Tire prices are rising and some analysts are pointing fingers at the Obama administrations 35% tire tariff on Chinese imports. I had previously vocalized why this was a bad idea: that although the current impact would be small, it could lead to a trade war with China. Of course with any tariff, there will be a dead weight loss, resulting in a decline of consumer surplus. So, how have consumers been affected by this? Explicit costs include: (From the AP article)
Under the government’s new tariff, which went into effect in September, a set of Chinese tires that would have cost $280 now cost nearly $100 more.
As well as implicit costs:
Jennifer Stockburger, a tire test engineer for Consumer Reports, says six of the top ten all-season tires recently tested by the magazine were made in China by major manufacturers.
More importantly, the price increases for domestic tires is expected to end up offsetting the tariffs. Some of the price increases have been caused by an upcoming rise in demand due to an economic recovery and maintenance needs as well as increasing material costs for production.
Lets do a cost-benefit analysis. 17% of the tire market is made up of Chinese tires. Tire sales for 2008 was around $27 billion, which means that about $4.6 billion is Chinese tires. With an average price of $280 for Chinese tires pre-tariff, the total quantity of Chinese tires sold would amount to 16.4 million. With a $100 price increase, assuming that domestic tire price increases offset the tariff increase, U.S. consumers are expected to lose out on a net savings of over $1.6 billion. And that of course does not take into account the implicit cost of quality loss.
The tariff was expected to stop the loss of employment in the U.S. tire industry. By assuming there would be a benefit of saving 5,000 jobs in the tire industry, even at the median U.S. income, that only amounts to a very large estimate of over $250 million of saved income.
Therefore, Obama’s tire tariff cost the U.S. over $1.35 billion dollars. Lets not to mention the sour trade relations he has made with China, and considering how his current trip there went; he has made it even worse. I hope his political support from the unions was worth it when he goes for re-election in 2012. It is quite an expensive campaign contribution.
Paul Krugman has an interesting blog post on comparing current protectionist policies in Ecuador put in place that are similar to those put in place in the U.S. during the great depression. The reason? Krugman points to a new paper that yields evidence to suggest that protectionist policies were a crude means of attempting to gain monetary stability as opposed to the popular argument that it was just simply economic ignorance. Assuming that this new paper is correct in its findings, ( which makes sense given the tumultuous environment of international exchange rates and the gold standard during the depression era) Krugman may have missed the difference between the Ecuadorian economy and the depression era U.S.
While the Ecuadorian dollar being pegged to the U.S. is an appropriate similarity to the gold standard, the U.S. was flush with gold reserves pre-depression, which marked it as an economic juggernaut for international lending. This is a starkly different position than what Ecuador is in right now.
While the protectionist policies Ecuador has decided to use may help stabilize their monetary stability, Krugman failed to highlight an important peice of what Ecudor actually put it on: (from the article he quoted, here)
In January 2009 Ecuador announced a series of stiff import restrictions on 630 tariff lines, affecting 8.7 percent of its ‘tariff universe’ and 23 percent of the volume of imports. Duties were raised on 369 tariff lines and quota restrictions imposed on 271 others for a one-year period. They cover products ranging from processed foods and shoes to cars, mobile phones and sunglasses, as well as many other goods that can be manufactured in Ecuador.
Ecuador insisted that the measures it proposed were necessary to balance its widening current account deficit.
As you can see in bold, whether or not this really is a correct justification for stabilizing their monetary system, what Ecuador has done invariably (or intentionally) is take down the forced liberalization that the WTO places on many other developing nations. In essence, Ecuador has made a move that will protect infant industries, which would hopefully help Ecuador be able to level the playing field concerning international trade. This level of protectionism, for at least their infant industries, has been proven to work in many of the high growth Asian developing nations including South Korea, China, Malaysia, Taiwan, and Vietnam. Ecuador has been able to use monetary stability as a guise for doing something more important for their economic development. The best part? The WTO is unphased, as they will let Ecuador do what their doing for now and hopefully, they will keep it that way.
Krugman, there is a deep moral here and that is to give Ecuador the right to develop their economy, whether it is in the name of monetary stability or just plain old protectionism.
Posted in Trade Policy
Tagged China, Economic Growth, Economy, Ecuador, Exchange Rates, Gold Standard, International Trade, Monetary Policy, Tariffs, U.S., WTO
Earlier today from the WSJ:
China’s Ministry of Commerce has made a preliminary ruling to impose tariffs of as much as 36% on certain nylon imports from the U.S., saying the imports have damaged the domestic industry.
Tariffs will also be imposed on such imports from the European Union, Russia and Taiwan, but at lower rates.
The tariffs will affect firms including BASF Corp., the U.S. affiliate of German chemical giant BASF SE, and Honeywell International Inc.’s Honeywell Resins & Chemical LLC, it said.
It is a shame that some workers at Honeywell’s and BASF’s U.S. facilities will have to face costs cuts in order to keep in line with profits. Another example of how Obama’s trade move was a bad one.
Becker and Posner has a thorough write up about why Obama did what he did regarding the “Buy American” stimulus provision as well as the Chinese tire tariffs. (here)
While we wait for the data to come in, I expect imports from elsewhere to replace the lost Chinese imports, only negatively affecting Chinese manufacturers and not creating any positive gain for the Unions. For Obama, he has the support now when re-election comes, but if a trade war ensues, he will have more on his plate than he bargained for.
Before China was even able to retaliate to the United State’s tire tariff, paper manufacturers have submitted their trade complaint to Washington, (here) hoping to get the same protection that Obama granted to the USW involving American made tires vs. Chinese ones. Ever hear of the saying “If you give a mouse a cookie then it will ask for a glass of milk?”
What doesn’t irk me is Obama’s move towards a more protectionist policy. (OK, it does a little bit) In fact it would be nice if he was able to outline exactly the policy he was going for. Instead, we are left with a very vague international trade policy.
The tire tariff was supposed to be a political move, albeit a risky one. Obama was expecting support from labor unions for upcoming health reform at the price of souring international trade policies. Pundits all over expected this to be the beginning of a trade war as China obviously tried to retaliate by evaluating their own tariffs on chicken feet and auto parts.
Already you can see how poorly this went. Not only are union workers worse off now since a larger and more important sector, auto parts makers, may lose out to exporting to growing Chinese markets, Obama is now facing the domino effect everyone expected: other unions who feel that they are being threatened now expect the same protection.
There are many ways this issue can be approached that doesn’t have to be an all or nothing game against American manufacturing vs Chinese imports, but this is something that shouldn’t be hanging over the administration heads now. Obama has more important things to focus on, like healthcare reform.