Repetitive Stupidity

Townhall.com ^ | June 7, 2013 | Mike Shedlock

[Kaslin]

No one wins a trade war. Ever. Not countries, not companies, and certainly not consumers. Yet, here we go again. People's Daily says China has more cards to play in EU trade dispute.

China still has plenty more cards to play in an increasingly ugly trade dispute with the European Union, the official People's Daily newspaper said on Thursday, accusing Europe of not realizing that its global power was waning.

The EU will impose duties on imports of Chinese solar panels from this week, a move that infuriated Beijing despite European attempts to soften the blow with a reduced rate. China in response announced on Wednesday its own anti-dumping and anti-subsidy probe into imports of wine from the EU.

"We have set the table for talks, (yet) there are still plenty of cards we can play," the newspaper wrote. "China does not want a trade war, but trade protectionism cannot but bring about a counter-attack."

A declining Europe needs to understand it can no longer laud it over other countries, the paper added.

"Times change and power rises and falls. Still this has not changed the deep-rooted, haughty attitudes of certain Europeans," it wrote.

Repetitive Stupidity

Time and time again, politicians place tariffs to "protect" jobs. In turn this provokes retaliation. This retaliation by China is mild so far. The implied threat is tariffs on Airbus or industrial components from Germany.

Chancellor Merkel understands this which is precisely why Germany was against the tariffs on solar panels, even though a German manufacturer was in play.

I have talked about this before. Here is a snip from EU On Collision Course With Germany Over Tariffs; Yet Another Reason for UK to Exit EU written May 20, 2013.

Damage of Tariffs

I do not believe it is possible to accurately predict the damage caused by inane tariffs. Much depends on how China would respond. But even if China did not respond, there is no advantage to artificially forcing up prices.

Krugman "Was" Right!

Inquiring minds may also wish to read Paul Krugman "Was" Right.

How and Why We Forget the Obvious

It is a simple statement of fact that the more goods and services we receive for our money, the better off we all are. The cheaper, the better!

Time and time again we forget free trade and lower prices are a benefit!

We forget because unions, socialists, and corporations forced to compete against the sun (or Skype), scream "unfair advantage" at the top of their lungs, via political contributions to politicians willing to "tax the sun" to be re-elected.

[expat_panama]

Interesting post. I’ve always had a hard time understanding why Americans paying higher taxes would somehow ‘get even’ with foreign morons that overtaxed their people.

[central_va]

China slaps tariffs on almost everything we export to them. 30% on heavy equipment for example. China can KMA. I hope they abort and starve themselves into oblivion.

[PieterCasparzen]

No, he’s wrong.

Every nation needs a robust employment situation for it’s people.

A person can earn enough to live on by investing their capital if they have enough capital. Or they can earn enough to live on through some kind of work.

Those with no assets and no earnings are a burden on those who have assets or earnings.

The unemployed may get checks from the government, or they may live with someone else for free.

Either way, someone besides themselves is forking over money - that they earned and paid taxes on - to pay for those who are not earning enough to support themselves.

In a robust employment situation, where there is plenty of demand for labor, the number of people who can’t earn enough to support themselves is minimized, therefore the burden on everyone who earns is minimized.

[rmh47]

China also reverse engineers imports and manufactures them without permission and pays no royalties on such goods.

They ignore patents and copyrights and sell bootlegged and pirated items.

They kill our dogs and cats.

They put poisons in medicines that they export.

They sell adulterated food products to us.

They injure our children with lead paint (and other heavy metal pigments) on toys.

And they make it virtually impossible for foreigners to sue Chinese companies for any of this.

They are not very good neighbors.

[yefragetuwrabrumuy]

“No one wins a trade war. Ever.” Not true.

Another expression for trade war is “protectionism”.

America is a very big market, so lots of corporations want to sell goods here. But they don’t make the goods here because it is more expensive than outsourcing production. Because they pay less for production, the prices of the goods here are lower. So consumers benefit.

However, if outsourcing becomes too great, consumer prices might be low, but unemployment is high, because there are no production jobs here. So this is where protectionism comes into play.

It says to corporations: “Right now you outsource, and sell your product in the US for $10 a unit. But if we erect a trade barrier, it will drive the price of an imported unit up to $20 a unit. Yet if you pay more for production by making it here instead of importing it, you will be able to sell it for $15 a unit. Thus making it worth your while to pay higher production costs by employing our citizens.”

Well, the downside is that consumers now have to pay $15 a unit. But the upside is that there are now more employed people who can buy units. And employed people also take less government benefits and pay taxes, which also reduces the load on everyone else.

The bottom line is that the US has gone way overboard with free trade, and while it has immensely profited other nations, and our consumers, it has gone too far and needs to be cut back so that there is a more even balance of trade.

[expat_panama]

...the downside is that consumers now have to pay $15 a unit. But the upside is that there are now more employed people...

