Tuesday, September 15, 2009

Obama's Folly

In an earlier posting, I shared my concern that President Obama might give in to the tendency of Democrats towards protectionism. (December 25, 2008) That fear is growing. Last week, the Chinese government took the first step towards impressing tariffs of American exports of automotive products and chicken meat. This move was an apparent and immediate retaliation for Obama’s decision to levy tariffs on tires imported from China.

This may should like dull stuff, but it can set in motion a trade war with far reaching effects. Consider what the combined actions of two governments can cause. China exports $1.3 Billion worth of tires into this country. The announced U.S. tariffs can reach as much as 35% of the price, which means that if China could maintain its level of exports with the tariff, American consumers would be required to pay almost $2 Billion for the same tires as before. The $40 tire would become a $60 tire. Arguably American union shop plants would get the business without being required to be competitive. You and I will thus be paying a higher price for tires in order to subsidize a plant in Akron in an attempt to preserve jobs for some loyal Democratic voters and their employers.

Actually the above scenario is not how the real world works. China would lose its edge as a low cost competitor. Other tire makers - some domestic and some foreign - could raise their prices at least to the level of the newly crowned low cost competitor, but the higher prices would apply to all tires, allowing for a smaller increase but covering a much greater volume of tire sales.

Nevertheless, the principal is the same. All of us are called upon to pay a higher price for the product in order to subsidize an inefficient industry. China is now retaliating by increasing the tariff on $899 billion worth of automotive products and $378 billion in chicken products. (This type of measured response is typical in tariff trade wars.) These tariffs will result in increasing prices for them in China, allowing other suppliers to take our market share. The resulting reduction in exports of the automotive and chicken products will penalize American firms and jeopardize jobs in the affected industries.

I wonder if workers in the automotive industry understand that they are facing further job loss because of tariffs set up for the benefit of rubber workers. When tire prices go up, will they understand that their loss of purchasing power is not the product of greedy wall street bankers but of the stroke of the pen of a politician who seems to be more concerned about the next Ohio primary than the general good?

Nice move Barack!

No comments: