Are trade wars starting with China?

Author: Jay | Date: September 23, 2009 | Please Comment!

The Problem:

It looks like thanks to the Obama administration the US is imposing a 35% tariff on Chinese made tires to protect jobs here in the US.

The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year, and 35 percent in the third. Obama settled on slightly lower penalties — an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said Friday.

The steelworkers union brought the original case in April, accusing China of making a recent push to unload more tires ahead of Obama’s expected action. The union says more than 5,000 tire workers have lost jobs since 2004, as Chinese tires overwhelmed the U.S. market. (1)

Does this not make sense to anyone else or is it just me? During this tough economically time people are now going to have to pay more for tires. Thanks Obama for forcing me to pay more for tires. I really appreciate it!

Economics of Tariffs:

Economically speaking wouldn’t you want to keep the prices low and keep businesses competitive? If a business can’t compete then it should go out of business and have those resources redistributed into the economy for more efficient jobs.

The book “Economics in One Lesson” chapter 11, “Who’s ‘Protected’ by Tariffs?”, section 3 has a great example of the consequences of imposing tariffs. It’s a bit to read but it is an excellent analogy to the tariffs the Obama administration has decided to impose on Chinese tires.

Now let us look at the matter the other way round, and see the effect of imposing a tariff in the first place. Suppose that there had been no tariff on foreign knit goods, that Americans were accustomed to buying foreign sweaters without duty, and that the argument were then put forward that we could bring a sweater industry into existence by imposing a duty of $5 on sweaters.

There would be nothing logically wrong with this argument so far as it went. The cost of British sweaters to the American consumer might thereby be forced so high that American manufacturers would find it profitable to enter the sweater business. But American consumers would be forced to subsidize this industry. On every American sweater they bought they would be forced in effect to pay a tax of $5 which would be collected from them in a higher price by the new sweater industry.

Americans would be employed in a sweater industry who had not previously been employed in a sweater industry. That much is true. But there would be no net addition to the country’s industry or the country’s employment. Because the American consumer had to pay $5 more for the same quality of sweater he would have just that much less left over to buy anything else. He would have to reduce his expenditures by $5 somewhere else. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 50,000 persons might be employed in a woolen sweater industry, 50,000 fewer persons would be employed elsewhere.

But the new industry would be visible. The number of its employees, the capital invested in it, the market value of its product in terms of dollars, could be easily counted. The neighbors could see the sweater workers going to and from the factory every day. The results would be palpable and direct. But the shrinkage of a hundred other industries, the loss of 50,000 other jobs somewhere else, would not be so easily noticed. it would be impossible for even the cleverest statistician to know precisely what the incidence of the loss of other jobs had been—precisely how many men and women had been laid off from each particular industry, precisely how much business each particular industry had lost—because consumers had to pay more for their sweaters. For a loss spread among all the other productive activities of the country would be comparatively minute for each. It would be impossible for anyone to know precisely how each consumer would have spent his extra $5 if he had been allowed to retain it. The overwhelming majority of the people, therefore, would probably suffer from the illusion that the new industry had cost us nothing. (2)

Even in history we have a good example of the effects of tariffs with Smoot-Hawley Tariff Act in the 1930s. The act, according to Wikipedia, “was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels.” (13)

The purpose of the act was due to the “weakening labor markets in 1927 and 1928 (which) prompted Smoot to propose yet another tariff increase.” (13) I interpret this as Smoot trying to protect American jobs. However, it had a drastically different affect.

The act was on 20,000 items but the effects were devastating on the American economy at the time.

U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP. (12)

How does this relate to the tire tariffs? Depending on China’s reaction to the tire tariffs something like Smoot-Hawley is in the realm of possibilities. It may not happen legislatively, but the president reacting and China reacting could spiral downwards. I think the risk of this happening is low, at the same time, it could happen to a scale we haven’t seen since Smoot-Hawley was passed. You can also use this as an example of what might happen in the case of the tire industry and the unintended consequences of the tariffs.

The China and US Difference:

The US has other competitive disadvantages against China. The US has labor laws and worker’s rights. China has labor laws but with a minimum wage of roughly $0.60 per hour (3). As a result China get the edge here because they have massive amounts of people who are willing to work for cheap pay. The US has a much higher minimum wage of $7.25pr/hr. (4) China like the US has a 40 hour work week. However, with such lower wages it’s no wonder how China can produce for less.

Minimum Wage Laws and their consequences:

The high minimum wage laws cost US businesses as a whole billions of dollars a year. I’m not saying that workers shouldn’t have rights. What I’m trying to show is how these laws make the US less competitive. It’s no wonder outsourcing is as popular as it is.

