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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Monday, September 21, 2009

The Tariff on Tires

Just over a week ago, the Obama Administration announced a 35% tariff on certain car and truck tires imported from China. Apparently, the purpose of the tariff is to raise the price of imported tires so they won't be so attractive, thereby encouraging U.S. consumers who are shopping for new tires to choose some produced in the U.S. It's hard to know how savvy tire-shoppers are, but one of them, Debbie from Geranium Farm's Hodgepodge, saw an article the next day with the headline, "Tire Prices To Rise by 20-30%". Debbie thought to alert her relatives and friends who might be needing tires – as she herself does at the moment, she tells me – and she circulated the article to some 40 people, including me. They should buy their tires right away, she thought, before that huge price hike.

I responded to her note immediately, but as an economist, not a tire-buyer. The following poured out of my fingers into the computer in not more than ten minutes (the text here is a bit more elaborate than what I actually sent back to her).

Dear Debbie,

I guess you want a comment about this . . . .

I haven't read this specific piece, but I've kept up with the news in the last couple of days. It is truly disappointing. In a word, protectionism is bad. Raising tariffs in the 1930s was a major contributor to the length of the Depression. Because when we raise them, the other countries retaliate, as China has already threatened on chicken and car parts. So prices go up and jobs go down, everywhere. We've spent years and years since then trying to lower tariffs.

It is false that higher import tariffs will "protect" American jobs. Sometimes, very occasionally, you can make an argument in a very young industry that it deserves "protection" until it builds a customer base and momentum. But even there, they already have patent protection. There might also be national security reasons to discourage buying of products from certain countries.

But in the vast majority of these cases, in fact, the people get hurt who are the very people government officials think they're helping, the workers. These imported tires are cheaper, so they are bought heavily by lower income Americans, who can least afford these higher prices, especially now in the fragile, job-scarce economy.

China and India and Wal-Mart, with their ability to produce and sell at low-cost, are one of the main reasons that the Fed Chairman [last week could] say that he believes the recession now may have concluded and a recovery, however hesitant, begun.

My email ended here, but let me finish the thoughts. One of the saving graces in these dire times has been the availability of low-price options for many products. By shifting to shopping at Wal-Mart, for instance, people can make their limited dollars stretch farther. If they need new tires, they can find some they can afford. Further, the imposition of the tariff, by chopping demand from the exporters in China and India, will export our economic hurt to the people of those countries, who are just starting to enjoy the fruits of their own economic emergence. They, in turn, would buy less of the products we try to sell, hurting our exporting companies. The industries are different: the Chinese tend to make the consumer goods and the U.S. firms specialize more in capital equipment, but the mutual harm is the same.

The dollars here are not large – car tires are hardly our biggest import – but the pending action sends a very difficult message at a very sensitive time in the world economy, and it comes just days before the leaders of the G-20 nations are scheduled to meet together in Pittsburgh. The British-based magazine The Economist last week highlighted this issue on their cover: "Economic Vandalism", they called it. They have supported the President editorially on other issues, and they do tend to be on his side. But the language in their article is stronger than mine here.

It is true that trade relations with China need attention. But it would seem that joint examination and negotiation would be more appropriate ways to work on them. And we haven't even mentioned that China owns substantial assets in the U.S. and has recently become the largest creditor of the U.S. government. That position makes our unilateral tariff action problematic as well.

Thanks, Debbie – I think – for showing so clearly how important these policy decisions can be in our everyday lives.

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Anonymous Anonymous said...

From reader Nancy T.: "I agree with you about the ultimate foolishness of imposing tariffs. History should teach us some lessons!

"I read your longer response to Debbie ... and don't agree with you about shopping at Wal-Mart. I wish I remember where I read or heard it, but the average shopper saves little or nothing by shopping at Wal-Mart. A full one-third of their prices are higher than at competing retailers; they are very clever at marketing, and will sell a lot of rather unnecessary items at very low prices. Who really needs another dress for her Barbie? It's easier to spend less by considering what you really need, and buy that, wisely.

"Add to this the fact that shoppers have often to drive a longer distance to get to Wal-Mart, and are also supporting Wal-Mart's still unfair labor practices and low wages."

9/21/2009 7:13 PM  
Blogger Carol S. said...

I'm not a retail analyst, but I did check a bit into some facts about Wal-Mart. A study by economics professors published in the "Review of Agricultural Economics" in 2008 showed that families who live close to a Wal-Mart save something like $200/year per person shopping for groceries there. And if they shop at supermarkets close by, they also save something because Wal-Mart's competition keeps pressure on prices at all the stores.

More recently, both Wal-Mart and Target have gained market share as more people have taken to shopping at those discounters, and recent sales reports show Wal-Mart's sales flat or a bit ahead of a year ago, while other store chains see notable declines.

The point of my comment is not to favor Wal-Mart so much, though, as to emphasize that varied pricing and shopping opportunities have helped cushion consumer welfare during this awful economic situation. This is a really bad time to force higher prices in the market for any product.

At the same time, I appreciate Nancy's views, and we'll visit the issue of Wal-Mart again. Thank you for writing, Nancy!

9/21/2009 7:27 PM  
Anonymous Anonymous said...

I also agree that tariffs are a bad idea, but I wonder about another aspect of trade. How does the issue of product quality play out here? In some cases (clothing, for instance) I do not worry about safety, but tires are different. While the US has a Consumer Product Safety Commission, China has been negligent in the past in some imports. What is a prudent attitude?

9/21/2009 8:44 PM  
Blogger Carol S. said...

Safety is a different issue altogether. There, violations of U.S. safety regulations would result in a total ban. A quick Google on this issue suggests that food items have been subject to this, and one example I found pertains to the importation of seafood into Europe. In that instance, the EU Commission required certified inspections by the Chinese government before the products would pass European customs. This is an occasion when mutual examination and negotiation are clearly appropriate and indeed took place; the problem became evident and a ban imposed in 2002. The ban was lifted in 2004 when the EU Commission was satisfied that the Chinese inspection process was adequate.

This type of practice is not inherently unfair; the products receive pretty much the same treatment as domestic products would in similar circumstances. One has to imagine that the Chinese people might also benefit if their local producers are forced to be more careful.

Anonymous, thank you for writing. Is this the kind of issue you had in mind?

9/21/2009 11:14 PM  

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