Various kinds of trade barriers, including tariffs, have been used in international trade to modify trade to suit a nation’s needs. Tariffs are used to protect domestic industries and can earn revenue for the government. The US has imposed tariffs on various Chinese goods, including washing machines. While the price of foreign manufactured washing machines increased, the price charged by domestic manufacturers increased as well. https://www.nytimes.com/2019/04/21/business/trump-tariffs-washing-machines.html The domestic manufacturers increased the price and can still be price competitive while earning higher profits. At the same time, dryers, which are complements of washing machines, experienced an increase in prices too. Therefore, the tariffs had the effect of increasing the price charged by domestic manufacturers not only for washing machines but also for dryers.
The increased profits that domestic manufacturers earn due to higher prices may attract new entrants in the domestic manufacturing sector in the medium to long-term. The entry of new domestic manufacturers will depend on the barriers to entry and for manufacturers of washing machines and dryers, the barriers can be quite high because of substantial investment, intellectual property rights, etc. But, the higher profits earned by domestic manufacturers will definitely attract new entrants in the domestic manufacturing sector in the medium to long-term.
The effect of the tariffs on consumers is quite substantial as the consumers bore between 125 percent and 225 percent of the tariffs. It increased consumer prices by US $1.5 billion while adding only US $82 million to the US Treasury. The tariffs encouraged foreign manufacturers to move some of their production to the US, which created 1,800 jobs. However, the price of creating these new jobs was quite high; it was US $817,000 per job. Therefore, the washing machine tariffs have been an expensive way of creating not a substantial number of domestic jobs. This raises an important issue of whether tariffs are the best way to create jobs lost due to globalization, automation and artificial intelligence.
Globalization has taken a toll on jobs, particularly, manufacturing jobs, in developed countries including Canada and the US. According to Statistics Canada, more than one in seven manufacturing jobs were lost between 2004 and 2008 in Canada. https://www150.statcan.gc.ca/n1/pub/75-001-x/2009102/pdf/10788-eng.pdf It shows the severity in loss of manufacturing jobs in Canada. The same trend is observed in the US. According to Autor, Dorn and Hanson (2016), Chinese imports contributed to unemployment of 2.4 million workers between 1999 and 2011 in the US. https://www.ddorn.net/papers/Autor-Dorn-Hanson-ChinaShock.pdf They found that these unemployment were concentrated in specific industries and geographical locations. With increased trade and globalization, manufacturers moved their production bases to low-wage manufacturing destinations. The domestic manufacturers could not compete with foreign low-wage manufacturers and closed their operations, leading to unemployment of manufacturing jobs in both Canada and the US. Considering the US auto sector, it lost a third of its jobs since 1994 (350,000). Meanwhile, Mexican auto sector employment increased by more than four times, from 120,000 to 550,000 jobs. https://www.cfr.org/backgrounder/naftas-economic-impact
Autor, Dorn and Hanson (2013) found that Chinese imports have adverse effects other than the direct effect in loss of manufacturing employment. https://www.aeaweb.org/articles?id=10.1257/aer.103.6.2121 It leads to increased transfer payments through various federal and state programs while the largest transfers are for federal disability, retirement and in-kind medical payments. Therefore, there are social costs of increased trade with China or, trade, in general, and increases government expenditure in social programs. Inspite of its benefits, globalization has had adverse effects on the societies of Canada and the US beside the immediate adverse effects in loss of manufacturing industries and employment.
