Who ever said China was communist?

From the Telegraph:

In another sign of Asia’s ascendancy, and of its growing economic and political union, duties will be dropped on everything from steel to rubber and shoes to electronics.

China hopes that the zone will quickly rival the European Economic Area and the North American Free Trade Area and provide new outlets for its goods in the face of Western protectionism.

Duties will be scrapped on 90pc of goods traded across China, Indonesia, Malaysia, Singapore, Thailand, Brunei and the Philippines. Over the next five years, tariffs will also be removed on trade in Cambodia, Laos, Vietnam and Burma.

Tire Tariff Cost US About $1.35 Billion

The consequences of Obama’s 35 percent tariff on imported Chinese tires are now starting to become apparent. An Associated Press article yesterday (via Pushing Possibilities) identified a few of the explicit and implicit consequences of the tariff.

Explicit costs include:

Under the government’s new tariff, which went into effect in September, a set of Chinese tires that would have cost $280 now cost nearly $100 more.

Implicit costs include:

Jennifer Stockburger, a tire test engineer for Consumer Reports, says six of the top ten all-season tires recently tested by the magazine were made in China by major manufacturers.

To calculate the true cost of the tariff, Pushing Possibilities conducted a cost-benefit analysis:

17% of the tire market is made up of Chinese tires.  Tire sales for 2008 was around $27 billion, which means that about $4.6 billion is Chinese tires. With an average price of $280 for Chinese tires pre-tariff, the total quantity of Chinese tires sold would amount to 16.4 million.  With a $100 price increase, assuming that domestic tire price increases offset the tariff increase, U.S. consumers are expected to lose out on a net savings of over $1.6 billion.  And that of course does not take into account the implicit cost of quality loss.

The tariff was expected to stop the loss of employment in the U.S. tire industry.  By assuming there would be a benefit of saving 5,000 jobs in the tire industry, even at the median U.S.  income, that only amounts to a very large estimate of over $250 million of saved income.

Therefore, Obama’s tire tariff cost the U.S. over $1.35 billion dollars.

A short guide to protectionism

From the Telegraph:

1.  Smoot-Hawley

The most famous act of protectionism took place in the 1930s when the US government, facing the early forces of depression, legislated to impose tariffs on over 20,000 imported goods – some significantly. The act triggered a spiral of retaliatory protectionism across the world, and in the view of some economists, fuelled both the Great Depression and the geopolitical tension that led to the Second World War.

2. Common Agricultural Policy

Under the CAP – a European scheme, although similar programmes are in place in the US and throughout the developed world – domestic farmers are given subsidies for producing (or in some cases not producing) food. Without such subsidies many domestic agricultural businesses would collapse, since they cannot compete with the cheap prices charged by overseas exporters for everything from vegetables to livestock to cotton.

3. Shoe wars, bra wars

Recently, in his former role as European Trade Commissioner, Peter Mandelson accused China of illegally dumping vast numbers of shoes – and later bras – on the European markets. “Dumping” is the name given when a country exports a product at a price even lower than that paid in its domestic market. Under the WTO code, it can act against such moves under so-called “anti-dumping” rules.

4. Chinese tyres

China and the US are currently locked in a trade battle over the trade in car tyres. In September, the US Congress accused China of illegally swamping the US market with cheap tyres and imposed tariffs on those imported from the Asian giant. China in turn accused the US of protectionism, arguing that exports to America had actually dropped last year. But with thousands of American jobs on the line, the case is still the focus of heated debate.

5. India vs China

The WTO is not merely a mechanism for the West to fight its own corner against cheaper emerging market exporters. Emerging and developing nations also use it as a forum to tackle their own independent trade battles. Recently, China and India have been locked in debate over trade, with India accusing China of expanding overly aggressively into its silk and satin markets. India argues that Chinese prices are so cheap that its key domestic industry is simply unable to compete.

Economic vandalism: Barack Obama and free trade

The Economist has a timely and spot-on article on Obama’s “string of ominously protectionist policies” highlighted recently by his decision to impose a 35 percent tariff on imported Chinese tires. The magazine writes:

This newspaper endorsed Mr Obama at last year’s election (see article) in part because he had surrounded himself with enough intelligent centrists. We also said that the eventual success of his presidency would be based on two things: resuscitating the world economy; and bringing the new emerging powers into the Western order. He has now hurt both objectives.

