Just What an Ailing Economy Needs: A Trade War

by Carrie L. Lukas

September 14, 2009, 2:48am

 President Obama slapped a duty on Chinese made tires on Friday, which looks like it will set off a trade war.  The Financial Times reports:

In his first big test on world trade since taking office in January, Mr Obama sided with America’s trade unions, which have complained that a “surge” in imports of Chinese-made tyres had caused 7,000 job losses among US factory workers.

Chen Deming, China’s minister of commerce, condemned the decision, saying that it “sends the wrong signal to the world” at a time when Washington and Beijing should be co-operating to deal with the worst economic and financial crisis in decades.

The Financial Times quotes Eswar Prasad, a trade professor at Cornell on the potential impact of the U.S. imposed tarriff:  “These protectionist measures, some of which amount to domestic political posturing rather than substantive restraints on trade, could easily ratchet up into a full-blown trade war and inflict serious economic damage on both countries.”

When it comes to trade, too many only look at one side of the ledger:  the job losses caused by outside manufacturers producing lower cost goods and driving U.S. manufacturers out of business.   Yet the U.S. wins more than it loses from trade:  we have more markets in which to sell our own products and we save money, which can then be put to other uses, by buying cheaper products from elsewhere.   Encouraging the closing of markets around the world is exactly the opposite of what we should be doing in the midst of a recession.

 From the WSJ article “Tariff on Tires to Cost Consumers“:

1. Consumers who buy low-price Chinese tires — the bulk of the tires China exports to the U.S. — will be hit hardest by the new tariff, as shortages in this market segment cause retailers to scramble to find alternative sources in other countries.

 

2. The tariffs won’t just hit Chinese producers. Both of the U.S.’s remaining domestic manufacturers — Goodyear Tire & Rubber Co. and Cooper Tire & Rubber Co. — make tires in China that they sell in the U.S. Cooper this year is on track to import 2.5 million tires that it made in China. It was planning to boost that to four million next year.

 

MPerry: In other words, the “punitive tariffs” on the Chinese will actually punitively penalize our own American consumers, especially poor and middle-class, the largest buyers of low-price Chinese tires, and we’ll also punitively punish two of our own Ohio-based tire companies, which combined employ more than 88,000 full-time employees, many in the U.S.

 

Obama Subsidizes President Obama with Tire Tariff

Posted by Daniel Ikenson

Who benefits from 35 percent duties on Chinese-produced tires?

U.S. producers? No, they are the ones who, pursuing profit-maximizing strategies, have consciously shifted production of low-end tires from their U.S. plants to their Chinese plants over the past few years. They will now have to incur the costs of shifting production from China to production facilities in Brazil, Mexico, Indonesia and other developing countries, where it makes economic sense to produce low-end tires.

U.S. workers, then? Nah. Low-end U.S. tire production workers won’t see an increase in U.S. capacity, capacity utilization, hours worked, or wages because, as implied above, production isn’t coming back to the United States. Meanwhile, U.S. workers in tire wholesaling, distribution, and other segment of the supply chain are likely to see a decline in business in the short-run, as higher prices reduce demand for tires. Things may improve once adjustments are made to the new production locations, but that will involve certain adjustment costs and lower profit margins because presumably China is the profit-maximizing production location. Right?  Why else would producers have chosen China?

Does the tariff benefit consumers, then? Come on. Not only will it lead to higher prices for consumers, but it will hit cost-conscious consumers the hardest. And you thought President Obama opposed regressive taxation?

No, the only beneficiary of the tariff is President Obama, who presumably gets some political mileage for his Chicago-style payback of Big Labor.

But make no mistake that any benefits to the president will be fleeting, as the direct costs of the tire tariff and the costs of copycat protectionism start to squeeze economic recovery. As the president is flooded with similar requests for protection from other unions and producers, he will have to choose between disappointing those favor-seekers or strangling economic prospects entirely.

The tire decision was selfish and shortsighted.