Earlier posts have discussed supply-chain networks that bind U.S. manufacturers with Chinese and Mexican factories producing intermediate goods and materials. “Trump’s Tough Trade Talk Could Damage American Factories,” (New York Times, December 2, 2016) examines the US/China trade debate, looking first at a successful and growing manufacturing firm in Michigan:
But many existing American manufacturing jobs depend heavily on access to a broad array of goods drawn from a global supply chain — fabrics, chemicals, electronics and other parts. Many of them come from China. At Mr. Reid’s factory, imports account for roughly two-thirds of the cost of making a recliner chair.
In short, Mr. Trump’s signature trade promise, one ostensibly aimed at protecting American jobs, may well deliver the reverse: It risks making successful American manufacturers more vulnerable by raising their costs. It would unleash havoc on the global supply chain, prompting some multinationals to leave the United States and shift manufacturing to countries where they can be assured of buying components at the lowest prices.
The article emphasizes that in addition to fabrics imported from China, Mr. Reid’s firm, First Class Seating, uses U.S. materials as well as employing US workers:
Mr. Reid takes pride in using American products. His designers here in Michigan dreamed up his sleek recliner. Local hands construct the frames using American-made steel, then affix molded foam from a factory in nearby Grand Rapids. They staple upholstery to hunks of wood harvested by timber operations in Wisconsin. They do all this inside a former heating and cooling equipment factory that shut down a decade ago when the work shifted to Mexico.
New and higher tariffs on materials imported from China would raise costs for First Class Seating, likely leading to lost sales to competitors still able to access Chinese made goods and materials.
In “Globalization isn’t killing factory jobs. Trade is actually why manufacturing is up 40%,” (LA Times, August 1, 2016), Daniel Griswold also emphasized the key role of imports for US manufacturing:
Imports also play a critical role in the success of U.S. manufacturing. Measured in terms of value, more than half of what Americans import each year is not for consumption but for production. Being integrated into global supply chains allows U.S. manufacturers to source more affordable parts, components, raw materials and production equipment, making their final products more competitive.
Around the world women wash clothes and most wash by hand since they lack access to electricity, or access to enough electricity to power a washing machine.
Access to modern washing machines, like access to cars, matters for teenagers and adults in wealthy countries as well as poor. Protectionist policies that tax foreign goods can shield some jobs and companies, but taxes on imports raise prices that especially hurt low-income families and limit consumer choice. Protectionism shelters domestic firms, which may protect jobs in the short run also leads to less competitive domestic firms over time by reducing incentives for innovation in domestic companies.
Tariffs on foreign cars and washing machines reduce the competitiveness, profits, and, over time, employment of U.S. firms. So Whirlpool’s dumping charges against Korean/Chinese washing machines will hurt Whirlpool employees and stockholders in the years to come as well as hurting U.S. consumers now. (See “U.S. to Charge Duties on Some Samsung, LG Washing Machines Built in China,” (WSJ, July 20, 2016) and “Whirlpool Wants Tariffs for Chinese Washers,” December 30, 2015, and more on Asian washing machine protectionism below.)
The U.S. Commerce Department is:
upholding a complaint by competitor Whirlpool Corp. alleging that the companies [LG and Samsung] sold their washers in the U.S. for less than they cost to produce.
The concern is “predatory pricing,” where large firms care said to sell goods below cost for a time to drive competitors out of business, then later raise prices to recover early losses. So have LG and Samsung, both South Korean companies with Chinese factories, been manufacturing washing machines and selling in the US below their cost of production?
In “The Mounting Costs of Antidumping Laws: Time for Action?” (Truth on the Market blog, May 23, 2016), Alden Abbott argues for reforming US Antidumping laws:
Although the original justification for American AD law was to prevent anticompetitive predation by foreign producers, I explained that the law as currently designed and applied instead diminishes competition in American industries affected by AD tariffs and reduces economic welfare.
Abbott cites and quotes from an October 2015 World Bank study, “Antidumping and Market Competition: Implications for Emerging Economies,” he says “confirms that the global proliferation of AD laws in recent decades raises serious competitive concerns.”
Over a century, antidumping has gradually evolved from an obscure and rarely used policy tool to one that now constitutes an important form of protection not subject to the same WTO [World Trade Organization] controls as members’ bound tariff rates. Rather, antidumping is one of several instruments that allow members to exceed their bound tariffs, albeit subject to very detailed WTO procedural disciplines. Moreover, while the application of antidumping was until the WTO era mainly the province of a few traditional users, emerging markets have become some of the most active users of antidumping and related policies as well as important targets of their application. And though these policies are known collectively as temporary trade barriers, WTO rules governing the duration of antidumping measures are much weaker than for safeguards.
Antidumping policies have, under pressure of special interests at home and abroad, developed into a complex network of trade barriers used both by and against US manufacturers.
Virginia Postrel’s New York Times column, “Economic Scene: Wealth Depends on How Open Nations Are to Trade,” (2001) quotes from economists Stephen L. Parente and Edward C. Prescott’s book Barriers to Riches on the cost of protectionism in India:
In other words, says Professor Parente, “poor countries are poor because some groups are benefiting by the status quo,” and those groups use the law to block change. India has a long history of this. In the early 20th century, strikes kept Indian textile mills from increasing the number of looms each worker operated, and the government protected the old ways through steep tariffs on foreign textiles. As a result, from 1920 to 1938 textile productivity rose by only a third as much in India as it did in Japan, which was beginning its climb to prosperity.
Indian government policies blocked imports of Japanese and other foreign cars and blocked foreign direct investment. Special interests limited competition within India (blocking new firms). Established companies working with labor unions and government blocked imports of foreign manufactured goods. So India protected existing firms and jobs and stayed poor through the 1960s, 70s, and 80s, and only started prospering after barriers to international trade and foreign direct investment were lifted in the early 1990s.
