Saturday, June 22, 2013

A Tariff Debate

Bloomberg reports that athletic shoe maker New Balance is in favor of US tariffs on footwear while athletic shoe maker Nike is not.  Why?  New Balance produces shoes in the US and Nike produces shoes overseas where labor costs are relatively lower.  The tariff acts as an equalizer for imported lower cost shoes (Nike) for the domestically higher cost shoes (New Balance).

Question is what is the overall impact of a tariff on footwear to the US?  Theoretically, as I show in class, tariffs are economically welfare reducing, meaning that society as a whole is worse off with the tariffs than without the tariffs.  Of course, some gain with the tariffs (New Balance and the US Government in collecting tariff revenues) and some lose with the tariffs (Nike and US consumers forced to pay higher prices).  Net, the model shows that the winners could not compensate the losers, so we conclude that tariffs are economically welfare (or economic well-being) reducing.

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