Saturday, September 12, 2009

Poking The Chinese Dragon

It is very widely agreed upon that the trade wars that began with the Smoot-Hawley Act of 1930 were a significant contributor to the severity of the Great Depression. Obama's advisers are well aware of this, but this didn't stop the President from deciding to impose punitive tariffs on tires imported from China, increasing the tax from 4% to 35%.

Considering the desire of virtually every U.S. business to sell to the Chinese, the likelihood that China will be a substantial positive contributor to global GDP in the coming decades, the fact that the Chinese hold a significant amount of U.S. Treasury securities, and the notion that Chinese funding of our future deficits would certainly be helpful, it is clear that this move is being done simply to appease Obama's union support.

It's hard to imagine the Chinese will be pleased by this move. We're bound to see some form of retaliation from them before long. Of course, our politicians will be outraged by any Chinese retaliation. Let's hope this gets nipped in the bud quickly and doesn't escalate.

Evidence that this is simply a political ploy rather than a sound economic decision made with the best interest of the country in mind comes from a New York Times piece on this subject.
The Tire Industry Association has opposed the tariffs, arguing that they will not preserve American jobs but will instead cause manufacturers to relocate plants to other countries where they can produce tires cheaply.

The decision signals the first time that the United States has invoked a special safeguard provision that was part of its agreement to support China’s entry into the World Trade Organization in 2001.

Under that safeguard provision, American companies or workers harmed by imports from China can ask the government for protection simply by demonstrating that American producers have suffered a “market disruption” or a “surge” in imports from China.

Unlike more traditional anti-dumping cases, the government does not need to determine that a country is competing unfairly or selling its products at less than their true cost.
So, we're not upset that the Chinese are dumping their product at less than cost to steal market share. Apparently, we're just upset that the Chinese are selling a competitive product at a price Americans find attractive. If that's the threshold for tariffs, why aren't we slapping tariffs on every product China makes?

In the short-term, Obama may have won points with his union supporters, but at what cost? We're likely accelerating the loss of these manufacturing jobs. We're risking a trade war with the next super power. And, despite falling income and soaring unemployment, every American will now have the patriotic opportunity to pay more for their tires. The treadwear on the American taxpayer continues to increase.

This post was put aside for a day. As I was getting ready to send this out, I saw the following story from Bloomberg:
China to Probe Alleged ‘Dumping’ of U.S. Products

Sept. 14 (Bloomberg) -- China announced a probe into the alleged dumping of American auto and chicken products, two days after U.S. President Barack Obama imposed tariffs on imports of tires from the Asian nation.

Chinese industries have complained that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site yesterday. The Beijing-based ministry is also looking into subsidies for the products, it said. It didn’t specify the imports’ value.

link to full story
It's hard to blame the Chinese for retaliating. We'd certainly do the same had they acted first. The Chinese are most likely to target a value of American imports fairly equal to the value of Chinese tires being impacted. If we know what's best, we'll leave it at that and go back to squabbling over North Korea.

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