Punitive Tariffs: Let's Take a Look
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Recently, the US House of Representatives passed a bill that calls for punitive tariffs on Chinese imports as a form of punishment for what is said to be an artificially weak Chinese RMB against the US dollar. The bill will not become law until the US Senate enacts a similar version and the US President signs the reconciled version. Therefore, the House action is merely a first step, but it is obviously one that offends the Chinese. Of course, there is a mid-term election in the US and a large part of the motivation for such action is to garner votes by using the RMB exchange issue and the foreign trade deficit issue as convenient ways for campaigning candidates to generate some election "heat." Nevertheless, it is a reflection on the narrow mindedness of some voters that the threat of import tariffs can gain any degree of credibility. A look at the fundamentals shows how misguided the current political arguments are for import tariffs.
It is a well known among economists that international trade is predicated on both trading countries benefiting by taking advantage of their respective comparative advantages. This means each country's societal benefit is greater with trade than without trade. In the case of imports, it is true that societal benefit is composed of some temporary losses by domestic suppliers. But, this temporary loss is off-set by significantly larger permanent gains by consumers.
An example in the US might be the clothing industry. Those US companies and workers that make clothes suffer with cheaper imported clothing, but US consumers benefit from being able to purchase cheaper imported garments. The aggregate benefit to consumers greatly exceeds the aggregate loss by producers, thus society is better off. Unfortunately, the politics of free trade run counter to the economics of free trade. The minority (domestic producers of clothes), those that are injured by imports, is loud in its protests, while the majority, those that benefit from imports, is silent in its appreciation of imports. That is to be expected because the degree of injury, on a per person basis, is much greater than the degree of benefit enjoyed by each individual purchasing inexpensive clothes. An injured textile worker (or textile lobbying group) will contact their congressman and voice a strong protest. At the same time, the typical clothes buying citizen is, most likely, not even conscious of the lower price for clothing because of imports.
What specific imported items would be subject to the proposed tariffs? If some products are selected for tariffs and others are not, that, in and of itself will greatly distort and disrupt the US economy. Even if all imports from China are subjected to an import tariff, some sectors of the US economy will be affected more than others. Again, the consequences of these distortions would be significant. Furthermore, major distortions could be created just by the actual amount and design of the tariffs. Are distortions and disruptions in the best interest of trying to promote a US economic recovery? One could rightfully conclude, the devils are in both the general principle and in the details.
Finally, what about a weak RMB? It is important to realize China imports vast amounts of raw materials from all over the world in addition to exporting products to countries around the world. A weaker RMB makes imported resources (such as oil, timber and minerals) more expensive for the Chinese. Therefore, it is possible, that in some markets, a stronger RMB could allow Chinese exporters to actually lower their prices on some exported products because the inputs to produce those products would be cheaper.
In conclusion, it would be a pity for bad politics to trump and spoil good economics. And, that is precisely the risk the US runs with its initial step to impose import tariffs on products from one of its largest trading partners.
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