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How does adding duties to Chinese goods benefit Americans?

September 29, 2010

Question, how many of you shop at wal-mart?  Or a dollar store?  You ever wonder how the dollar stores get all that stuff for under a dollar?  It ain’t because they buy it from America.

The House of Representatives just passed HR 2378, “Currency Reform for Fair Trade Act”, which allows the commerce department to add new tariffs to imports from countries we think are devaluing their currency(targeted at China).  While this sounds like a good idea(who doesn’t want to screw China?), as is typical with most politicians, our representatives that support this bill are ignoring the obvious unintended consequences of this legislation.

While all members of the house concur there is a growing problem with China’s manipulation of their currency and the resulting trade imbalance that allows, not all agree this is the correct way to address the issue.  Many congressman feel this bill will only result in higher prices for american consumers, as stated by Representative Jeb Hensarling(R – Texas), “prices of goods may go up 10%.”  As is most often the case with government, they seem to want to address issues at the worst possible time.  China, by undervaluing its currency is, in effect, subsidizing goods they export to the United States, but given the level of unemployment and our current economic problems, is that really such a bad thing?  In response to Hensarling’s comments, Representative Sander Levin(D – Michigan) stated, “without a job, one can’t buy goods at any price.”

Representative Levin(sponsor of the bill) makes a good point, well not really, given how we have extended unemployment benefits, but he does stress what proponents of the bill say this legislation will accomplish, bringing jobs back from China.  But is that really what will happen?  As Derek Scissors, Ph.D., from the Heritage Foundation states, “if American trade measures did make Chinese exports to the U.S. prohibitively costly, production of those goods would not shift to the U.S.”  Dr. Scissors continues, “Instead, it would shift to other low-cost areas, such as Vietnam or Bangladesh. Applying duties to Chinese goods would not suddenly make the American textile, toy, furniture, or even computer-assembly industries globally competitive”.  He concludes with, “Globalization means the U.S can punish China, but it cannot simply turn Chinese losses into American gains.”  Evidence of this is prevalent due to Obama’s choice to impart a 35% tariff on Chinese tire imports last year.  According to tirebusiness.com(a tire industry journal), “The import tariffs…have proved a boon for tire makers in South Korea, Taiwan, Thailand, Indonesia and Vietnam.”

Given the strong support of this bill by union backed representatives it is not hard to understand why congress won’t address the predominant issue why our jobs are leaving America en masse, mainly the cost of manufacturing in the US.  This bill is only punitive in nature, and assumes these punishments would result in a change in behavior.

Many cries of “its not fair” and “we need a level playing field” flew around the House today in sometimes hyperbolic debate, and all I could think of was, “Isn’t it our fault the playing field is not level?”  Our cost of labor is insane, our regulatory costs on manufacturing are even crazier, our capital gains taxes are the second highest in the industrial world; since when does Congress care about a level playing field for our companies?  Oh yeah, when the unions start complaining about a problem they helped create.

The end user that gets screwed in all this is, once again, the average american consumer.  A quick check of the products currently around me that are made in China, hat, remote control, lamp.  Just so you don’t think I am less cheap than I actually am, my shirt, pants and shoes all come from Honduras.  50% of the stuff I checked comes from China, and we want to raise the prices on them?  What would that do to China?

If we take the earlier tire tariff as an example lets see what China did in response.  They added a 6% tariff on imports(into China) of Nylon 6, a fiber used in making tires.  A not so subtle hint they didn’t like our tariffs.  So we are currently in the opening shots of a trade war with China.  Considering they hold over $2 trillion in US debt, I am not entirely sure we should go there.

In conclusion, I will let Dr. Scissors sum it up, “Legislation targeting the yuan may feel good, but it will not accomplish anything.”  Well, it will raise prices on Americans which is exactly the wrong thing to do in this economy.

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