Once upon a time, life in our town flourished. Our craftsmen produced the most intricate jewelry and the finest embroidered baby dresses. Those were the days of tariffs and import quotas. High tariffs were imposed on imported goods . Traders had to apply for a license to import . Their importation was restricted to a certain number. In my simple mind, government was trying to discourage imports because the country did not have much dollars. I only came to understand the use of tariffs to protect domestic industry when I learned basic economics. Tariffs added to the costs of imported goods and made them more expensive.
Fast forward and I was part of government’s team advocating for knocking down trade walls. The era of globalization had begun. The Estanislao and Leung levies on imports were abolished as tariffs fell down. There were to be no distinction in taxing domestic and imports products. Trade was to flourish between and among countries. I then believed that liberalization was good especially for consumers. They would have freedom of choice. They would have a huge and diverse number of goods to choose from at competitive prices.
Likewise, producers would have cheaper inputs and produce at lower costs. But then, things did not become all rosy. Our local craftsmen closed their shops, and so did our manufacturers of baby dresses. Similar problems were encountered by other domestic manufacturers. The shoes from Marikina could no longer be found in department stores . The stores in Caloocan were selling furniture that were made in Malaysia instead of those that were made in Bulacan. They were part of a sad story of producers who could not compete with the influx of cheap imports from China. It was said that decades of protection spared them from the pressure of competition . But they also had to reckon with stringent labor laws that prescribed minimum rates, high costs of utilities, and the prohibitive costs of transacting with government .
Similar stories thrive until today. We just read about the travails of our poultry industry about the deluge of imports which depress local prices . In an surprise development, the United States government which used to be the chief proponent of free trade started using tariffs as a means to protect its local industries. Tariffs were imposed on goods worth US$250 billion from China and the President has threatened to impose tariffs on US$250 billion more. What was more surprising was the use of tariffs by the US President to force Mexico to adopt draconian measures to restrain the number of people immigrating to the United States.
But tariffs work both ways. Producers have designed a supply chain to source inputs and labor from countries which have the greatest comparative advantage. Thus, this policy could end up hurting domestic producers instead of protecting them. It was estimated that only about 67% of American cars are made in the United States. It would take local manufacturers some time to restructure their supply chain, i.e. to source their imported inputs from domestic producers. China has retaliated by setting tariffs on US$110 billion worth of goods imported from the US. In addition, the Chinese government has threatened to impose qualitative measures” that would affect US businesses operating in China.
A trade war between countries could escalate globally. Countries are so intertwined in producing a product or a service. Spare parts and labor are sourced all over the world . A decline in the demand for products from China and the US will affect the production of all others that are part of their supply chains.
Tariffs are such intricate policy instruments. They can build and destroy. Like in any other war, nobody can win.