It looks like those behind-the-scenes negotiations between American and Chinese officials did not succeed.
Last month, the Chinese government threatened to impose tariffs on 128 U.S. products, following President Donald Trump’s latest levies on imports. It looks like Beijing is now moving forward with the retaliation.
China’s Ministery of Commerce published a list of tariffs that will apply to 128 U.S. products, ranging from fruit to nuts to alcohol to stainless steel pipes. The tariffs will be anywhere between 15 and 25 percent.
The one industry that will get hit the hardest by these tariffs is Florida’s orange market. The Sunshine State’s orange farmers have been in a depression for the last few years, stemming from citrus diseases, weather events, and sliding sales. This is something that orange farmers did not need.
Quartz has put together a full list of what will face a new tax.
The tariffs total close to $3 billion.
Beijing claims the U.S. violated the World Trade Organization (WTO) rules and regulations, prompting the world’s second-largest economy to suspend “substantive equal concessions and other obligations to the United States” to “effectively protect China’s interests.”
The market is deep in the red. The Dow Jones has plunged 550 points, the Nasdaq is down 184 points, and the S&P 500 has tumbled 63 points.
It looks like the global trade war has entered into first gear.
Senator Reed Smoot and Representative Willis C. Hawley probably did many things in their careers, but history only remembers them for the Smoot-Hawley tariff of 1930 which remains today as the prime example of the damage that protectionism can do.
Protectionism is the progressivism of fools. Gandhi was a great statesman but a horrible economist. Just as the ignorant in the USA argue that American workers who earn $15 per hour should not have to compete with Chinese workers who make $2 per hour, Gandhi thought that Indian workers should not have to compete with American and European workers who have the benefit of modern machines. As a result India adopted protectionism. In 1947 the per capita income of India was similar to countries such a South Korea. By 1977 the per capita income and standard of living in South Korea was many times that of India. India has since largely abandoned protectionism and has benefited immensely from free trade. Just as David Ricardo proved would be the case when he developed the concept of comparative advantage.
Reducing international trade generally reduces economic activity which can be deflationary as was seen in the 1930s. American businesses depend on free trade in many areas. Boeing could lose market share to Airbus if a trade war erupts as Chinese airlines are some of their major customers. American natural gas producers are counting on selling an additional 7 trillion cubic feet of gas to Mexico. Trade restrictions such as pulling out of NAFTA could jeopardize that and be deflationary.
Protectionism can save jobs. In the USA the best measurement of the cost per job saved to the rest of the country is about $1 million per job saved. Saving one job might provide $100,000 in gains to the worker and the employer who benefit from the protectionism, but cost the rest of the country $1,000,000. Since the million dollars is just one third of one cent per person in the USA, no one notices it.
To save a million jobs via protectionism would cost the country a S1 trillion which would be about the same impact as a very severe recession. To save 10 million jobs via protectionism would cost the country a S10 trillion. That would make the USA a poorer country than Mexico. That would mean it would be likely the people born in the USA would be going to Mexico to work as servants and dishwashers. The degree of impoverishment that would result from that much protectionism is usually only associated with severe natural disasters or wars.
Furthermore, some tariffs are stupider than others, and some forms of protectionism are worse than others. There are stupid tariffs and very stupid tariffs. A very stupid tariff is a tariff on steel and aluminum that increases the costs of every product made in the USA that uses those metals. This increases consumer prices and makes products produced in the USA less competitive relative to those made outside the USA using steel and aluminum priced at the world market rather than the artificially propped-up protected US steel market.
A less stupid tariff would be a retaliatory tariff that might be put on US motorcycles (Harley-Davidson (NYSE:HOG)) that will not raise any costs on any EU producers, or raise prices for anyone in the EU, except for buyers of motorcycles. A truly frightening piece of news is that in order to exempt South Korea from the steel tariffs and agreement establishing quotas may be undertaken. Even worse than the new steel and aluminum tariff proposals is the possibility of quotas. As I said in: BDCL With 15.9% Dividend Can Provide Diversification For Interest Rate Sensitive Portfolios,
The worst form of protectionism comes in the form of quotas. Quotas are bilateral agreements, negotiated by governments which allocate shares of the market that thus restrict exports and imports. None of the higher prices on the restricted goods are remitted to governments as is the case with tariffs and border adjustment taxes. The losses to the consumers are allocated to the favored producers under a quota system. Prices are always higher and production is always lower under a quota regime than would be the case in a free market. Higher consumer prices leads to lower standards of living. Lower production always leads to less employment.
The worst impact of quotas is that firms involved have little or no incentive to innovate. If the amount they sell is determined by quotas, then the most important and desired employees of the firm are no longer the scientists and engineers would can come up with the best innovations and inventions. Rather the most sought after and highest paid employees of the firm become the politically connected lawyers and lobbyists who can influence the quota allocations in such a way to most benefit the firm.
That said, the “good news” regarding the risk of protectionism and trade wars is that the Trump “bark is worse than his bite” view regarding trade policy that prevailed last year, might still be relevant. If “competent protectionists” such as Wilbur Ross and Peter Navarro, or senators Bernie Sanders or Sherrod Brown (D-Ohio) were in charge of implementing a protectionist agenda, the outlook would be very bleak. Any of those protectionists could outdo Smoot and Hawley in terms of reducing the living standards of the American people and collapsing the markets. However, “luckily”, Trump is clearly in charge and calling the shots.
Even though Trump ominously asserted that trade wars can be easily won, the Trump version of protectionism and trade wars could be called the “professional wrestling” version. Pundits who really hate Trump like to say that the core Trump voting base consists of people who believe that professional wrestling is real. In some respects, protectionism and trade wars, as directed by Trump, are similar to the combat that takes place in professional wrestling. Professional wrestling is a show for entertainment where usually no real injuries occur. An example of the difference between really dangerous protectionism and the “professional wrestling” version can be seen with regard to the tariffs on steel and aluminum. When those tariffs were first announced, Wilbur Ross and Peter Navarro explained why there could absolutely not be any exceptions made for any countries, including American allies.
The Trump version of the tariffs on steel and aluminum will exempt Mexico, Canada, Australia, and the list is still growing. Competent protectionists know that if there are exemptions, the countries exempted from the tariffs can simply buy steel and aluminum at the lower world market prices and then ship it to the United States. They might employ some fig-leaf subterfuge by shipping the steel and aluminum produced in their countries to the United States and then using steel and aluminum from China or other world market producers to satisfy their domestic needs for steel and aluminum. The net result is that the tariffs on steel and aluminum will have very little net effect, but might impress those who believe that professional wrestling is real.
https://seekingalpha.com/article/4160161