This is a lesson for the U.S. as well. Domestic regulations coupled with protectionist policies can slow and even stop advances across whole industries. Plus protectionism is often advanced under the guise of various policies claimed to be pro-consumer, antitrust, environmental, and pro-labor.
China is both a developed and an undeveloped country, much like Europe after the fall of communism. When Deng Xiaoping’s reforms began in 1978, parts of “China” were already market-based (Taiwan and Hong Kong). Agricultural reforms allowed mainland China families to essentially own farmland, which immediately and dramatically increased food production.
Reforms also opened a handful of southern and coastal regions, Special Economic Zones, to foreign investment and the most important early investors were returning Chinese investors who had earlier fled China and prospered in other countries.
By the 1990s firms and workers in these free-enterprise zones had surged ahead, with 40% annual growth rates in Shenzhen, for example. By 2016, hundreds of millions in China have enjoyed decades of sustained economic development. Western and rural regions, though, have been slower to enjoy the gains from market reforms and international trade and investment.
Access to electricity and washing machines plays a larger role in reducing poverty and gender inequality around the world. Swedish statistician Hans Rosling explains the magic of washing machines in his famous TED talk (now with over 2 million views).
Washing machines, or the lack of them, impact every family on the planet. Rosling is passionate in advocating access to electricity and washing machines for Earth’s five billion people still living below the “wash line.” Rosling says one billion live above the “airline,” with access to all sorts of machines and gadgets and even flying machines! Another billion can’t afford all that, but do have electricity and washing machines. But below the wash line, five billion live in families where women take dirty clothes to the river each week, bring water from wells, or, for those lucky enough to have running water, wash clothes by hand at home.
(My mother had a washboard in the utility room before we had any machines for cleaning. We later bought a washing machine and mom hung clothes out to dry in the patio or front yard (depending on rain). Later we bought a dryer and still later a dishwasher. These magic appliances made daily chores much, much easier for my mother and my sister.)
There are important ways this washing machine progress story connects to the U.S./China debate topic. Central to Hans Rosling’s TED presentation: Some environmentalists believe Earth’s ecosystems unable to cope with the economic expansion and surge in electricity use needed to power washing machines for the billions still washing clothes by hand. Rosling mentions his environmentally-conscious Swedish students who ride bicycles each day to reduce their “carbon footprint.” He asks for a show of hands on bicycles first, then on clothes washing. None of his students wash their clothes by hand.
U.S. trade policy with China is impacted by environmental concerns (especially CO2 emission) with policies involving energy use and global climate change (as well as separate labor, antitrust, and other policies).
Environmentalists want more renewable energy used in China, and find common cause for protectionist policies that would also protect relatively more energy-efficient U.S. manufacturers from Chinese competition. Chinese manufacturers are shifting to more efficient and less polluting natural gas power, especially in China’s more-developed southern and coastal provinces.
The Chinese government though, is spending billions to heavily-subsidize solar and wind power installations, and also running heavily-polluting coal-power for electricity in the north, and coal-powered state-owned steel production. These costly policies are driven by politics. Fears of jobs losses, plus local corruption sustain coal and steel subsidies.
Concern about foreign environmentalists and protectionism energize solar and wind power subsidies. Unless the Chinese government makes a big show of spending billions for solar and wind power, and being a leader in renewable energy, they risk U.S. and E.U. environmentalists joining with manufacturing and labor interests to build new protectionist barriers. This 2011 article, “Prospects for Green Protectionism under China-US Energy Cooperation” discusses this dynamic:
A typical example was that the US threatened to impose unilateral trade sanctions, especially the so-called “carbon tariffs”, on energy-intensive products imported from those developing countries that would not adopt CO2 mitigation policies “comparable” to that of the US. The Waxman-Markley bill, passed in June 2009 by the US House of Representatives, and most other proposed [laws/legislation] in recent years all contained such provisions, [with/regarding] China as the major target.
The Chinese government understands the threat of “carbon taxes” so continues to subsidize solar and wind power generation.
Separate from green energy policies are more traditional protectionist policies claiming foreign firms are hurting the U.S. by selling manufactured goods below cost. Cited above are efforts by Whirlpool to slap tariffs on Korean washing machines made in China. Courthouse New Service December 30, 2015 story, “Whirlpool Wants Tariffs for Chinese Washers.”
Appliances maker Whirlpool wants the federal government to impose tariffs on imported Samsung and LG washing machines made in China, claiming they are priced too low. Whirlpool Corp. filed an anti-dumping petition with the U.S. Department of Commerce and the U.S. International Trade Commission, accusing its Korean rivals of circumventing federal orders. Dumping refers to selling a product in the United States at a price that is lower than “the price for which it is sold in the home market,” or the fair value, according to a government handbook.
Does it seem reasonable that Samsung and LG would invest hundreds of millions in design, factories, tooling, production, and shipping to sell their new washing machines in the U.S. for less that it costs to produce them?
The popular theory is that firms engage in “predatory pricing,” with big firms selling below cost in order to drive their smaller competitors out of business. Once competitors are bankrupt or leave the business, these “predatory” firms plan to recoup their losses as monopolists by raising prices much higher.
It is an interesting theory, but according to economists, doesn’t work in practice. “Antitrust,” an article in The Concise Encyclopedia of Economics, notes:
Likewise, belief in the efficacy of predatory pricing—cutting price below cost—as a monopolization device has diminished. Work begun by John McGee in the late 1950s (also an outgrowth of the Chicago Antitrust Project) showed that firms are highly unlikely to use predatory pricing to create monopoly. That work is reflected in several recent Supreme Court opinions, such as that in Matsushita Electric Industrial Co. v. Zenith Radio Corp., where the Court wrote, “There is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”
Those researching US/China trade policy should ask: who benefits from current and proposed trade policies? Past posts have noted that trade restrictions are often proposed and promoted by concentrated interest groups expecting to benefit from anti-dumping policies and other trade barriers.
Trade policy is not so different from other regulations. Regulations restricting Uber and Lyft ride-sharing, for example, are passed in the name of protecting the public but serve to protect established taxi and limousine companies from competition.