A quick browse of Wikipedia will show a history of the minimum wage laws. The first minimum wage law was set in 1933, during the depression, at $0.25 per hour. However, the law was struck down by the supreme court in 1935 as unconstitutional. Then in 1938 as part of the Fair Labor Standards Act, the minimum wage was established again at $0.25. (7) How this can be unconstitutional once in 1935 and then not again in 1938 is beyond me.

None the less in 1941 the supreme court found it to be constitutional saying:

[I]t is no longer open to question that the fixing of a minimum wage is within the legislative power and the bare fact of its exercise is not a denial of DUE PROCESS under the Fifth more than under the Fourteenth Amendement. (8)

The question of the minimum wage laws in 1938 is unconstitutional or not is out of the scope of this post, but it is definitely a debate that I believe needs to be started once again. If you are interested in pursuing more about minimum wage laws I would suggest looking at mises.org and libertarianpapers.org.

These laws have created a black market for labor. Just take a look at all the illegals that do all types of labor that others won’t do at a cost that is much cheaper than minimum wage. It seems that for some businesses it is worth the risk of hiring illegals to stay competitive and in business than have to pay minimum wage for legals to work and face the face that it will drive them out of business.

A few months ago I found some great videos made in the 80s of economist Walter Williams. These videos go into a bit of detail on the consequences of minimum wage laws. It is definitely worth the time to watch (~30 minutes). If you can’t watch all the videos I urge you to at least watch part 2. (5) If you even have more time check out IdeaChannel.tv they have some great original content worth checking out. (See the end of the post for the videos.)

Union Influences:

Let me start with this quote that president Obama said in a speach at the AFL-CIO cenvention in Pittsburg on September 15th, 2009.

We’ll grow our middle class by building a stronger labor movement. (9)

Obama also said the following about unions. I would argue that Obama really doesn’t understand economics or at the very least his ideas are so backwards that the things he believes will make for a better America will only make it worse.

So let us never forget: much of what we take for granted-the 40-hour work week, the minimum wage, health insurance, paid leave, pensions, Social Security, Medicare-they all bear the union label. It was the American worker-union men and women-who returned from World War II to make our economy the envy of the world. It was labor that helped build the largest middle class in history. So even if you’re not a union member, every American owes something to America’s labor movement. (10)

The labor unions are also very influential to the Obama administration. Senator Sherrod Brown (D-Ohio) said, “Since China joined the WTO, American workers have not been assured that the government would defend them against unfair trade.” (11) At the same time during the Obama campaign he said, “(Obama) had pledged to “crack down on China” and “work to ensure that China is no longer given a free pass to undermine U.S. workers,” as his Web site put it.” (11) Apparently, since the American unions are so influential it is no wonder why Obama is protecting the tire industry with these new tariffs.

In the same article, The Washington Post Leo W. Gerard, president of the United Steelworkers union said, “The president sent the message that we expect others to live by the rules, just as we do.” (11) It seems as Mr. Gerard is only thinking about himself and his union workers and not the bigger picture of the economy or his consumers as a whole. If I could question Mr. Gerard I would ask him one question. How do we get others to live by the same rules we have set? There are only two answers I can think of. One, we don’t and two, there would have to be some global orginzation that would enforce the same standards world wide (WTO anyone?). Anyone else have any other thoughts about this?

Lastly, on Judge Napolitano’s internet show on FOX News, Freedom Watch, he had Dan Griswold from CATO on to talk about the tariffs. They go into the discussion of Union pressure on Obama to impose tariffs not only on tires but possibly an array of goods coming into our country. The effects it has, going to have, and who is going to have the most impact due to the tariffs. It is a very good segment and I highly recommend watching the ~9 minute video. (6)

Conclusion:

Regardless of what you think about labor laws and worker’s rights China has a competitive advantage. This should be good for the US consumer. However, the influences of Unionized work in the government and the government’s reluctance to follow the constitution it seems as though the American public are in the cross hairs of the policy of the government. The consequences are numerous as seen through Smoot-Hawley Tariff Act, the loss of cheap tires for people who can otherwise not afford them pointed out by Dan Griswold from CATO on Freedom Watch, and Marguerite Trossevin, who represents a coalition of American tire companies that import Chinese tires said, “the tariff decision is “very disappointing.” She predicted price increases for U.S. consumers and losses for U.S. tire importers. ”For the U.S. tire distributors and consumers, there’s going to be a heavy burden to bear,” she said. “It sends the message that special interests will get protection if they ask for it — regardless of what that means for broader trade policy.” (11)

In conclusion, I will leave the rest up to you to do the research necessary to make up your own mind.

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