Responding to New Tire Tariff, China Targets American Auto Parts and Chicken Products

Just days after Obama bowed to union pressure and imposed a 35 percent tariff on Chinese tires, China has retaliated:

Chinese officials lambasted the decision, accusing the U.S. of engaging in protectionism and violating World Trade Organization rules. They argued that the U.S. tire industry had long ago abandoned the low-end market that China covets and said Chinese tire imports had increased only 2.2% between 2007 and 2008, state media reported.

By announcing the probe of U.S. imports, the Chinese Ministry of Commerce signaled that it was prepared to challenge Obama’s decision.

“Recently, the commerce ministry has received word from domestic industries indicating that [chicken and auto] products had entered our nation’s markets via dumping, subsidies and other unfair trade means,” the ministry said on its website, giving no details about the specific products.

James Zimmerman, a partner in the law firm of Squire Sanders & Dempsey in Beijing, recently told the Los Angeles Times, “American business in China should be prepared for what might be a zealous retaliatory response from China, which might impact a broad range of U.S. commercial interests.” Just what we need.

Obama To Impose New Protectionist Tariffs

Market Watch reports:

The Obama administration will impose stiff tariffs on imports of Chinese-made tires after finding that a surge of imports has disrupted the U.S. domestic market.

President Barack Obama signed an order on Friday to impose the special punitive tariffs for three years, the White House announced.

The action is the first major trade enforcement action of his presidency and comes less than two weeks before a high-profile summit of the leaders of the Group of 20 nations, including China.

This is a highly disappointing victory for protectionists. Henry Hazlitt gives a short yet accurate anecdote on one of the consequences of introducting tarriffs:

Suppose that in our country we import woolen sweaters from country A, and the sweaters sell for $25.

The local sweater industry petitions the government to impose, say, a $5 tariff (duty) on the imported sweaters. They argue that they cannot produce woolen sweaters for $25 and need this tariff in order to compete with country A. So, the government imposes a tariff.

As a result, the local sweater industry is able to employ many people. However, the consumers now pay $30 for the same quality sweater. The consumers no longer have that $5 to spend on other things. Thus the local sweater industry thrives, but a hundred other industries shrink.

You can see the sweater employees going to and from the factory each day, and you think, “The tariff was a good idea, it has given employment to people in our country.” But you don’t see the hundred other industries that have shrunk and all the lost jobs from that.

Click here for Professor Mark J. Perry’s “Simple Economic Analysis of the Tire Tariff: Americans Will Be Punished By the Punitive Tariffs.”

UPDATE: Responding to New Tire Tariff, China Targets American Auto Parts and Chicken Products

Quote of the Day

“You don’t need a treaty to have free trade”

~ Murray Rothbard

U.S. Trade Partners Around The Globe

(Click to enlarge)

HT: Visual Economics

Fallacious Facts

Cafe Hayek shows a prime example of how economic statistics can be easily manipulated to further an argument that the true economic data does not support. Harold Meyerson of the Washington Post reports

Since 1987, manufacturing as a share of our gross domestic product has declined 30 percent.

While this is true, it’s also very misleading. Here is part of Donald Boudreaux’s response:

…this fact is caused chiefly by a substantial growth in services and construction and not, as Mr. Meyerson implies, by declining manufacturing output.

In fact, according to the 2009 Economic Report of the President, total manufacturing output in the U.S. – measured by an industrial-production index – hit an all-time high in 2007 (the latest full year for which data are available).*

Socialism Illustrated

HT: Taxing Tennessee

The Invisible Economy

Jeremy Main of Fortune Magazine writes,

The underground economy, also called the informal, invisible, or black economy, is regarded around the world as a refuge of drug traffickers, smugglers, and tax evaders. Now a new view is taking hold: At least in the Third World, the underground economy is mainly good, not bad. It embodies the entrepreneurial energy of ordinary people striving in admirable ways to break out of poverty. It comprises thousands of craftsmen, storekeepers, truck and bus drivers, and food vendors whose operations would be perfectly legal in the U.S. but whose governments force them to ply their trades illegally. The underground economy is part of the solution, not the problem. If this entrepreneurial spirit were legalized and nurtured rather than fettered and suppressed, goes the argument, a burst of competitive energy would be released. Living standards, which have been dropping in much of the Third World, would start rising. International trade would increase, and developing countries could service their huge and debilitating external debts more easily.

Using data from the World Bank’s 2002 World Development Report, Peruvian Economist Hernando de Soto calculates that,

The total value of real estate held but not legally owned by the poor of the developing world is at least $9.3 trillion.

He estimates that the total amount of land informally or illegally held is 85% of total urban land holdings and 53% of total rural land holdings. By assigning a fair market value to all this informally held land, the grand total comes to $9.3 trillion-more than the total value of all the companies listed on the New York, Tokyo and London stock exchanges.

De Soto also points out that,

In Argentina, according to Marcos Victorica of the Institute of Contemporary Studies, an economic research organization, the unreported, informal economy last year produced $50.4 billion, vs. the official GNP of some $70 billion.