Everyday people benefit from wider transportation options, but not enough to lobby, protest, or vote because of this single issue. Taxi companies and drivers are concentrated and motivated, and they will lobby and protest to defend their government-protected privileges, just as Whirlpool and worker unions do to try to raise costs for Korean/Chinese companies.
Relatively open trade with China was originally easy because in the 1980s China was so poor and rural that manufacturing there was little threat to U.S. firms. As China under Deng Xiaoping opened up parts of the economy to foreign direct investment, manufacturing boomed. The Chinese economy integrated with the U.S., South Korean, Japanese, and Taiwanese economies. Now hundreds of millions of jobs across these five economies are woven together through tens of thousands of interconnected companies, supplier contracts, and distribution agreements.
The results of this relatively open trade and investment policy over three plus decades has been lower costs for goods for world consumers and astonishingly good news for hundreds of millions across China. A Huffington Post article, “Global Poverty Will Hit New Low This Year, World Bank Says,” reports the amazing story that as world population grew by billions since 1990, extreme world fell:
…a stunning decline from the numbers reported over the last 25 years. According to the World Bank, 37.1 percent of the world’s population lived in extreme poverty in 1990. In 2015, that number is estimated to drop to 9.6 percent.
In an October 7, 2015 Cato at Liberty post, “The Dramatic Decline in World Poverty,” Ian Vasquez connects this poverty reduction with the expansion in economic freedom, especially in China:
The drop in poverty also coincides with a significant increase in global economic freedom, beginning with China’s reforms some 35 years ago and the globalization that followed the collapse of central planning in the late 1980s and early 1990s. As we celebrate this achievement and strive for further progress, we should not lose sight of the central role that voluntary exchange, freedom of choice, competition and protection of property play in ending privation.
Relatively open U.S./China trade and investment policies have been the major factor reducing world poverty, along with India’s economic reforms in the early 1990s. Tyler Cowen in “Trump’s Disastrous Pledge to Keep Jobs in the U.S.” (Bloomberg, November 29, 2016) argues that policies designed to protect US manufacturing jobs will backfire:
If regulations prevented, say, Ford Motor Company from transferring its own capital funds to Mexico, what would keep it from using affiliates, subsidiaries, commercial alliances, or a complex web of foreign transfers to achieve more or less the same ends?…
Furthermore, if we limit the export of American capital to Mexico, the biggest winner would be China, as one of its most significant low-wage competitors — Mexico — suddenly would be hobbled.
China’s government is struggling to halt industrial and automobile pollution, even inspecting barbeques. Heavy winter smog in Beijing and other Chinese cities causes a range of health problems. In addition to coal-burning industries and cars, Beijing is up against mountains holding pollution in place as well as temperature inversions (the kind that contribute to smog in Los Angeles and Mexico City). The coal powering China’s industrial growth over the last three decades has a long history of generating both power and pollution.
Coal is the magic black rock that powered England’s Industrial Revolution then industrialization across western Europe and the United States. Thick pea-soup coal pollution smothered Pittsburgh. For pictures, see the June 5, 2012 Atlantic CityLab article: What Pittsburgh Looked Like When It Decided It Had a Pollution Problem. More here on Explore PA History:
“Hell with the lid off,” was an apt description of Pittsburgh during its peak decades of industrial production. In the late nineteenth and early twentieth centuries, Pittsburgh ran on bituminous coal. Each month the steam boilers and furnaces of its industries, railroads, and homes dumped 100 tons of pollutants on its streets.
Natural gas power is the key to cleaning up Beijing’s skies, along with nuclear and renewable energy. “For China, pollution and climate change are not the same problem: Kemp” (Reuters, November 14, 2014) blames coal power, but notes a complexity with reducing both pollution and CO2 emissions:
Climate campaigners blame the problem on China’s inefficient coal-fired power plants and argue that the solution is to replace them with cleaner burning natural gas power stations as well as zero-emission sources of electricity such as wind, solar, hydro and nuclear.
Conflating air pollution with global warming is a useful tactic for getting action because it suggests action to prevent the long-term threat of climate change would also yield tangible health benefits in the short term.
But the pollution problem is more complicated. The causes of air pollution are not the same as climate change. China’s leaders tend to see them as distinct issues and reducing air pollution is a far more pressing political problem.
Communist-era policies of providing “free” heating to the colder northern half of China are still in operation today, with electricity still generated by older polluting coal-fired power plants:
Due to budgetary limitations, free heating only extended as far south as the Huaihe River and the Qinling Mountains, which as well as the traditional boundary is roughly as far south as the freezing weather extends, according to researchers at the Massachusetts Institute of Technology (“Winter heating or clean air: unintended impacts of China’s Huai River policy”, 2009).
Most of the district heating systems, which are still in use today, employ old, inefficient coal-fired boilers to produce steam and hot water. They have few pollution controls and spew soot and mercury as well as sulfur and nitrogen compounds into the urban air.
Energy-intensive industries employ more advanced pollution control than the district power sources:
Almost all power plants have been fitted with baghouses and scrubbers to capture fly ash and sulfur and nitrogen oxides. District heating and industrial boilers are fitted with much more primitive controls and in many cases none at all. …
Cutting the air pollution in northern cities means first and foremost tackling district heating and industrial boilers. In some cases, district heating and industrial systems could be retrofitted with pollution controls or converted to cleaner burning gas.
This undated Shell Global promotional article, “Cleaning the Skies Over Beijing” offers some good news in the shift to natural gas:
That all came to an end on March 19, 2015, when the historic plant – said to be the cradle of China’s power industry – was shut for good. A day later, the 66-year-old Guohua Beijing coal-fired power plant in the heart of the central business district was also closed.
The last of Beijing’s major coal-powered stations will close in 2016, with four natural gas-fired plants replacing them as part of the city’s transition to cleaner energy. The new gas power stations can supply 2.6 times more electricity, according to the Beijing city authority, and help tackle the city’s serious air pollution.
