Obama’s Tariff

I am terribly disappointed with Obama’s tariff. Especially I believe that he is an intelligent person. He definitely should understand the reaction from Beijing and is well aware of the impact of Smoot-Hawley Tariff Act to the Great Depression. He is basically risking all these for the political capital needed for his health reform. While I agree the necessity of the latter, imposing the tariff is extremely unwise.

Just go read any economic textbook, tariff is bad to economy. Period. The logic is actually very simple. There is something known as the comparative advantage. It is just like one doesn’t want to mow his/her lawn but hires someone else to do it since one can pursue more meaningful stuffs with his/her limited time. So instead of making tires, the US could have invested money on high tech, green, and creative industry. Now, the money is artificially subsidizing a dying industry (tariff is a form of subsidizing since consumers are paying more on tires instead of putting money on other products). Moreover, because of the subsidy, the industry will not receive the essential incentive to improve itself and become more efficient. So when the subsidy is taken away, the industry simply dies. It is like computer industry in South America in the 90’s.

One argument in justifying the tariff is that the Chineses  are artificially pushing down their currency and thus it is not a fair trade. It is basically nonsense and ignorant. Especially, most of these people do not realize that Yuan actually has risen from 1 USD to 8 Yuan to 1 USD to 6.8 this couple years. For some weird reasons, people now seem to think that the cheaper the currency the better. Actually, continuing decline of a currency usually do more bad than good. It does of course encourage export as everyone points out. But it reduces internal consumption and internal/foreign investment and thus slows down the overall economy. It is even more silly to think that the Chineses pushes down the currency so that they can pay the workers less. After all, the average wage of the workers is determined by their productivity (unless you are running a real communist country!). The total wages cannot be higher than the revenue earned from the final product. The average wage in china is low mostly because the productivity is low. Instead of artificially subsidizing the union wage through tariff, the US should try to increase the productivity of the workers here. Or we will end up another GM mess in a couple years.

Again, I support Obama in trying to change the health system but the tariff is really a horrible political move. I thought he were much better than this but I was very disappointed with him now. I don’t understand why we can’t have a President who was sensible in both domestic, international, and economic policies. It seems like that if we don’t want to hurt the environment and fight some stupid wars, then we need to accept some elementary school level economic policy. God bless America…

2 Replies to “Obama’s Tariff”

  1. I would just like to disagree with you on the point that tariffs are always bad. Sometimes relying on a comparative advantage that exists at present is not a good idea.

    A temporary comparative advantage can be created by a country dumping a good below cost for a while.

    Suppose you have two countries A and B. Both produce a product P. B starts selling product P below cost, and undercuts A’s internal price of product P. Then people in A can save money by buying the product from country B. However, industries tend to die if they lose too much business. The industry to produce P in country A dies. Then the only producer of P is country B. After this, country B may increase the price above the price at which country A sold it. Country B may even threaten to deny country A access to P under certain conditions and use it a diplomatic bargaining tool. This price increase results in reduced access to the good for people in country A. If the good is something where continuous access is required, such as a staple food, or a resource needed by one of country A’s main industries, the cost of a sudden reduction of accessibility can be quite high.

    This kind of thing does happen on a business level, as Walmart exemplifies, and as long as countries place their own money above the needs of people in other countries, they will follow the same strategy when they can.

    In this example, the need to follow comparative advantage is overruled by the need to guarantee access to the product. In computing terms, redundancy may be needed in case one source of the good fails. So how do you maintain continued access to a good when the comparative advantage for the good is held by another country, perhaps only on a temporary basis?

    By the way, I’m arguing against your statement that tariffs are always bad. I do not contest that Obama is making a bad move with the tire tariff. I don’t know enough about that.

    1. Thank you for your comment. But I still stand by my statement. I believe it is also the common view of most economists. Of course, always bad sounds very strong and maybe instead of saying it bad, I may say the no-tariff choice is almost always better.

      In a short period of time (couple months, a year?), your argument might hold. But I don’t think country B can increase the price for long. The beauty of market and capitalism is that as long as there is a demand, there will be a product. Country B cannot increase the price in a long run because it will create a void for the same product at a cheaper price. In a very short period of time, country B may benefit by this disruptive behavior. But there is no promise that its short-term gain will outweight what it has already lost from selling below cost. Not to mention that there are not only two countries in the world but over a hundred. An intentional disruptive tactic is actually very risky for any country.

      Actually, I can’t even agree with your Walmart example. I understand that everyone hates Walmart. But I think that even the mighty Walmart cannot suddenly raise every goods by 50% tomorrow. Customers will just go elsewhere. So I don’t think your argument will hold.

      On the other hand (sorry to be a bit repetitive), tariff is bad because of 1). distortion to supply/demand—i.e. market gets the wrong signal of what is needed to be produced/invested and what is not; 2). inefficiency—cannot utilize the comparative advantage effectively; 3). unfairness—the entire public is subsidizing a small group in the country imposing tariff.

      Honestly, I found most pro-tariff argument is sentimental. If we really need to help the worker, we can just do it directly. Maybe introduce special aids for the layoff worker. Also, many may claim their industry are absolutely essential to the nation. I am quite a bit doubtful about it. There was a time in the 80s that the scissors manufacturer in the US claimed that their industry was essential to the security of the nation. It sounds totally absurd now. And definitely, I don’t see how tire manufacturing is an essential industry to any country.

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