In Kenya the lethal minibuses called matatus that cruise around Nairobi are the most colorful expression of the unofficial economy, which the ministry of planning says contributes about 35% to the country’s GNP.

He explains,

Extra legal businesses are taxed by the lack of good property law and continually having to hide their operations from the authorities. Because they are not incorporated, extralegal entrepreneurs cannot lure investors by selling shares; they cannot get low interest formal credit because they do not even have legal addresses. They cannot reduce risks by declaring limited liability or obtaining insurance coverage. In fact, the only ‘insurance’ available to them is that provided by their neighbors and the protection that local bullies or mafia are willing to sell them. Moreover, because extralegal entrepreneurs live in constant fear of government detection and extortion from corrupt officials, they are forced to split and compartmentalize their production facilities between many locations, thereby rarely achieving important economies of scale. With one eye always on the lookout for police, underground entrepreneurs cannot openly advertise to build up their clientèle or make less costly bulk deliveries to customers.

Ultimately, De Soto concludes,

Most people do not resort to the extralegal sector because it is a tax haven but because existing law, however elegantly written, does not address their needs or aspirations. In Peru, where my team designed the program for bringing small extralegal entrepreneurs into the legal system, some 276,000 of those entrepreneurs recorded their businesses voluntarily in new registry offices we set up to accommodate them – with no promise of tax reductions. Their underground businesses had paid no taxes at all. Four years later, tax revenue from formerly extralegal businesses totaled US$1.2 billion.

Informal Economy as percentage of GNP (follow link for complete data):

For more on the invisible economy, Capitalism’s struggle in the developing world, and property rights, I would highly recommend reading Hernando do Soto’s The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

Kosher Economics

A lesson in demand for meat from one of my favorite economists, Daniel Hamermesh:

The Economist reports that pork prices have plunged 24 percent in the past year, partly because the demand for U.S. pork exports has dropped sharply. I don’t eat pork, so how does this help me?

With a lower price of pork, the quantity demanded will rise, as people shift into this now-cheaper meat. And that will shift the demand curve leftward in related markets, including pork substitutes, such as beef and perhaps even chicken. Since I eat those, I will benefit indirectly from the drop in pork prices.

Furthermore, the drop in pork prices may be a long-run phenomenon, since one reason for it is a set of technological improvements in pig-raising. With lower long-run average costs, prices will remain lower than they were last year for quite a while. That means that my benefits will continue even without any efficiency gains among beef and chicken producers.

This, of course, only works under the assumption that pork, beef and chicken are substitutes (which, to the majority of consumers, they are). This same principle, moreover, applies to imported goods that are cheaper than domestic goods.

For instance, foreign cars in the U.S. drive down (our should have driven down) the prices of domestic cars –resulting in a greater consumer surplus. Where does the surplus go? Either into other sectors of the economy or capital markets (i.e. investment). Sadly, the U.S. government has instead chosen to extort money from taxpayers to allow domestic car manufacturers to keep producing at their inflated costs and selling at their inflated prices. The consumer surplus–instead of flowing back into the economy–evaporates to the government where it is allocated less efficiently than it would have under a market mechanism.

A free market leads to innovation, production and prosperity. A government-run economy results in nothing but stagnation and poverty.

The Intellectual Portrait Series: A Conversation with Milton Friedman

Below is an audio conversation from the Online Library of Liberty between Nobel laureates Gary S. Becker and Milton Friedman. It is part of The Intellectual Portrait Series: Conversations with Leading Classical Liberal Figures of Our Time.

This Title Is Available In The Following Formats:

MP3 mono	20.6 MB	A lower quality mono MP3 audio file.
MP3	82.41 MB	A high quality stereo MP3 audio file.
M4A	65.72 MB	A high quality stereo M4A audio file.

About this title:

Milton Friedman discusses his economic ideas with Gary S. Becker. Recipient of the 1976 Nobel Memorial Prize in Economics, Milton Friedman has long been recognized as one of our most important economic thinkers, and a leader of the Chicago school of monetary economics. A senior research fellow at the Hoover Institution since 1977, he is also the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, where he taught from 1946 to 1976. Friedman was awarded the Presidential Medal of Freedom in 1988 and received the National Medal of Science the same year.

Clunker Replacements Are Mostly Japanese

According to Newser,

The “cash for clunkers” program might be a boon for car dealers, but for American automakers the news isn’t so good—four of the five top-selling cars in the program are Japanese. While the Ford Focus is the No. 1 seller, Toyota and Honda occupy the next four spots. The new vehicles get an average of 25.4 miles per gallon, while the traded-in cars—more than 80% of which were trucks and SUVs—get just 15.8 mpg.

Good, there is nothing wrong with that. Americans deserve the freedom to buy whatever cars they please–they are adults. That should not be a radical statement, yet sadly it is.

And since Japanese cars are cheaper (not to mention better), more money will remain in Americans’ wallets to buy other American products. New industries will grow.

Question: What will the Japanese manufacturers do with the dollars they receive from American buyers?

Answer: They will spend it on American products, where dollars can be spent. Again, new–and efficient–industries will grow.