US tariff reform risks unintended consequences for global economy; just ask Madison Paper

Dive Brief:

  • Madison Paper Industries, a shuttered paper mill in Maine, believed a tariff on a government sponsored Canadian competitor would save it, but failed to do so, The Wall Street Journal reported Tuesday.
  • Though 1994's NAFTA agreement eliminated most tariffs, a 2015 trade law exception allowed U.S. companies that could demonstrate harm from imports to see the imposition of a 20% tariff, which had an unexpectedly negative impact on both Madison Paper as well as its Canadian competitor.
  • As a result of the tariff, that Canadian mill in Port Hawkesbury, Nova Scotia, which employed more than 1,200 people — including Americans in Ohio, Wisconsin, and Maine was badly affected, not only from new duties and legal fees, but also from reduced competitiveness. 

Dive Insight:

The law of unintended consequences is always a risk for governments who seek to alter economic forces, and even more so when it involves international trade. The ending Madison Paper is but the latest event where the ultimate ending was the opposite of the desired outcome. Furthermore, it underscores how things can go completely wrong when only the superficial issues are being addressed through government force (tariffs) while the underlying fundamentals (diminished demand, disruptive tech, high turnover) are ignored.

Further complicating the situation, according to the DC-based think tank Stimson Center, a 2015 change in trade law lowered the threshold for domestic companies to demonstrate harm caused through trade imbalances. The impact of this lowered threshold in this case was that it was perhaps too easy for the paper mill to state its case that simple tariff adjustment would cure what ails them, rather than a closer examination of the long-term viability of the business. With what turned out to be an overreaching tariff, the net result was damage to the Canadian companies as well as the American ones. 

In the end, this is one of the primary drawbacks of Representative Kevin Brady's tax overhaul proposal; it is almost impossible to weigh all the factors that will come into play that will balance out the market forces, meaning the desired outcome may never be reached. It is well for the U.S. to favor its own industry, but levying tariffs without a healthy consideration for all global market forces may result in a slap by the invisible hand. 

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Filed Under: Regulation