Top-down programs and policies are limited to plans and powers of government agencies. Many economists recommend market-based reforms to create pollution and carbon credit trading. Give all firms a “right” to, say, 80% of their current emissions, then allow trading of those emissions rights to enable discovery of least-cost pollution reduction strategies. Money-losing state industries could shut down quickly (and could sell pollution credits to other firms for severance payments to workers). Pollution credits could be traded separately from CO2 emission “carbon credits.”
BloombergMarkets in China Turns to Free Markets to Tame Fossil-Fuel Pollution, August 16, 2016, reports on new emissions trading plans:
In China, authorities have previously ordered factories closed and cars off the street to combat smog. Trading will cover eight industries, including areas such as papermaking, aviation and power utilities. They will buy credits covering their emissions and can sell any surplus. A link to overseas markets may also be possible, giving another way to profit.
For China, carbon trading is part of President Xi Jinping package of emissions cuts promised in a deal with U.S. President Barack Obama that revived the global climate talks and led to the deal in Paris in December.
Economists have long focused on the wide range of pollution reduction costs from company to company. Some firms can reduce emissions inexpensively while similar reductions for other firms would be very expensive. A top-down regulation requiring all firms in a region to cut emissions by 10% or 20% wouldn’t engage emissions cost differences across companies and industries. But a market in exchangeable emissions permits could, creating incentives for engineers and entrepreneurs to search for least-cost emissions-reduction technologies.
In China some of the heaviest pollution comes from inefficient and money-losing state-owned district power and manufacturing companies. The Chinese government could actually save money if these industrial dinosaurs closed. Revenue from selling emissions credits helps incentivize the whole process (replacing incentives to hide pollution and bribe officials).
Pollution markets usually call for extinguishing 10% to 20% of emission permits with each exchange, so a firm has to purchase 110% or 120% of the emission amount they need. The more active the pollution trading market, the faster pollution levels decline.
Separating CO2 emissions from pollution in cap and trade schemes is important. Coal burning releases a range of pollutants, depending on sulphur and other impurities in the coal, how inefficient the burning process, and the pollution control equipment in place (scrubbers, for example).
Wikipedia entries on cap and trade and on carbon credits provide an overview. “China Will Start the World’s Largest Carbon Trading Market” (Scientific American, May 16, 2016) reviews political battles over access to scarce resources like water in the Western U.S. and clean air, and the opportunity in market-based approaches:
[Environmental Defense Fund’s Dan] Dudek wanted to introduce a market-based system to protect scarce resources that he’d seen debated in California, where for decades disputes over water rights were settled by legal and political fights. The winners were usually farmers and ranchers who lobbied the government to dam the state’s remaining wild rivers to irrigate more crops on dry land. Once they’d won the fight, Dudek recalled, it was “use it or lose it.” He felt the government should be encouraging people to find ways to save water.
As Dudek sometimes puts it, “the status quo is a vicious competitor.”
In 1985, Dudek, who had watched this battle as a U.S. Department of Agriculture economist and later as a professor at the University of Massachusetts, Amherst, joined EDF, the one group he felt might listen to his grand scheme to protect the environment.
The best place to do it was in China, Dudek urged Krupp, and the resource in the most trouble there was not water, but air. Dudek noted that China’s economy was exploding, and air pollution in its major cities was going to become a major health problem. He told Krupp he wanted to go China to get the government to explore using economic markets to provide incentives to reduce air pollution. …
Pollution trading markets are a challenge to put in operation, but compared to other regulatory schemes, markets in pollution credits have a fairly good track record (Though the EU’s carbon trading crashed, according to this 2013 article, “Europe’s Carbon Emissions Market Is Crashing.” (Bloomberg, March 28, 2013)
Stricter pollution controls in China could be good news for U.S. natural gas exports. In “Chinese Pollution Opens Door For U.S. Natural Gas Exports,” (Forbes, November 21, 2016), James Taylor argues for U.S. government approval of LNG export terminals:
Chinese provincial governments are shutting down everything from industrial manufacturing plants to outdoor barbecues to address oppressive air pollution, Reuters reports. The United States can economically benefit from the situation if our government will stop blocking the construction of liquefied natural gas (LNG) export terminals
Taylor says state and federal policies block LNG terminal construction, and that significant coal pollution from China makes its way to the western U.S.:
Failing to see that LNG exports would enable nations like China and India to convert their electricity base from coal to clean-burning natural gas, government officials are actively blocking the construction of LNG terminals in the name of environmentalism and opposing “fossil fuels.” Ironically, Chinese pollution swept over the Pacific Ocean by prevailing wind currents accounts for up to 11 percent of black carbon particulate matter and 24 percent of sulfates on the U.S. West Coast.
(Warning for debaters: James Taylor evidence will invite anti-James Taylor evidence. Here is his DeSmogBlog entry)
After learning witches are made of wood, peasants in Monty Python and the Holy Grail, are asked what, besides wood, floats. One peasants asks hopefully: “tiny rocks”? Well there are ways for rocks and other heavy cargo to float, and floating across the world’s oceans today are millions of tons of steel and aluminum forged and smelted in China.
By ship is by far the least expensive way for steel to travel from producers to consumers. Shipping costs from China to California are lower than shipping by rail from steel mills in Pennsylvania, Ohio, and Indiana. So coastal Chinese steel and aluminum producers can have a significant cost advantage along America’s west coast, and can be competitive in markets in other coastal cities.
High taxes (tariffs) on imported aluminum and steel can save companies and jobs in domestic steel and aluminum industries, but are costly and job-destroying for U.S. manufacturers who depend upon these raw materials for their production processes.
The November 8, 2016 Wall Street Journal article “U.S. Says Aluminum Exports From Chinese Firm Evaded Restrictions” reports:
U.S. officials said a Chinese aluminum magnate is sidestepping U.S. trade sanctions, the latest development in federal attempts to rein in a flood of cheap metal imports that have overwhelmed U.S. producers.
