« "The Most important First Step is to Limit Leverage" | Main | links for 2009-09-13 »

Sunday, September 13, 2009

"Are Tire Tariffs Stupid?"

Brad DeLong (I've added a few comments are at the end):

Barack Obama Does Something Really Stupid: Tire Tariffs, by Brad DeLong: Why oh why can't we have better Democratic presidents?
Barack Obama does something stupid. So does Harold Meyerson, who writes an op-ed on the tire tariff that clouds the issues.
A Trade Test for Obama: Sometime before Sept. 17, President Obama has to make a decision that will tell us a lot about his commitment to American manufacturing. By that date, Obama has to accept, reject or modify a recommendation from the International Trade Commission (ITC) to impose tariffs on the Chinese-made tires that are swamping the U.S. market. The importance of this battle goes well beyond its impact on the tire industry. Much of Americans' skepticism toward free trade comes from their empirically verifiable sense that their government has been reluctant to enforce its own trade laws -- an issue that candidate Obama tackled head-on last year by his repeated pledges to enforce those laws.
Between 2004 and 2008, tire imports from China increased 215 percent, while imports from other nations decreased 5 percent and U.S. tire production declined 27 percent...
Harold: you need to provide people with the right numbers--which are that Chinese tires rose from 6 to 20 percent of U.S. purchases. You don't.
Meyerson goes on:
[T]he ITC's staff analysis forecast an increase of only $3.50 per tire -- not nothing, to be sure, but a cost that has to be measured against the possibility of tens of thousands of job losses in U.S. tire factories (where more than 5,000 jobs already have been lost because of Chinese imports)...
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.
But, Meyerson says, not to impose the tariff would violate the rule of law:
The ITC found this a clear violation of a provision in the Trade Act (Section 421), added with Beijing's consent during the negotiations preceding Congress's 2000 enactment of Permanent Normalized Trade Relations with China...
China isn't doing anything wrong. For Chinese manufactures to sell us tires is not against the law. To say that China has committed a "clear violation" of the law is to badly misstate the case.
What is the case is that:
Section 421... allowed the U.S. government to levy tariffs on surging Chinese imports that were eviscerating an American industry... [and it] was a key argument in persuading Congress to permanently normalize trade relations...
§421 gives the U.S. the right to impose tariffs in response to a surge. It doesn't make the surge a crime, or a violation. And it doesn't require the U.S. to impose tariffs--especially if imposing them would be a really bad idea for U.S. consumers.
But, Meyerson says, we can't do the right thing now because imposing tariffs might be the right thing to do at some point in the future:
The implications of Obama's decision go well beyond tires. Section 421 was created to provide some protection for American workers while allowing China entry to our markets. If Obama opts not to enforce it, why would anyone concerned about American jobs believe such provisions in future trade agreements? Why would U.S. manufacturers maintain their domestic production if they know that none of the legal protections they've been promised will ever be invoked?... Endorsing the ITC's recommendation would not only honor his campaign promises and fulfill the mandates of our trade laws, but would also allow him to rescue the very Americans who, rightly or wrongly, have felt left out of his efforts to save the nation's economy.
I have a proposal. The president should, in each case, do the right thing. When there are net benefits to the United States from exercising its §421 rights, it should exercise them. When there are net costs to the United States from exercising its §421 rights, it should not exercise them.
That would be real change we could believe in.

Suppose that you agree this is not a good policy, but you think that the benefits of health care reform to workers are larger than any losses associated with this policy, and that success on health care reform is an essential step that will allow additional policies that help workers to be enacted down the road. All of that is in danger if health reform fails.

My understanding is that this is part of a deal for union support on health care reform (further politicizing economic policy?). If so, and if that support is the key to future policy success, does that change the equation at all? Is it proper to consider the costs and benefits of this policy in isolation, or should we look at the costs and benefits of the entire trajectory of current and future policies associated with the two options (tariffs or not)? It's hard to justify tariffs based upon the economics of this policy in isolation, and perhaps economists should stop there, but I doubt the administration views the net costs and benefits of a policy in isolation from the rest of its agenda.

Still, even if it is the case that future policy success requires giving in to bad policy at present and the net benefits are positive, I am uncomfortable advocating that position. Even if it's true that future policy success requires such tradeoffs, the role of the economist is to point out exactly what those tradeoffs are so they can be fully evaluated, and to suggest less costly alternative policies that benefit workers, but avoid the negative effects of the tariffs. What happens in the political arena after that is out of our control.

    Posted by on Sunday, September 13, 2009 at 11:01 AM in Economics, International Trade, Politics | Permalink  Comments (103)


    Feed You can follow this conversation by subscribing to the comment feed for this post.