That's the nut of the idea, that most of us will be worse off paying higher taxes so that those who are underemployed (for whatever reason) will be better off.  We've been hearing this idea a lot over the years and what happens is that while most of us do in fact become worse off as expected, the underemployed folks never do become better off as promised.

Historic tariff rates and unemployment numbers are there for all to see; import tax cuts mean more jobs.

[yefragetuwrabrumuy]

I’ve no doubt that importing goods does create some jobs, but not all jobs are equal. A manufacturing job may pay five times what a retail sales job pays. Manufacturing jobs also create more jobs to support them.

The best example in economics is mining, a unique historical economic benchmark. Economic zones that mine prosper, when mining declines, they decline. This is because mines create many more businesses, with a ripple effect to an economy.

By the time nations create tariffs and trade barriers, they are usually already in trouble, and it might take many years to show positive results to limiting trade. But it is most likely a better result than free trade over time.

To cite an example of a free trade disaster, a reason for the huge trade imbalance between China and the US can be seen outside of the West Coast ports. Immense number of expensive Chinese built shipping containers that radically increased the cost of imports, because they were never sent back. The back haul was too expensive. Now stacked in mountains and slowly rusting.

At the same time, there was explosive growth in the Chinese shipping container industry. And iron and coal mining, and smelting, and sheet metal fabrication. Their industries boomed, while ours went bust.

[expat_panama]

By the time nations create tariffs and trade barriers, they are usually already in trouble, and it might take many years to show positive results to limiting trade...

That reasoning may be all that some folks need for spending money, but when successful people spend time and money they actually check the hard numbers from historical records.  That's why I included links to tariffs and jobs in my last post.  In case those linked tables were too hard to follow here're the data plotted--

--and what we got is actual recorded hikes in import taxes have been followed by record spikes in unemployment, while import tax cuts were followed by more jobs.  Of course, while you're free to vote for import tax hikes as you want, most of the rest of us see ourselves better off with tax cuts and vote accordingly.

[yefragetuwrabrumuy]

I don’t really see that in the graph, if you know the underlying history. For instance, though tariffs were high but declining in 1910, unemployment was mediocre. Then there was a burst of unemployment after WWI, and tariffs increased while unemployment then declined.

Then the massive jump in unemployment of the Great Depression, followed by the Smoot-Hawley Tariff Act, that seemed to cause unemployment to drop. But credit to the big drop in unemployment there comes from the New Deal, in which tariffs mattered little to government make work projects. And unemployment really slammed down with WWII.

Beyond that there doesn’t seem to be much correlation, other than a slow decline in tariffs and a slow increase in unemployment.

[bert]

The reason for what you have outlined is the IMF. The nation defaults on IMF loans and they come in and take over.

The first thing they do is impose import controls and tariffs. They then hire one of the Clobal agencies, SGS, Bureau Veritas, Intertek or Cotecna, to survey the cargo before export and then determine if the proforma value is within acceptably limits. A Pre shipment Inspection is made at the exporter’s warehouse prior to shipment. The inspection result are evaluated for proper pricing. A clean certification is made and shipment goes forward.

In some instances, the countries lack the expertise or are corrupt or both and one of the above is hired as the government contractor overseeing all import operations. They then survey the shipment in the exporting nation to assure all is in order. The goal is to be certain that the import prices are not under stated to reduce tariff.

[yefragetuwrabrumuy]

While the IMF uses tariffs, I would never entrust the creation or management of a tariff to the IMF. This is because tariffs are a tool that a nation uses for its own advantage. If not used for that purpose, it is likely worse medicine than the disease.

[bert]

I will not disagree but what I outlined is the way of the world. Accepting IMF money can be very very painful and expensive.

I have watched it for nearly 20 years now.

[expat_panama]

 

 ...the massive jump in unemployment of the Great Depression, followed by the Smoot-Hawley Tariff Act, that seemed to cause unemployment to drop...

Let's look together at the high and increasing tariffs from the '20's into the '30's that preceded the Depression.  Then we see in the '30's how unemployment fell with tariffs being rolled back.  Finally we see the period of low tariffs after 1950 coinciding with an era of low unemployment.  In fact, before 1950 with average tariffs over 13% we had an average unemployment rate over 8%, but after 1950 with average tariffs of 4% we had average unemployment below 6%.

[1010RD]

I would never entrust the creation or management of a tariff to the IMF.

You're thoughtful, and you know that the IMF is made up of the people the elites appoint. Those same elites want government control, which is to say people control. They themselves will be at the top.

There are real costs to free trade and it does create losers in an economic sense. Keep in mind that the current labor imbalance is due to government intervention in the market.

Government schools have created a system of educational failure that has caught up to us. Why should education stop? Pile on government regulations, licensing and permitting that prevent labor mobility. Add in a housing market rigged to benefit banks and the securities markets at the expense of individuals. This housing market then traps people even more. Toss on the student loan debt bomb encouraged by the federal government. You know the list continues on and on.

That's the real source of unemployment, not China which doesn't account for that much US trade in the first place. Free trade is by definition liberty, individual liberty.