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Brooks Wilson's Economics Blog: More on the US's Trade Dispute with China

Monday, September 14, 2009

More on the US's Trade Dispute with China

(HT Drudge)  As would be expected, China has announced its opposition to the Obama administration's decision to place a 35% tariff on tires from China.  Geoff Dyer and Tom Braithwaite of the Financial Times in "US tyre duties spark China clash," outlines the issues in the trade dispute. 
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.

“This is a grave act of trade protectionism,” Mr Chen said in a statement. “Not only does it violate WTO rules, it contravenes commitments the US government made at the [April] G20 financial summit.”
Economists often wonder if presidents listen to their economic advisors and this is a data point that suggests they do not.  Larry Summers and Christina Romer, two top notch economists, must be hiding under their desks and refusing calls from reporters.  The administration will be hard pressed to find economists who support the action.  Brad DeLong gives a simple numerical example to explain why the tariff is a bad idea.  After citing a reporter who notes that the tariff will add $3.50 per tire and save 5,000[1] U.S. jobs, DeLong does some back of the envelope calculations.
Let's see... 250 million cars in America... need 4 tires per car... need new tires every 2.5 years. 400 million tires a year... $1.4 billion dollars a year... 10,000 worker jobs saved... $140,000 dollars per worker-job per year.

Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.

But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.

That's the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid.
Does the administration believe that we are the only country that has domestic producers who will complain when competition heats up with foreign producers?  Dyer and Braithwaite continue.
China said it would now investigate imports of US poultry and vehicles, responding to complaints from domestic companies.

The US earlier warned Beijing against taking retaliatory action. “Retaliation would be inappropriate, as the United States acted entirely within the bounds of trade laws and within the safeguard provision that China itself agreed to upon accession to the World Trade Organisation.
[1] The job numbers used by DeLong come from another article and differ by 2,000 from those cited by Dyer and Braithwaite. 

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