Besides globalization, automation and artificial intelligence have also played a role in the disappearance of employment in the manufacturing sector. There have been increased adoption of automation and artificial intelligence not only in manufacturing but also in services. The self-checkout kiosks in grocery stores threaten retail jobs while self-driving vehicles, even though are in preliminary stages, may put cab drivers and truck drivers’ jobs at risk in the future. Autor and Salomons (2018) found that automation has reduced labour’s share in value added. https://www.brookings.edu/wp-content/uploads/2018/03/1_autorsalomons.pdf Their study found that the labour-displacing effects of productivity growth, even though quite negligible in the 1970s, have become more significant over time, especially in the 2000s. This indicates that automation has had adverse effects on employment including manufacturing employment. However, Houseman (2018) found that globalization and increased trade and not automation was the main reason for loss in manufacturing employment in the US. https://research.upjohn.org/up_workingpapers/287/
Automation and artificial intelligence have created jobs and replaced existing ones. With the increasing adoption of automation and artificial intelligence, there will be disruption in the workplace as they will create new jobs and destroy existing ones. While the degree of effect of automation and artificial intelligence on job loss is debatable, it must be mentioned that the combined effects of globalization, automation and artificial intelligence have had adverse effects on employment, particularly, manufacturing employment, in Canada and the US. These two countries can implement several programs and policies to address this issue. One is increased investment in education, training and skills development of their workers, especially the adversely affected workers. This will raise human capital of the affected workers, make them more employable and their skills more relevant in a changing economic landscape.
It will be prudent to make tax policies and tax rates more competitive so that it is lucrative for manufacturers to manufacture domestically. Also, giving tax breaks and incentives to domestic manufacturers relative to companies which choose offshore production will encourage domestic manufacturers to expand their local manufacturing base and reshore their production processes. Again, allowing companies to bring their overseas profits at low tax rates will encourage them to bring their overseas profits and invest in Canada and the US, thereby, creating domestic employment.
It is important to realize that some jobs lost to globalization are never coming back. The adverse effects of globalization, automation and artificial intelligence have put increased strains on the low-income and middle-class in Canada and the US. Therefore, lowering the income tax rates on these two groups and providing tax credits will ameliorate their situation. Both Canada and the US can explore the concept of introducing universal basic income as it will eliminate poverty instantly and provide every citizen a decent standard of living. Also, student debt has become a major concern for students in both the countries. The two countries can explore offering free tuition to low-income students while the US may research the introduction of universal health care as affordability of health care remains a critical concern, especially among the low-income and middle-class in the US.
Income inequality is a concerning issue all over the world, including in Canada and the US. The governments of both countries may take necessary steps to reduce income inequality. The introduction of higher income tax on the rich, and lower income tax and tax rebates for the low-income and middle-class will reduce income inequality. Also, lower taxes on the low-income and middle-class will boost their after-tax income. This will allow them to consume more, and higher consumption will have positive effects on the economies of Canada and the US, including generating employment.
In conclusion, tariffs may not create enough jobs as intended. The combined effects of globalization, automation and artificial intelligence have contributed to the decline of manufacturing in Canada and the US, leading to unemployment among manufacturing workers. Also, automation and artificial intelligence may be labour-displacing in many cases including in the services sector. This has put the low-income and middle-class cohorts in Canada and the US, like in other developed countries, under strain. Again, these three forces have contributed to rising income inequality in both Canada and the US, similar to other parts of the world. The angst and anger of the adversely affected groups have contributed to rising nationalism and populism in these two countries like in other countries. This can threaten social stability in these societies and increase crime in them as well. Therefore, appropriate policies and programs needs to be introduced or enhanced to combat the combined adverse effects of globalization, automation and artificial intelligence. Increased investments in education, training and skills development of the workers in both Canada and the US will improve their human capital and make them more employable in a changing world. Designing and implementing tax policies that provide incentives to domestic manufacturers to manufacture in Canada and the US relative to abroad will be favorable. This will encourage domestic manufacturers to expand production, reduce their incentive to move production overseas as well as increase the possibility of reshoring of production. Also, allowing them to bring overseas profits at low tax rates will be fruitful as well as they may invest the overseas profits to expand their domestic operations. However, tax policies will not be sufficient and the governments of both Canada and the US may need to introduce new social programs and expand on existing ones. Both the countries can explore the introduction of universal basic income as well as offering free tuition to low-income students. The US may explore the introduction of universal health care. Finally, both the countries may introduce appropriate income tax policies to reduce income inequality. The adoption of these policies and programs will improve the situation of the adversely affected population in both Canada and the US. It will allow them to live decent standard of living and stem the angst and anger of the adversely affected groups. It will reduce nationalism and populism in these countries, and improve social stability and well-being of the population in both Canada and the US.
SALMAN SAKIR 