Trade War with China? Great Idea!

“We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.” – Herbert Hoover, 1932

Only the fact that I wrote this piece on a computer is keeping me from thinking it’s the early 1930’s because Obama and this administration feel it necessary to replicate every mistake Hoover made at the time.

Outlandish rise in spending and taxes? That’s been done before. Create unquestionable uncertainty in the financial sector leading to inactivity and declines in investment? Once again, old hat. Starting a trade war in the vein of Smoot-Hawley? You most likely missed this one, but yes, another rerun.

Around 10 p.m. last Friday night, the Obama administration announced a new 35% tariff on Chinese tires, in addition to the 4% currently in place. This was a typical trick left over from the Bush years, where they frequently waited until the start of the weekend to make controversial announcements.

With the economy still slumming it, the last thing to do is apply protectionist measures, especially with a country that owns half of our debt and frankly, has the spine to retaliate and cripple us. In fact, China has already taken action, announcing they will be scrutinizing U.S. exports of poultry and vehicles. Short of armed hostilities or political subversion, no state action is more provocative than banning another’s products from entering your market.

That’s plenty disturbing but long-time readers know I like consequences here, so let’s look at what will result from this tariff.

U.S. producers will be hurt. They are the ones who, pursuing profit-maximizing strategies, have consciously shifted production of low-end tires from their U.S. plants to their Chinese plants over the past few years. They will now have to incur the costs of shifting production from China to production facilities in Brazil, Mexico, Indonesia and other developing countries, where it makes economic sense to produce low-end tires.

With unemployment heading to double digits, Obama must be looking to slow that trend right? Wrong. Low-end U.S. tire production workers won’t see an increase in U.S. capacity, capacity utilization, hours worked, or wages because, as implied above, production isn’t coming back to the United States.

Meanwhile, U.S. workers in tire wholesaling, distribution, and other segments of the supply chain are likely to see a decline in business in the short-run, as higher prices reduce demand for tires. Things may improve once adjustments are made to the new production locations, but that will involve certain adjustment costs and lower profit margins because presumably China is the profit-maximizing production location. Otherwise producers would not have chosen China.

Most importantly, this tariff will hurt consumers. It will lead to higher prices and cost-conscious shoppers will be harmed the most. First we devastated the used car market with “cash for clunkers” and now we’re forcing people to pay too much for tires. I thought Obama was all for the little guy?

We’ve already upset Canada earlier this year when the “buy American” provision was written into the spending (it was not stimulus) bill. Tack on tire tariffs and a proposal to add a 21% duty on Chinese pipe used in oil wells. Does this administration have a death wish? Trade wars are detrimental to a country’s economic health, especially one as fragile as ours.

An unrelated note: in case anyone forgot, over the weekend we celebrated a year since Lehman Brothers filed bankruptcy! Bravo to the one, shining moment of clarity in the end times of the Bush administration in allowing the company to die. Shame they didn’t allow the same fate for Citibank, AIG, Wells Fargo, and GMAC.

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