The reporters uses says “cheap metal imports” are “flooding” the U.S. Here though is an InvestmentMine chart showing 25 years of aluminum prices. Looks like aluminum prices have been going up and down over the years, with a surge in 2006-2008, followed a steep fall in prices with the financial crisis of 2008-2009, and prices surging after, then falling again.
When aluminum prices are high, producers make huge profits and tend to invest some of those profits in expanding output. As new capacity boosts supply, prices are pushed down, leading aluminum companies to reduce production but also to complain to Congress and the Department of Commerce about “dumping” by foreign firms.
Two points to keep in mind about imports of aluminum, steel, copper and other metals. First, as key raw materials to U.S. manufacturing, lower metals prices help U.S. manufacturers stay competitive. With steel prices up 70% so far in 2016, U.S. manufacturers face higher costs and often raise prices, making their goods less attractive to consumers. Firms trying to absorb much higher raw materials costs have less margin for raising wages, capital investment, and dividends.
U.S. Steel’s campaign to exclude Chinese steel imports would make U.S. companies that manufacture products from steel less competitive, steel users told a federal agency. They also said domestic steelmakers either don’t want to make some of the steel they need or can’t make it as reliably as Chinese suppliers do.
It is not the case that steel (or aluminum) are monolithic products and few U.S. manufacturing firms want to purchase lumps of raw steel or aluminum. The article quotes various U.S. steel users who emphasize the benefits to them of access to specialized steel producers in China:
Michael Papera, who purchases steel for Allstate Can in Parsippany, N.J., told the agency that the steel his company buys from Baosteel of China “is by far superior to anything purchased domestically in the way of shape and performance.”
Baosteel is one of the Chinese producers targeted by U.S. Steel.
Neal Lux, president of Global Tubing, said the Dayton, Texas, company worked with an unnamed U.S. steelmaker to provide steel used to make tubing for the energy industry.
“The results were disastrous,” he wrote.
So it is interesting that with the media and think tank concern the Trump Administration might launch a damaging trade war with China, U.S. manufacturers are already suffering from ongoing trade disputes launched by U.S. steel and aluminum producers, and their associations, working through Department of Commerce Anti-Dumping (AD) and Countervailing Duties (CFD) operations:
The Antidumping and Countervailing Duty Operations Unit is responsible for enforcing U.S. antidumping duty (AD) and countervailing duty (CVD) laws. AD/CVD Operations conducts investigations in response to petitions received by the Department from domestic industries and/or labor unions. AD/CVD Operations also conducts subsequent proceedings known as administrative reviews in which importers’ actual duty liability is assessed.
The Wall Street Journal reports on continued efforts to keep aluminum import costs high:
The Commerce Department in 2010 had punished China Zhongwang and other Chinese producers with tariffs as high as 374.15% after finding they were receiving illegal subsidies and dumping, or selling products in the U.S. below market prices.
Chinese firms receive subsidies from local, regional, and national governments in China. But so do many U.S. firms. General Motors and Chrysler were bankrupt in the financial crisis and bailed out by the U.S. government (along with various insurance and investment firms). U.S. aluminum production benefits from inexpensive electricity from federally-funded dams in the Pacific Northwest. State governments provide tens of millions in subsidies for new auto plants and other factories, plus spend millions on road and rail infrastructure to help these goods reach international markets.
You may not know Alcoa by name, but there’s probably at least one product with Alcoa aluminum in it somewhere in your home. As the world’s third largest producer of aluminum, Alcoa has an extensive history dating back to 1886 when it was first founded in Pittsburgh, Pennsylvania. The company has received $5.64 billion across 99 subsidies according to Find Good Jobs‘ report, which have helped the company go on to secure lucrative contracts for projects, like building jet engine parts.
As of the past few years, Alcoa has really been picking up steam. Production has increased at its numerous plants and stock prices have jumped as investors have taken notice. As the company continues to ramp things up, look for subsidy levels to remain high in coming years.
The federal government has spend billions on solar and wind power as well (though these subsidies, combined with renewable energy mandates, tend to raise energy prices and costs for U.S. firms and consumers). (This 2016 article disagrees, with study showing no statistical increase.)
Businesses and industries often turn to government both for subsidies for their operations and for trade restrictions hampering foreign competitors. Chinese firms lobby for subsidies and trade restrictions much as U.S. firms do.
Which firms receive the largest subsidies and the most effective/damaging trade restrictions, is a question for economists (and debaters) to research. But in all cases other manufacturing firms must deal with the challenge of higher prices and limited access to supplies needed for their operations. Firms in developed countries have integrated supply chains and Department of Commerce AD and CVD regulations throw wrenches in these supply chains.
The next Administration has the option reduce or remove disruptive and costly trade barriers, as well as to set up new ones.
Update: This November 14, 2016 Foreign Affairs article, “Will China Trump Trump? Antagonizing Beijing for Short-Term Gain,” provides useful overview of problems neo-mercantilist policies would cause with current US/China/Mexico supply chains:
Overall industrial output in the United States is at a historical high, while manufacturing employment is at a historical low. As it happened with agriculture more than a century ago, technological progress, which leads to productivity gains, is to be blamed for the dearth of blue-collar jobs in the United States. Globalization only reinforces the underlying dynamics. Moreover, in a world of global value chains, where production is sliced and diced across the world, several imports from China, such as auto parts, steel, semiconductors, and plastics, are actually intermediate goods or raw material for U.S. exporters, meaning that they contribute to the value of the final good.
Previous posts have reviewed arguments both for and against additional trade restrictions with China.
The Nov/Dec, 2016 Lincoln-Douglas Debate topic is controversial: “Resolved: The United States ought to limit qualified immunity for police officers.”
Lincoln-Douglas debaters should read widely on the police/citizen clashes over the last year, and consider values including, of course, justice and safety.
Police working in high-crime neighborhoods are under pressure and deal with many difficult situations. But life can be difficult and tense too for the people who live day-to-day in high-crime neighborhoods.
