Thursday, September 30, 2010

House Approves Tariff Bill Targeting China

David E. Sanger and Sewell Chan wrote an article for The New York Times on Wednesday regarding the passage of a bill in the house that will give the Commerce Department the authority to impose tariffs on Chinese goods.
The House of Representatives sent a unusually confrontational signal to the Chinese leadership on Wednesday, voting overwhelmingly to give President Obama the authority to impose tariffs on all Chinese imports — more than $300 billion this year — in retaliation for Beijing’s refusal to revalue its currency.

The vote was 348 to 79.

The bill is unlikely to become law because the prospects for Senate approval are dim.

Nonetheless, the action was intended to hand President Obama additional leverage in what has become a major flashpoint between the world’s two largest economies. While tariffs have been slapped on specific products, from steel to tires, because of evidence of unfair export subsidies, the threat to put sizable tariffs on a country’s entire line exports to the United States is highly unusual — and, some argue, of dubious legality under international trade law. It reflects both election-year politics over jobs and huge frustration over unfulfilled promises by China to allow its currency to rise in value, which would make Chinese goods less competitive in the United States.
I find this legislation very interesting because it is a mix of politics and economics - a dangerous mix.  There is no real winner when a tariff is placed on a good.  I understand that this bill is designed to send a message to the Chinese government but it will be at the expense of the American middle class - those who depend on the inexpensive products of China will suffer by paying more for those goods.

"The gains from a tariff are clearly visible but the costs are hidden," writes Mike Moffatt, a political science and economics scholar.  "it will often appear that tariffs do not have a cost. By understanding this we can understand why so many government policies are enacted which harm the economy."

Moffatt writes the following describing the negative effects of a tariff:
Except in all but the rarest of instances, tariffs hurt the country that imposes them, as their costs outweigh their benefits. Tariffs are a boon to domestic producers who now face reduced competition in their home market. The reduced competition causes prices to rise. The sales of domestic producers should also rise, all else being equal. The increased production and price causes domestic producers to hire more workers which causes consumer spending to rise. The tariffs also increase government revenues that can be used to the benefit of the economy.

There are costs to tariffs, however. Now the price of the good with the tariff has increased, the consumer is forced to either buy less of this good or less of some other good. The price increase can be thought of as a reduction in consumer income. Since consumers are purchasing less, domestic producers in other industries are selling less, causing a decline in the economy.

Generally the benefit caused by the increased domestic production in the tariff protected industry plus the increased government revenues does not offset the losses the increased prices cause consumers and the costs of imposing and collecting the tariff. We haven't even considered the possibility that other countries might put tariffs on our goods in retaliation, which we know would be costly to us. Even if they do not, the tariff is still costly to the economy. In my article The Effect of Taxes on Economic Growth we saw that increased taxes cause consumers to alter their behavior which in turn causes the economy to be less efficient. Adam Smith's The Wealth of Nations showed how international trade increases the wealth of an economy. Any mechanism designed to slow international trade will have the effect of reducing economic growth. For these reasons economic theory teaches us that tariffs will be harmful to the country imposing them.
What interests me even more is that this bill, which is designed to manipulate world markets, was approved by 99 Republicans (more than half) - the political party that is supposedly for the free market.  If that was the case, they should have voted against the bill, but because it is an election year, they needed to do what would be perceived as the popular thing to do and let their hypocrisy show by voting for the tariff - some politicians did make some sense, though.
During the House debate, supporters cited studies that they said show the legislation would boost American exports and create more manufacturing jobs in this country.

"Some credible estimates are that we could return a million American jobs to this country," said Rep. Xavier Becerra, D-Calif., in urging support for the legislation. "We can either take bold steps or we can take baby steps."

Opponents said the legislation would boost the cost of clothing, toys and other goods that American consumers buy and also ran the risk of sparking retaliation by China against American exports.

"The available evidence is that the price of many of these Chinese goods will go up 10 percent, a pair of shoes that a mother needs for her child to go to school ... toys at Christmas, all become more expensive," said Rep. Jeb Hensarling, R-Texas.

Supporters rejected that argument, saying it is critical in hard economic times to protect U.S. jobs.
Basically, this bill looks good on paper - it will supposedly boost jobs and exports (although I hardly see how it will boost American exports), and with jobs being a top concern with the American voter, how could any politician pass up the opportunity to look like a hero by adding a million jobs to the economy?  The only problem is what good will those jobs do if many more people see their weekly bills increase possibly 10 percent?

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