The Case against Proposed Chinese Tariffs

In the midst of “Fair” Trade Month, the House of Representations passed a misguided bill entitled Currency Reform for Fair Trade Act of 2010 by a vote of 348-79 last week. Supporters of the protectionist bill likely believe that China is manipulating its currency to artificially lower the price of Chinese goods imported in the United States. If approved by the Senate and President Obama, the law would allow the Obama administration to raise tariffs on Chinese imports. According to Heritage Foundation Fellow Derek Scissors, the value of Chinese currency has not significantly impacted the US economy:

 The extent of the yuan’s misalignment is unclear, and so designing real remedies is almost impossible. More importantly, undervaluation is not a major factor in the bilateral deficit and not a factor at all in the overall trade deficit. And there is very little evidence that the yuan’s undervaluation costs the U.S. a large number of jobs. China is often a poor economic partner, but retaliation aimed at the exchange rate will not fix anything.

The fears surrounding the Chinese Yuan are largely unfounded. Since bilateral trade deficits are admittedly meaningless, a reduced deficit will not mean more American jobs. Dr. Scissors further states that:

Applying duties to Chinese goods would not suddenly make the American textile, toy, furniture, or even computer-assembly industries globally competitive, and these are the primary imports from the PRC. Globalization means the U.S can punish China, but it cannot simply turn Chinese losses into American gains.

During economic downturns, Americans are unfortunately more likely to become skeptical of free trade. Yesterday, the Wall Street Journal reports that 53 percent of Americans wrongly believe that free trade has hurt the US economy. This simply is not the case.

As philosopher George Santayana said “those who do not learn from history are doomed to repeat it.”  Similar to our current economic woes, the Great Depression was largely created by the Federal Reserve’s interference in the economy. Unfortunately, Congress wrongly blamed foreign trade for our past economic troubles by passing the misguided Smoot-Hawley Tariff Act of 1930.

It is believed that the protectionist Smoot-Hawley Tariff Act which raised U.S tariffs to record levels severely prolonged the Great Depression. Studies by economic professors Douglas Irwin, Mario Crucini and James Kahn found these tariffs directly reduced imports by 4 to 8 percent and decreased U.S GNP by 2 percent in the 1930’s. According to The Freeman, a publication by the Foundation for Economic Education:

In the 1990s Robert Archibald and David Feldman found that the politics of the Tariff generated tremendous business uncertainty. That uncertainty started in 1928 and grew worse throughout 1929 as the Tariff marched forward. Archibald and Feldman come as close as anyone has to linking the Smoot-Hawley Tariff specifically to the Great Crash.

In retaliation to the Smoot-Hawley’s punishing tariffs in the 1930’s, many of America’s trading partners ended up imposing high tariffs of their own against American goods. The New York Times even warns that China may also react in similar ways to current proposed tariff increases:

 If Washington were to restrict trade with China — either by pushing the Chinese currency sharply higher or by imposing sanctions — it would only backfire. China could very well retaliate against American exporters, and buy goods from elsewhere (a worrisome development in what is now America’s third-largest export market). Or it could start to limit its purchase of Treasury securities.

Punishing China by raising U.S tariffs will likely do more harm than good. Ultimately, high tariffs will get passed on to American consumers in the form of higher prices for goods. If China retaliates by buying goods from elsewhere, American exporters will be hurt in the process. Instead, we should strive to have freer trade with all countries to promote innovation and freedom. As classical economist Adam Smith stated in the Wealth of Nations:

That trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous.

If we want to live in a free nation, we must allow individuals to voluntarily trade their goods with whomever they desire which will also increase productivity and wealth.

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