This post is an editorial comment offered in response to Paul Krugman’s NYT op-ed of 15 March 2010 suggesting that the US assess a 25% tariff on all Chinese goods in order to begin remedying its trade imbalance and to punish China for not allowing the renminbi to rise. Far be it from me to disagree with a guy who was awarded the Nobel for his work in international trade theory, but this idea strikes me as ill-considered to put it mildly.
We would do well to remember that trade sanctions –specifically the Smoot Hawley tariffs – were a key reason the Great Depression was as deep and extended as it was. I’m not a pure free marketer than thinks tariffs have no place, but like capital punishment, if you’re going to use them you’d better be damned sure you have all the facts right and understand the consequences.
The Chinese appear to me to have “played the game” to the degree possible. Back in 2005 the US administration was screaming for a 30% renminbi revaluation; the Chinese currency rose about 22% over the subsequent 3 years. Reticence to widen the exchange rate band and “unpeg” seem to be the appropriate thing to do when the “host” currency, the US$, is in danger of sliding off a cliff because of a home-grown financial crisis.
If the US did slap Krugman-esque tariffs on Chinese goods, two immediate impacts are certain: First, lower income Americans, whom I suspect buy the majority of goods manufactured or processed in China, would see a sharp increase in their personal inflation rate (which would of course in short order be translated into the national statistics). This is not the kind of event that an economy with nearly 10% headline unemployment (and 20% underemployment) will readily withstand. Second, where possible consumers will simply substitute goods from other low-cost manufacturing regions like emerging Asia or Eastern Europe. Clearly, such a shift does little to improve our trade deficit.
Further, we must consider where the trend stops. Do we slap tariffs on the EU if the Euro reaches parity? On the UK, a great military and economic partner who’s in worse economic shape than we’re in? On Japan, which is, as one commentator noted, “a bug in search of a windshield”? By definition not every nation can run a surplus. The relative size of our economy almost guarantees that we’ll run a deficit, at least until the US shifts its economic base towards exporting. That transition’s years away.
I suggest these solutions:
- Since a significant minority of the trade deficit is due to importation of foreign oil, push an energy policy that reduces its use – alternative energy (hello, nuclear!), natural gas, far offshore drilling all seem reasonable to consider.
- Open trade agreements with as many foreign nations as possible would create competition among the providers of those goods and give the US export sector, which I suspect will be (must be!) the engine of economic growth for the next 25-50 years, greater opportunity.
- Very importantly, insist on continuing to open the Chinese market to US goods and services. Encourage the growth and success of the Chinese consumer class.
Macroeconomically speaking, the trade deficit is caused by Americans choosing to use their “savings” to purchase goods made overseas. No one’s forcing us to buy those goods, and no one’s forced us not to save. “Beggar-thy-neighbor” is a game that no one wins.
Apr 02th
“Separating Wheat from Chaff”
Author: Kenn Lamson
Comments: 0
As even a casual observer would recognize, there are hundreds of pieces of economic data available from various departments within the Federal government and private research firms. There’s also lots of anecdotal information, too. Unfortunately, as a relatively young (17 month anniversary is tomorrow, 3 April!) investment and research firm we don’t have time or the patience to try to analyze and write about what we find interesting, much less every thing that’s available. It’s clear, though, that some data are more important than others, because:
With the able assistance of intern Vu Ngo, a senior majoring in finance at Boise State University, we’ve “separated the economic wheat from the chaff” by creating a list of about 15 indicators on which our research will focus.
We segmented our list by the component of the economy about which it informs us. The list looks like this:
CONSUMER
BUSINESS
FOREIGN TRADE
OVERALL MACROECONOMIC ACTIVITY
Of course we’ll keep our finger on the pulse of other data, and this list may change if items lose their efficacy. We think, however, it strikes a good balance between data overload and having too narrow a focus.