But just as most property crime and violence in high-crime neighborhoods is caused by a small minority of young men, most incidents of police misbehavior is caused by a small minority. (Link to 2015 Brooking Institution post.)
Shikha Dalmia in “How police unions actually hurt police officers,” (The Week, July 18, 2016) argues these “bad apples” are protected by union procedures designed for other purposes. Part of the challenge, Dalmia writes is lack of reported data on police/citizen incidents:
The Crime Control Act of 1994 asked the FBI to annually compile and publish data about the use of police force in all instances so that the country could keep track of trends of police violence, identify problematic precincts, or catch enforcement bias. But union representatives of law enforcement agencies successfully lobbied the feds to make reporting optional. So most departments now simply plead poverty and refuse to comply.
This is a huge problem. In the absence of good data, it is impossible to say definitively if racism is driving police abuse in black communities. And because it is impossible to identify the size and scope of this problem, it is impossible to craft and enact a solution to it — a solution, mind you, that would not only better serve and protect minority communities, but also keep police safer, too.
This is but one example of police unions going to eye-popping lengths to protect rogue cops at the expense of citizens (and the many decent cops who are tainted as well). Consider the binding arbitration that has become a standard feature of virtually all police contracts, which are often negotiated in secrecy. Binding arbitration allows cops to appeal any disciplinary action taken by their superiors to outside arbitrators such as retired judges. In theory, these folks are supposed to be neutral third parties. In reality, they are usually in the pockets of unions and dismiss or roll back a striking two-thirds of all actions, even against cops with a history of abuse and excessive violence. The upshot is that police chiefs are powerless to clean house, even as community complaints pile up. This is exactly what was happening in Baltimore when Freddie Gray died during his ride to the police station last year.
Students are encouraged to read the article for more on Dalmia’s argument on the role police unions play in protecting the minority of police involved in violent or aggressive incidents with the public that appear unjustified after review.
For more, see Conor Friedersdorf, “How Police Unions and Arbitrators Keep Abusive Cops on the Street,” in The Atlantic (December 2, 2014)
Police institutional procedures like binding arbitration clauses and procedures in union contracts should allow fair evaluation of complaints about violent incidents between police officers and the public.
And more directly on the LD topic, Evan Bernick, Assistant Director of the Center for Judicial Engagement at the Institute for Justice, has this May 6, 2015 article in The Freeman, “To Hold Police Accountable, Don’t Give Them Immunity,” drawn from his April, 2015 remarks to the US Commission on Civil Rights.
Critics of these reform proposal and the focus on police misconduct point to dramatically increasing violence in many inner-cities, and police pull back. (Murder Rates Rising Sharply in Many U.S. Cities (New York Times, August 31, 2015.) Murders have increased through 2016 in Chicago and other cities.
Economist Thomas Sowell draws from The War on Cops for his National Review article: “The Race War No One Can Win” (National Review, July 13, 2016)
Reason magazine’s critical review of the book: “There Is No War on Cops: A new book from a prominent right-wing commentator fails to make the case.”
And New York Times review article of “The Problem With Modern Policing, as Seen From the Right and From the Left” (June 27, 2016).
Economists Tyler Cowen & Noah Smith at Bloomberg are “Debating Free Trade and the Populist Backlash” (November 1, 2016 1:16 PM EDT).
For NSDA (and NCFCA) debaters, the benefits, costs, and pushback on U.S./China trade is at the center of economic and diplomatic relations with China. Alan Reynolds in the Wall Street Journal “What the China Trade Warriors Get Wrong” (Oct. 26, 2016 7:21 p.m. ET) says Trump advisor Peter Navarro is wrong in claiming the “U.S. and Europe in particular got the short end of that stick” after China joined the WTO in 2001:
… China joining the WTO had zero effect on U.S. tariffs against Chinese imports. But it did force China to cut weighted-average tariffs to 19.8% in 1996, down from 32.2% in 1992, according to World Bank estimates. They shrunk further to 14.6% in 2000 and 3.2% by 2014. Yet U.S. tariffs remained unchanged by China’s entry into WTO, staying between 2% and 3% on a weighted average.
Reynolds notes however, that joining the WTO did have a big short-term impact in China:
They found that China’s “aggressive restructuring led to the layoffs of 45 million workers between 1995 and 2002, including 36 million from the state sector.” If China’s entrance to the WTO was about “stealing jobs,” it certainly got off to a bad start. Even in the world’s most populous country, those tens of millions of lost jobs had a big effect.
Did U.S. imports surge after China joined the WTO? Reynolds quotes a recent front-page WSJ story: “Imports from China as a percentage of U.S. economic output doubled within four years of China joining the World Trade Organization in 2001. . . . By last year, imports from China equaled 2.7% of U.S. gross domestic product.” (How the China Shock, Deep and Swift, Spurred the Rise of Trump). But Reynolds says this is misleading and instead U.S. exports to China surged:
Those numbers might appear to suggest U.S. imports surged after 2001, but it was actually Chinese imports that exploded. China’s global imports jumped to 29.2% of GDP in 2005, according to the World Bank, up from 18.3% in 2001. Meantime, U.S. exports of goods to China quickly rose from $19.2 billion in 2001 to $69.7 billion in 2008, according to the Bureau of Economic Analysis. With services added, the U.S. exported $169.2 billion worth of goods and services to China by 2014.
U.S. imports were 15.5% of GDP in 2005 and the main shift was reduced imports from Japan as imports from China rose:
A decade later, U.S. imports were still 15.5% of GDP—the same as 2005. The fact that China’s share of U.S. imports was up and Japan’s down did not mean the U.S. was importing more.
Japan shifted manufacturing to mainland China, building factories and training Chinese workers. So more goods flowed to the U.S. from these factories as imports of goods decreased from Japan.