…The tyre decision needs to be set into the context of a string of ominously protectionist policies which started within weeks of the inauguration with a nasty set of “Buy America” provisions for public-works contracts. The president watered these down a bit, but was not brave enough to veto. Next, the president stayed silent as Congress shut down a project that was meant to lead to the opening of the border to Mexican trucks, something promised in the NAFTA agreement of 1994. Besides these sins of commission sit the sins of omission: the president has done nothing at all to advance the three free-trade packages that are pending in Congress, with Colombia, Panama and South Korea, three solid American allies who deserve much better. And much more serious than that, because it affects the whole world, is his failure to put anything worthwhile on the table to help revive the moribund Doha round of trade talks. Mr Bush’s tariffs, like the Reagan-era export restraints on Japanese cars and semiconductors, came from a president who was fundamentally committed to free trade. Mr Obama’s, it seems, do not.

Click here to read the full article.

Do Economists Agree on Anything? Yes!

Several years ago, Greg Mankiw posted on a column by Robert Whaples in which he “surveys PhD members of the American Economic Association and finds substantial agreement on a wide range of policy issues” from free trade to educational vouchers.

The information below shows his findings:

• 87.5 percent agree that “the U.S. should eliminate remaining tariffs and other barriers to trade.”
• 85.2 percent agree that “the U.S. should eliminate agricultural subsidies.”
• 85.3 percent agree that “the gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged.”
• 77.2 percent agree that “the best way to deal with Social Security’s long-term funding gap is to increase the normal retirement age.”
• 67.1 percent agree that “parents should be given educational vouchers which can be used at government-run or privately-run schools.”
• 65.0 percent agree that “the U.S. should increase energy taxes.”

And, finally, the topic that generates the most consensus:

• 90.1 percent disagree with the position that “the U.S. should restrict employers from outsourcing work to foreign countries.

Click here to view the original article.

Click here to view the data.

Tire Industry Opposed ‘Punitive Tire Tariff’

Mark J. Perry points to an interesting New York Times article that claims the “punitive tire tariffs” against China were in fact opposed by the domestic tire industry (Goodyear and Cooper):

Last Friday night, Mr. Obama, responding to a complaint by the United Steelworkers, imposed a 35 percent tariff on Chinese tires for cars and light trucks. China quickly responded by threatening to retaliate against American auto products and chicken meat, raising fears of a possible trade war, an especially unwelcome prospect just as the global economy is struggling to recover.

China has deplored the administration’s decision, suggesting it caved to domestic support for protectionism. The Tire Industry Association, which represents American tire retailers, said the decision was ill-advised and would lead to higher prices for consumers.

Asserting that the decision would hurt tire retailers, the association said it “believes this was a politically motivated decision that will end up costing more jobs than it saves. These tariffs will not bring back the jobs that the union claims have been lost.”

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

Milton Friedman: ‘The Business Community’s Suicidal Impulse’

In 1999, Milton Friedman wrote,

There’s a common misconception that people who are in favor of a free market are also in favor of everything that big business does. Nothing could be further from the truth. As a believer in the pursuit of self-interest in a competitive capitalist system, I can’t blame a businessman who goes to Washington and tries to get special privileges for his company. He has been hired by the stockholders to make as much money for them as he can within the rules of the game. And if the rules of the game are that you go to Washington to get a special privilege, I can’t blame him for doing that. Blame the rest of us for being so foolish as to let him get away with it.

I do blame businessmen when, in their political activities, individual businessmen and their organizations take positions that are not in their own self-interest and that have the effect of undermining support for free private enterprise. In that respect, businessmen tend to be schizophrenic. When it comes to their own businesses, they look a long time ahead, thinking of what the business is going to be like 5 to 10 years from now. But when they get into the public sphere and start going into the problems of politics, they tend to be very shortsighted.

Click here to read the full article.

U.S. Hypocrisy Knows No Bounds

Today, The Wall Street Journal reports:

WASHINGTON — In a bid to revive support for free trade within the U.S., the Obama administration plans to press foreign nations to increase imports of U.S. agriculture and manufacturing — but not to push so hard as to ignite a protectionist backlash.

