Tuesday, January 7, 2014

Prospects of tariff increases and manufacturing employment

US manufacturing is on the decline, and the obvious reason is pressure from globalization. This is not necessarily bad as it means a better use of resources, except for some potentially large transition costs. Globalization has been encouraged by decreases in tariffs, thus one should find a strong correlation between tariff reductions and declines in US manufacturing. That does not seem to be the case, though, and a sharper decline in manufacturing since 2001 cannot be traced to any major change in tariffs.

Justin Pierce and Peter Schott find that it is not the actual tariffs that matter, but the potential for tariff increases. Indeed, there was a change in 2001 that removed potential increases especially for sectors in competition with China, and once these sectors lost this potential tool for protection, they withered. There was no such change in Europe, where no sharper decline in manufacturing occurred.

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