Since 1990, media and special interest fears of Asian imports shifted from Japanese factories to Chinese factories. Consider this 1990 New York Times story: “Japanese Still Fear Trade Tensions With U.S.” (April 28, 1990):
Indeed, although American exports to Japan have risen in recent years, American imports – particularly automobiles, consumer electronics and machinery – have risen twice as fast.
Japanese officials say they feel lingering bitterness at the way they had to negotiate with the United States under the threat of sanctions, a principal tool of the Super 301 clause.
Japan viewed the Super 301 action as coercive, unilateral and illegal. Mrs. Hills was understood to have been advised by many American negotiators not to use it again this year.
Back to the present, this New York Times and Seattle Times article looks at overall international trade: “A little-noticed fact about trade: It’s no longer rising” (Originally published October 30, 2016 at 3:47 pm Updated October 30, 2016 at 7:41 pm) Global trade is flat and:
The United States is no exception to the broader trend. The total value of U.S. imports and exports fell more than $200 billion last year. Through the first nine months of 2016, trade fell an additional $470 billion.
For all the complaints about “free trade” by U.S. and E.U. politicians and industry associations, many new trade barriers are being thrown up by U.S. and E.U. governments:
Meanwhile, new barriers are rising. Britain is leaving the European Union. The WTO said in July its members had put in place more than 2,100 new restrictions on trade since 2008.
One example is a new Iron Curtain lobbied for by U.S. steel manufacturers. See “U.S. Imposes 266% Duty on Some Chinese Steel Imports” (March 1, 2016 7:23 p.m. ET), and “U.S. Steel Tariffs Create a Double-Edged Sword” which notes:
New tariffs on imports are boosting steel prices in the U.S., offering a lifeline to beleaguered American steelmakers but raising costs for manufacturers of goods ranging from oil pipes to factory equipment to cars.
So how much of the global slowdown in trade is due to falling construction and commodity prices, and how much is due to new U.S. and E.U. trade restrictions?
Binyamin Appelbaum’s NYT/Seattle Times article also claims:
The benefits of globalization have accrued disproportionately to the wealthy, while the costs have fallen on displaced workers, and governments have failed to ease their pain.
Appelbaum claim certainly doesn’t apply to everyday people in China and other East Asian countries. According to the World Bank “benefits of globalization” (international trade and investment) shifted billions out of extreme poverty.
East Asia’s population grew from 1.821 billion in 1990 to 2.279 billion by 2015, yet the percentage of East Asians in extreme poverty (earning less than $1.9 a day) fell from 60.8% of the population in 1990 down to 4.1% by 2015.
Maybe he just wanted to focus instead on the hundreds of East Asian business leaders now billionaires, and the tens of thousands millionaires.
Inequality of income increased as economic and political entrepreneurs built tens of thousands of enterprises from small to large, and some to very, very large. We could research further the income gains Chinese workers enjoyed over the last 25 years vs. gains to Chinese and foreign company founders and stockholders. Still, everyday people saw stunning gains in income and living standards thanks to relatively open trade with the U.S., E.U., and the rest of the world.
East Asian gains are discussed here too: “In 1990, more than 60% of people in East Asia were in extreme poverty. Now only 3.5% are.” (Vox Oct 2, 2016, 4:00pm)
It’s hard to overstate how astonishing and rapid the decline in extreme poverty in the past couple of decades has been. In 1990, more than a third of people on Earth lived on less than $1.90 a day, adjusted for local prices (this is the line the World Bank uses as its main metric). By 2013, barely 10 percent of people did; the rate had been cut by more than two-thirds. That’s one of the biggest and fastest improvements in human well-being in the history of the planet.
Appelbaum is maybe thinking more about how globalization impacts low and middle income American:
During the 1990s, global trade grew more than twice as fast as the economy. Europe united. China became a factory town. Tariffs came down. Transportation costs plummeted. It was the Wal-Mart Era.
Wal-Mart is of course a store where millions of low and middle income Americans have purchased billions of dollars worth of clothes, gadgets, and other goods made by Chinese workers. Did buying these goods hurt or benefit American consumers? Did purchasing less expensive goods from China hurt American manufacturers, “hollowing out” America’s middle class? (An earlier post noted the 40% gain in U.S. manufacturing output since 2000, and research showing most job losses were from automation.)
Well, this is an overlong post already. But, in addition to the Cowen/Smith above, here are a additional responses to populist “Death by China” claims. Bryan Riley of the Heritage Foundation’s argues “Trade With China Is a Net Plus for Americans” (August 31, 2016). This Cato Institute Commentary “The Truth about Trade” (April 11, 2016) adds more support for the gains from trade.
For a more in-depth discussion, see Dartmouth economist Doug Irwin’s “The Truth About Trade:What Critics Get Wrong About the Global Economy” in the July/August issue of Foreign Affairs,
The most important point is that the US China Trade War is expanding and has now become a universal trade war. - Bill Perry, US/China Trade War
I’ve been reading Thucydides’ The History of the Peloponnesian War (431 B.C.E.) and researching the U.S./China debate topic. Thucydides mentions trade issues between Greek city-states, along with escalating passions following political and military disputes.
Graham Allison’s article “The Thucydides Trap: Are the U.S. and China Headed for War?” (The Atlantic, September 24, 2015) features an ominous subtitle: “In 12 of 16 past cases in which a rising power has confronted a ruling power, the result has been bloodshed.” Allison argues:
The defining question about global order for this generation is whether China and the United States can escape Thucydides’s Trap. The Greek historian’s metaphor reminds us of the attendant dangers when a rising power rivals a ruling power—as Athens challenged Sparta in ancient Greece, or as Germany did Britain a century ago. Most such contests have ended badly, often for both nations, a team of mine at the Harvard Belfer Center for Science and International Affairs has concluded after analyzing the historical record. In 12 of 16 cases over the past 500 years, the result was war. When the parties avoided war, it required huge, painful adjustments in attitudes and actions on the part not just of the challenger but also the challenged.
