Scott Sumner  

Two kinds of supply shocks

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Imagine a commodity that is a key input into much of our manufacturing industry, especially transportation sectors such as autos. Nearly half of our domestic consumption of this commodity is supplied by imports, although we maintain a large domestic production base, and even substantial exports.

Now imagine that there is a sudden spike in the price of that key input. (To avoid reasoning from a price change, let's assume the price spike is not due to increased demand for the commodity). Does that hurt the US economy?

Does your answer depend on whether I'm talking about oil or steel?

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PS. This interesting FT article explains how the new steel tariffs may force a number of US steel mills to shut down.

PPS. One difference between the two scenarios is tariff revenue to the US government. But this revenue will be trivial in a macro context, which is the focus of this post.

Comments and Sharing

COMMENTS (11 to date)
Hazel Meade writes:

Excellent point.
Does anyone ever propose protections for the US oil industry? Or import tarriffs on oil?
Why not?

David R Henderson writes:

@Hazel Meade,
Does anyone ever propose protections for the US oil industry? Or import tarriffs on oil?
Yes. Eisenhower did in 1959. Not only did he propose import quotas on oil, but also he achieved. This helped "achieve" the formation of OPEC. See Ben Zycher, "OPEC," in The Concise Encyclopedia of Economics.

Ben writes:
In 1959, the U.S. government established the Mandatory Oil Import Quota program (MOIP), which restricted the amount of imported crude oil and refined products allowed into the United States and gave preferential treatment to oil imports from Canada, Mexico, and, somewhat later, Venezuela. This partial exclusion of Persian Gulf oil from the U.S. market depressed prices for Middle Eastern oil; as a result, oil prices “posted” (paid to the selling nations) were reduced in February 1959 and August 1960.

In September 1960, four Persian Gulf nations (Iran, Iraq, Kuwait, and Saudi Arabia) and Venezuela formed OPEC in order to obtain higher prices for crude oil. By 1973, eight other nations (Algeria, Ecuador, Gabon, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates) had joined OPEC; Ecuador withdrew at the end of 1992, and Gabon withdrew in 1994.

Thaomas writes:

Of course the macro effect of either (if the volume of imports were the same) are trivial. But the economic loss of oil will be somewhat larger because the "tax" is collected onone case by a foreign government.

@Hazel Of course the Oil and gas industries are protected by the tax subsidy of percentage depletion.

Mike W writes:

So, as described at David Henderson's post, OPEC was formed in response to U.S. concern about being dependent on a potentially unfriendly source for a key commodity...i.e., an issue of economic national security. And the supply shocks of the early 1970s were the result of OPEC raising prices due to a geopolitical dispute. The price increase seems to justify the initial concern. Seems to be a chicken-egg question.

China has 49% of the world's steel making capacity...and it is increasing (although at a slower rate since 2014). Should the U.S. allow its steel industry to become substantially diminished because we can depend on imports?

Alan Goldhammer writes:

@Thaomas - lots of other extraptables have tax subsidies associated with depletion including iron ore!!!

IVV writes:

Do we have Americans who want to be responsible for making cheap steel?

Scott Sumner writes:

David, Thanks for that info.

Mike, You said:

"The price increase seems to justify the initial concern."

But not the protectionist policy, Indeed just the opposite. If you are worried about foreign sources of oil you'd like to produce less domestically. If we hadn't restricted imports in the 1950s, we'd have more oil today.

You asked:

"Should the U.S. allow its steel industry to become substantially diminished because we can depend on imports?"

Clearly yes; it's far larger than we need for national security reasons. And we import only a trivial amount of steel from China; most comes from friendly nations such as Canada.

BC writes:

Trump undermined the security rationale even more during his press conference today. He said that he would consider exempting other allies besides Mexico and Canada from the tariffs. One of the factors in considering exemption would be whether they paid their "fair share" for their defense, presumably referring to NATO military spending requirements. Trump says its unfair that we subsidize their defense so much. In protectionist language, we "dump" our military exports on our allies by subsidizing the soldiers and weapons we deploy for their defense. The result is that our allies don't produce as many soldiers and weapons themselves. So, Trump would like the US to produce more steel and fewer soldiers and weapons. Which industry is more *directly* tied to national security: (1) steel, for which our military only requires about 3% of our domestic production, or (2) actual soldiers and weapons systems?

Matthew Waters writes:

"Should the U.S. allow its steel industry to become substantially diminished because we can depend on imports?"

1. The US should generally allow free markets, with what that entails.

2. Domestic steel production is pretty much flat since 80's. While the early 80's were tough on steel (smaller cars, along with foreign competition), it's been pretty flat for 35 years.


3. Military use of steel is 3% of domestic production. You would need a huge ramp-up in steel use by military AND have a >90% implosion in domestic production AND not get steel from allies, for the national security argument to actually matter.

Mike W writes:



In sum, President Reagan's finding under Section 232 demonstrates that the abundance of low-priced oil imports today should not lead to complacency about the future. Today's oil surplus and low prices means increased vulnerability for the United States in the future (as measured by the enhanced risk of high oil prices and peacetime supply disruptions). For these reasons, the President should carefully consider and adopt a mix of policy measures that best ensures access to reasonably priced energy resources-both today and in the future.

Christophe Biocca writes:

In the steel case, the government won't try to "fix" the price increase by imposing price controls and rationing, making economic dislocations even worse. Or at least I hope so, given they have the option of repealing/decreasing the tariffs, should they prove too effective at raising prices.


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