday, January 9, 2011

Tariffs, Lower Foreign Wages And Corporate Taxes

The following is a comment I posted on Carpe Diem blog, "Top Ten Reasons Trade is Good for America" by Mark Perry:

I think that many people who are for trade protectionism and opposed to outsourcing assume that tariffs are necessary to equalize the wage differences between lower wage foreign countries and the higher wage US to protect industries.

A worker's wage, including benefits, is usually a small part of the cost of manufactured goods. For example, for a US manufactured automobile, labor costs are about 10 percent of the selling price, and labor cost in the 10-20 percent range is a typical amount for most goods.

The other costs are materials, energy, capital, corporate taxes and foreign currency conversion rates.

Lower wages in foreign countries exporting to the US are not the primary reason for the substantially lower prices of imported goods into the US.

US corporate taxes and unfavorable US dollar foreign currency conversions are the two major causes of the comparative disadvantage of US manufacturers versus foreign manufacturers exporting to the US.

If lower foreign wages were the primary cause of US outsourcing and foreign made imports into the US, US manufacturers could increase their capital investments, increase their production efficiency and lower the percentage of labor per unit of goods until the US price differences between imported and domestic manufactured goods were negligible.

If people for protectionism understood that wage differences are not the cause of increased imports or the cause of the decline in certain industries, they would be much less in favor of tariffs. Tariffs just allow the protected industries to avoid lowering prices through competition and efficiency/productivity gains to the harm of US consumers. Sure, there are times when domestic manufacturers cite high wages as the cause of their decline, but productivity gains through increase capital investment can offset high wages. The unwillingness to make further capital investment in an industry causes it to decline. The unwillingness to continue to invest in an industry comes from expected low future profits and the availability of other, newer opportunities with much higher expected returns and profits on the investment.

Since sustainable foreign currency conversion rates are not easy to modify, the best way to protect and increase US manufacturing companies would be to lower the US corporate tax rate. It would do much more good for US manufacturers and US consumers than trade tariffs.

1 comment :

  1. Wuden mein hertz mit ein tomottischgot.