In “Thucydides’s trap has been sprung in the Pacific” (Financial Times, August 21, 2012), Graham Allison made a similar claim:
The defining question about global order in the decades ahead will be: can China and the US escape Thucydides’s trap? The historian’s metaphor reminds us of the dangers two parties face when a rising power rivals a ruling power – as Athens did in 5th century BC and Germany did at the end of the 19th century. Most such challenges have ended in war. Peaceful cases required huge adjustments in the attitudes and actions of the governments and the societies of both countries involved.
Classical Athens was the centre of civilisation. Philosophy, history, drama, architecture, democracy – all beyond anything previously imagined. This dramatic rise shocked Sparta, the established land power on the Peloponnese. Fear compelled its leaders to respond. Threat and counter-threat produced competition, then confrontation and finally conflict. At the end of 30 years of war, both states had been destroyed.
In “Superpower and Upstart: Sometimes It Ends Well,” (New York Times, January 22, 2011), David Sanger compares the U.K. to U.S. global power transition (peaceful) to the predicted U.S./ China power transition in the Pacific:
Just ask the British, who a century ago were struggling to come to terms with the erosion of their status as the world’s No. 1 empire. It didn’t help that they were being upstaged by a former colony that had turned into an upstart sea-power…
Or ask Thucydides… “What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.”…
Both Mr. Hu and President Obama seemed desperate to avoid what Graham Allison of Harvard University has labeled “the Thucydides Trap” – that deadly combination of calculation and emotion that, over the years, can turn healthy rivalry into antagonism or worse.
After discussing events surrounding Chinese President Hu Jintao’s meetings during a 2011 visit to the U.S., Sanger concludes:
Meanwhile, Thucydides might be appalled at the nationalistic talk that resounds in both countries. In Chinese newspapers these days, it’s hard to avoid accounts of “American decline.” Meanwhile, some new members of Congress talk lightly of cutting off Chinese access to the American market — as if that could happen in today’s global economy.
In both languages, that’s fear talking.
Mostly open markets, trade, and international investment explains why America’s rise to global economic power in the 19th Century helped rather than endangered UK and European companies, investors, or consumers. British and other European firms and investors earned profits from supplying capital for expanding U.S. railroads, manufacturing, nature resource extraction, and agriculture (for example, see this history of Balfour-Guthrie: “A British Firm on the American West Coast, 1869-1914* The Business History Review, Vol. 37, No. 4 (Winter, 1963), pp. 392-415)
Through the primaries and Presidential campaign, anti-China claims and threats seem everywhere. Yet the reality, as previous posts have noted, shows U.S. manufacturing is robust, with output expanding 40% over the last 20 years, the period of the North American Free Trade Agreement (NAFTA) and China joining the World Trade Organization (WTO). (See also: Globalization isn’t killing factory jobs. Trade is actually why manufacturing is up 40%)
Automation is the major reason the number of U.S. manufacturing jobs dropped over this period. And far from challenging the U.S., manufacturers and workers in China have been integrated into complex and cost-effective supply-chain networks, benefiting U.S., other Asian, and European manufacturers as well as consumers.
Still, not everyone benefits from rising global trade and investment. Some labor unions and domestic firms and industries have declined, and blame China. With the slow recovery since the 2008-2009 “great recession” some manufacturers and trade associations have pushed their governments for domestic subsidies and restrictions on imports.
For an overview of recent trade U.S./China trade disputes see Bill Perry’s “UNIVERSAL TRADE WAR, TPP IN LAME DUCK, SPOTTING POTENTIAL AD CASES, CUSTOMS, FALSE CLAIMS ACT, VITAMIN C ANTITRUST, IP AND 337″ (US/China Trade War, October 7, 2016), which spells out the downward spiral:
The most important point is that the US China Trade War is expanding and has now become a universal trade war. Although the US continues to bring numerous antidumping (AD) and countervailing duty (CVD) cases against China, the Chinese government is now bringing and will bring numerous AD and CVD cases against the US.
In the recent Chinese antidumping case against Distiller Grains from the US, the Chinese government has levied a 33% rate against $1.6 billion in US exports to China. There are rumors that the Chinese government may soon bring AD and CVD cases targeting $15 billion in US exports of soybeans to China.
Meanwhile numerous countries have adopted their own AD and CVD laws modeled on the US and EU and are bringing cases not only against China, but also against the US.
The only recent trade developments that would break the retaliation cycle are the Trans Pacific Partnership (TPP) and the TTIP deal with Europe and both trade agreements are in serious trouble.
Debaters should be familiar with arguments for increasing as well as reducing trade restrictions with China. Economist Don Boudreaux explains the case for more open trade in this April 20 2015 Mercatus Center post “The Benefits of Free Trade: Addressing Key Myths.”
Economist Peter Navarro (an advisor to Donald Trump), advocates increased trade barriers with China. See “Trump Economic Advisers Denounce Trade Deals in Theory, Practice,” (Bloomberg, August 3, 2016).
“Spend a few hours every week studying American history, human nature, and economic theory. Start with “Economics in One Lesson.” Then try Keynes. Then Hayek. Then Marx. Then Hegel. Develop a worldview that you can articulate as well as defend. Test your theory with people who disagree with you. Debate. Argue. Adjust your philosophy as necessary. Then, when the next election comes around, cast a vote for the candidate whose worldview seems most in line with your own.”
Henry Hazlitt’s Economics in One Lesson, long popular in high school debate classes, is online here from the Foundation for Economic Education.
Henry Hazlitt, probably this century’s greatest journalistic expositor of the economic way of thinking wrote: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
He went on to say that nine-tenths of the economic fallacies that work harm in the world today are the result of ignoring this lesson. While Hazlitt’s Lesson is not exactly a separate economic principle, it is a form of mental discipline that must be exercised when constructing or analyzing policy…. protective tariffs and quotas harm American consumers and workers… In each case the counter-intuitive result is found by consistent application of Hazlitt’s Lesson: look not just to the immediate effects on one group, but the long run effects on all groups.
So, lots for debaters to ponder. — Greg Rehmke, Debate Central