Walking the anti-free-trade walk
WHILE in Pittsburgh, a sense of seemliness should prevent President Barack Obama from again exhorting the G-20, as he did April 2 in London, to be strong in resisting domestic pressures for protectionism. This month, invertebrate as he invariably is when organized labor barks, he imposed 35 percent tariffs on imports of tires that China makes for the low-price end of the market.
This antic nonsense matters not only because of trade disruptions it may cause, but also because it is evidence of his willowy weakness under pressure from his political patrons.
Obama: Can’t say “no” to protectionists in his own party.
In 2000, as a price of China’s admission to the World Trade Organization, Congress enacted a provision for “relief from market disruption” to US industries from surges of Chinese imports. Actually, American consumers cause “disruption” in American markets when their preferences change in response to progress — better products and bargains.
Never mind. Congress said disruption exists whenever imports of a product “like or directly competitive with” a US product increase “rapidly” and threaten “significant” injury to a US industry. Evidence of disruption includes the volume of imports of a particular product, the effect of imports on the prices of competing US goods and the effect on the US industry.
Notice that China need not be guilty of any wrongdoing: It can be punished even if it is not “dumping” — not selling goods below the cost of manufacturing and distributing them. (That we consider it wrongdoing for a nation to sell us things we want at very low prices is a superstition to be marveled at another day.)
And China need not be punished: Presidential action is entirely discretionary.
So Barack Obama was using the sort of slippery language that increasingly defines his loquacity when he said he was simply “enforcing” a trade agreement.
None of the 10 manufacturers who comprise the domestic tire industry sought this protectionism. Seven of the 10 also make tires in other countries. Most US manufacturers have stopped making low-end tires, preferring the higher profit from more expensive models. (Four US companies make low-end tires in China.)
The president smote China because a single union, the United Steelworkers, asked him to. It represents rubber workers, but only those responsible for 47 percent of US tire making.
Obama’s action won’t create more than a negligible number of jobs, if any. It won’t restore a large number, if any, of the almost 5,200 jobs that were lost in the tire industry between 2004 and 2008. Rather, the president will create jobs in other nations (e.g., Mexico, Indonesia) that make low-end tires. They make them partly because some US firms have outsourced the manufacturing of such tires to low-wage countries so the US firms can make a small profit, while making high-end and higher-profit tires here in America.
The 215 percent rise in tire imports from China is largely the fault, so to speak, of lower-income Americans — many of whom will respond to the hike in the cost of low-end tires by driving longer on worn tires. How many injuries and deaths will this cause? How many jobs will it cost in tire-replacement businesses, or among longshoremen who handle imports? We’ll find out.
The costs of the president’s sacrifice of the national interest to the economic illiteracy of a single labor union may also include injuries China might inflict by imposing retaliatory protectionism or reducing its purchases of US government debt — purchases that enable Americans to consume more government services than they are willing to pay for.
Obama was silent when Congress, pleasing the Teamsters union, violated the North American Free Trade Agreement by stopping Mexican trucks from delivering goods north of the border. Although he’s almost never silent about anything, he didn’t protest “Buy American” provisions in the stimulus bill.
He hasn’t denounced the idea many climate tinkerers have of imposing “border adjustment mechanisms” — tariffs — on imports from countries that choose not to burden their manufacturers, as the administration proposes burdening US manufacturers, with restrictions on carbon emissions. And he allows unratified trade pacts with Colombia, South Korea and Panama to languish.
Still, he says he favors free trade.
He must — or so he thinks — say so much about so many things, perhaps he can’t keep track of the multiplying contradictions in his endless utterances. But they — and the tire tariffs — are related to the sagging support for his health-care program
Written by George F.Will
Commentary
Even if there are numerous advantages in relation to free trade[1] like increases in net welfare, countries and governments set certain levels of protectionism[2], such as tariffs[3] and quotas[4]. These measures are employed in the event that not all involved parties stand to gain from free trade. This is to say that one or more parties are more disadvantaged than others. The basic aftermath of free trade is the creation of winners and losers.
Nevertheless, the application of tariffs hurts the country applying them. In this case, the US is in the process of imposing certain restrictions concerning the inflow of cheaper tires from China.
Before the tariff, total demand for tires was O-Q, of which O-Q1 are domestically produced. Q1-Q are Chinese imported tires. Consumer surplus is shown by the areas 1+2+3+4+5+6. Producer surplus is 7, therefore welfare[5] is represented by areas 1+2+3+4+5+6+7.
However, the US (domestic) tire firms, their shareholders and tire workers’ unions, lobby[6] the government for a protectionist measure against the “unfair competition” of tire-producers from low-wage countries. The government feels to comply with their demands and imposes a tariff of a-b which shifts the world’s supply curve up to S (world tariff). Total demand for US tires falls to Q2, but US (domestic) production increases to O-Q3. As previously stated, there appear winners and losers. The winners are the US domestic firms. Crucially, employment would be preserved and expanded. Losers are the consumers who have to pay higher prices.
There is a net welfare loss. Consumer surplus shrinks to 5+6 that is a loss of 1+2+3+4. Of that loss 1 is picked up by producers and 3 is captured by the government in the form of tax revenue. However, no one captures areas 2+4 seeing that this is the welfare loss. Finally, producer surplus increases to 1+7.
There are several valid arguments that justify the US pursuit of protectionism regarding Chinese imported tires. Initially, these policies would serve as a means in the prevention of “dumping”[7]. The motive behind China’s actions may be to rid itself of a surplus before it tires, or as a part of a sinister plot to wreck the industry in the larger country, following which prices are raised. An action which showed a certain degree of success, seeing that the US tire industry acknowledges Chinese-made products as a threat.
Furthermore, domestic workers are protected by the “unfair competition” of low wage economies. This argument states that no OECD country can compete with wage levels of the poorest LDCs. However, this ignores unit labour costs. If a worker from China earns 1 dollar an hour and produces 100 tires, while a US worker earns 20 dollars and produces 2500 tires, then unit labour costs are, 1 tire made in China = 1c, while in the US one tire costs ($ 20/2500) 0.8c, showing a cheaper unit labour cost. The reason why US worker productivity is so much higher is because the US tire industry is given massive amounts of capital and is educated and better trained.
Lastly, an increase in Chinese tire purchases will result in decreased US output —-which will inevitably lead to layoffs. Protectionism in this case preserves domestic employment. This argument is often made by trade unionists and employer groups, when lobbying for tariffs against lower cost foreign producers. In this case for example, US tire makers are currently doing this. Their argument is that higher paid US workers cannot compete with low-wage Chinese workers, resulting in structural unemployment[8].
Nevertheless, a contrasting argument states that the US has clearly lost its comparative advantage in tire manufacture and that it is a waste of scarce resources to continue to make those goods. Instead those plants should close and the workers and other resources should relocate into other sectors of the economy where the US does enjoy a cost advantage. This argument is beneficial in the long-run, however in the short run, structural unemployment will prevail for a relatively long time.
[1] Free trade- refers to any form of international transactions without being subjected to trade barriers.
[2] Protectionism- refers to policies that aim at decreasing the total amount of imports to a given country.
[3] Tariff- an indirect tax on imported goods and services.
[4] Quotas- physical limits on the quantity/volume of a given import.
[5] Welfare- total economic prosperity, or “happiness”, enjoyed by both consumers and producers.
[6] Lobby- influencing governments legislative decisions while pursuing an enlightened self interest.
[7] Dumping- selling goods or services on foreign markets at a price below the cost of producing that good.
[8] Structural unemployment- unemployment due to occupational and geographical immobility.