DETROIT (Dec. 27, 2016) — The siren song of protectionism is playing throughout the U.S. these days, with the promise that high import tariffs and renegotiated trade deals will stop companies, particularly in the auto industry, from moving production to Mexico and elsewhere.
But let's take a collective, non-partisan breath and remember: Many, if not most, economists agree that the benefits of tariffs, no matter how well-intentioned, are temporary, if not illusory.
A tariff on goods from Mexico, for instance, would invalidate NAFTA, which has been in place for 20 years, and that would hurt many U.S. carmakers — OEMs and suppliers alike — that have invested in Mexican plants.
Already, in Mexico, Ford Motor Co. saves about 40 percent in labor costs over its unionized U.S. plants. Nissan, General Motors Co., Honda, Mazda, Volkswagen, BMW, Kia and Fiat Chrysler also are building or planning small vehicle lines south of the border.
Action and reaction
Restricting Mexican auto imports also could incentivize plants to redirect their exports to other countries with favorable trade agreements, competing with and potentially reducing U.S. exports elsewhere.
Further, a tariff on auto imports from Mexico would only provide short-term relief, as, eventually, U.S. production costs will rise because of the decline in competition from abroad. Steel tariffs, for example, have never worked well, and the steel companies did not reinvest the profits gained, leading to continued non-competitiveness.
And let's not forget that tariffs force industry leaders to look for ways to elude the tax. Last spring, for instance, when the U.S. Commerce Department imposed a 500-percent run-up in duties on Chinese cold-rolled steel, China shipped its steel to Vietnam and then to the U.S.