“In order to save trade, we’ve got to deal more honestly with those who feel like [trade's] benefits haven’t been manifested for them,” U.S. Trade Representative Ron Kirk said in an interview Tuesday. “We’ve got to be serious about enforcement.”

Thursday, Mr. Kirk plans to travel to Mon Valley Works, a steelmaking complex in Braddock, Pa., to tell steelworkers that the U.S. will begin regular reviews of countries whose regulations and other practices limit American exports of agriculture and manufactured goods. In agriculture, for instance, the U.S. would target health-based import restrictions that Washington considers bogus — such as bans of American pork products by Russia, China and other nations in reaction to the outbreak of H1N1 influenza.

The U.S. effort would rely largely on trying to embarrass countries into changing policies, rather than directly threatening tariffs or other commercial penalties. The U.S. could decide to refer some of the disputes to the World Trade Organization, but getting cases decided there can take years.

“One of the legitimate complaints levied against our trade policy is people feel like we just let our partners run roughshod over us,” Mr. Kirk said, at the cost of U.S. jobs. “I don’t think it’s too much to ask of our trading partners that you live by the rules that you agreed to.”

From both an economic and a philosophical perspective, there are many problems with the President’s new push on trade. From a philosophical perspective, it’s simple: the government should never interfere in trade between two consenting parties which does not produce any negative externalities. Though governments make trade deals, it is not governments or nations that trade. It is the individual citizens and firms of those nations. When two parties enter into a transaction, they reach terms that they each find beneficial. As soon as governments step in and impose regulations, taxes, tarriffs, etc., both of the original parties lose value. Each is losing some value to government. Government’s primary responsibility is to protects its citizens rights – it is a gross abuse of power when government steps into private transactions for the sake of asserting power or protecting a favored constituency.

As touched upon above, trade restrictions have adverse economic impacts for every country involved. Americans, for reasons unfathomable to me, are obsessed with protecting our auto industry. Why? Did we seek to protect the horse and carriage industry when the automobile was invented? Why would we resist exporting agricultural and manufacturing jobs overseas? I welcome the opportunity to decrease demand for lower-wage jobs and give American youth more incentive to seek higher education and professional careers. This, in fact, is one of the primary benefits of trade – specialization. For a simple example, I can just look back to my childhood. My parents instructed my brother and I to cut the lawn. This required us to complete two tasks: mowing and weed-whacking. We were told that whoever weeded the front yard, was to mow the back. And that whoever mowed the front, was to weed the back. My brother and I (with no knowledge of economics) quickly came to the conclusion that this was highly inneffective. My brother is stronger than I am, while I have always been more particular about yard work. So we quickly decided that my brother would do all the mowing and I would do all the weed-whacking. As a result, the work was faster and of higher quality. My parents’ plan for fairness was thrown out the window, but all parties to the transaction (my parents, my brother, and myself) were all better off. International trade works the same way as the economics of my parents’ lawn. If Japan is best at producing quality cars, Mexico can produe agricultural products at the lowest cost, and the U.S. offers the most desirable financial products; the U.S. should focus on financial products, where it will make the highest profit. Meanwhile, U.S. consumers benefit from the higher quality cars provided by Japan and the lower cost produce provided by Mexico. A minority of U.S. workers may suffer, but is right that an entire country should be forced to buy inferior and more expensive products for sake of a politician’s favored constituency? No. Unless we switched to an oligarchy.

Getting past general cricisms of trade restrictions, Ron Kirk’s statements are ridiculous. President Obama may, as the WSJ article claims, have tried to temper “Buy American” (i.e. protectionist) clauses in the stimulus bill, but that does not change the fact that we have adopted many protectionist policies. Plus, we are now heavily subsidizing both our auto and agricultural industries – a fact I’m sure is considered quite unfair by many of our trading partners.

Besides the global recession, we have threats and potential threats to our national security around the world. North Korea is threatening to launch nuclear missiles at Hawaii, Iran continues its posturing, we are involved in conflicts in both Iraq and Afghanistan, and Russia clearly has not given up its imperialistic ambitions for Eastern Europe. The record of history demonstrates that countries with strong economic ties are very reluctant to declare war with one another. Wars, sanctions, treaties – no policy tool can compare to the simple act of letting international trade alone. I can think of no better instrument of peace than capitalism.