On Friday President Obama decided to levy a 35% tariff on tires imported from China. This morning China has responded by beginning the process of imposing tariffs on U. S. auto products and chicken white meat
China unexpectedly increased pressure Sunday on the United States in a widening trade dispute, taking the first steps toward imposing tariffs on American exports of automotive products and chicken meat in retaliation for President Obama’s decision late Friday to levy tariffs on tires from China.
The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds.
This move bears comparison with President George W. Bush’s move, early in his presidency, to impose a tariff on Chinese steel, a move that was later overruled by the WTO. Bush’s actions were largely the result of a campaign promise to West Virginia steelworkers and they did not have broad support within the president’s own political party. Although no less foolhardy than Bush’s actions, President Obama’s are even more concerning for a number of reasons.
First and foremost, the economic climate is significantly different today than it was in 2002. The post-9/11 economic downturn was minor in comparison to today’s. President Obama’s economic incentives for his actions are commensurately stronger. The political environment that President Obama faces is quite different from the one that President Bush faced. Nearly every significant interest group in President Obama’s base provides at least some support for limiting imports, particularly Chinese imports. It’s harder to see a political downside to the actions for him. Dan Drezner points to the potential danger:
If I knew this was where the Obama administration would stop with this sort of nonsense, I’d feel a bit queasy but chalk it up to routine trade politics. When I look at Obama’s base, however, quasiness starts turning into true nausea.
China’s economic position is stronger than it was in 2002 and Chinese nationalism has grown right alone with that economic position. There’s substantial political support within China for a stern response by the Chinese authorities to what’s seen in China as an arrogant affront by the U. S. to China’s rightful position in the world order. Dan Indiviglio remarks:
The most obvious fear I see here is that China will retaliate. According to a separate article in the Wall Street Journal, they have already begun investigations into the U.S. “dumping” poultry and auto products in the Chinese market. The last thing you want during a global recession is a trade war. That would slow recovery across-the-board.
Additionally, due to the terms of China’s accession to the WTO and the world economic downturn there will probably be political support in any number of other countries for U. S. tariffs against China. Once any country, e.g. the United States, has imposed tariffs against Chinese imports, other WTO members are legally entitled to do so whether Chinese imports can be demonstrated to have injured their domestic industries or not. And nowadays there are protectionist pressures building practically everywhere.
Brad DeLong, not generally a fullthroated critic of the Obama Administration, is sharp in his retort:
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.
We face a conundrum. We have plenty of trade grievances with China and we’ve already filed a half dozen different complaints against China with the WTO that are awaiting resolution. Among our greatest concerns in trade negotiations are routine Chinese ignoring of U. S. intellectual property rights. Additionally, China’s de facto pegging of their currency to ours is arguably one of the forces behind the asset inflation that is one of the root causes of the economic problems we’ve been suffering for the last year or so.
However, as I watch these events unfold I can’t help but worry that we’re seeing the economic equivalent of the assassination of Archduke Ferdinand in which all of the great powers hurtle willy-nilly towards a truly stupid trade war.