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Home Publications Blogs Beat the Press China and Protectionism: It Ain't Quite as Simple as They Tell Us

China and Protectionism: It Ain't Quite as Simple as They Tell Us

Wednesday, 24 October 2012 04:25

Eduardo Porter has an interesting column on Governor Romney's threat to declare China a "currency manipulator" on day 1 of his administration. He makes the point that the real value of China's currency has risen substantially against the dollar in the last two years. He also notes that China is not the only country that deliberately props up the dollar relative to its own currency. Most importantly, he points out (as I have frequently noted) that declaring China a currency manipulator does nothing by itself. Inevitably the outcome of the currency issue would depend on a process of negotiation with China.

This is all true. However in the process of making his case, Porter takes advantage of a study by Gary Hufbauer on the cost of U.S. tariffs on imports of tires from China, which is more than a little suspect. Hufabauer, who is famous for predicting that NAFTA would create 250,000 jobs by increasing the U.S. trade surplus with Mexico, calculated the country paid over $900,000 for each job it saved in the tire industry as a result of the tariff. Most of this money was paid to other countries, since most tires are imported. He concluded that the net effect of higher tire prices was a modest loss of jobs, since consumers had less money to spend on other items. In addition, China retaliated by imposing barriers on imports of chicken parts that Hufbauer calculates reduced exports by $1 billion.

There are several aspects to Hufbauer's analysis that are very questionable. The most important is that he ignored the timing of the tariff. It was imposed in September of 2009, just as the car industry was recovering from its recession lows. Hufbauer attributes all the rise in tire prices in the fall of 2009 to the tariff. However, car prices more generally also rose in the fall of 2009 in response to the pick-up in demand. At the time the tariff was imposed in September of 2009 car prices were actually somewhat lower than their level of two years earlier. (They have risen by about 7 percent in total since the time the tariff was imposed.) Hufabuer makes no effort to control for the uptick in car demand in assessing the impact of the tariff on tire prices, which means he has almost certainly overstated its impact.

Hufbauer also makes a point of noting the open retaliation by China -- its tariffs on imports of chicken parts -- without taking into account the possibility that the threat of tariffs affected China' behavior in other areas. It is possible that China has limited the subsidies it has applied to other export industries in response to the tariff on tires. This would have reduced their exports to the United States and increased employment in other industries. China would of course not advertise the fact that it was responding to a tariff by adjusting its behavior in other areas.

Whether it did or not would change its behavior in other areas would require a close examination of China's conduct. Hufbauer simply assumed that there was no response to the tariff other than the public retaliation on imports on chicken parts.

There are a couple of other places where Porter is too quick to draw conclusions. At one point he notes that China's trade surplus with the U.S. is overstated because we will include the price of a finished product in the trade data even though much of the value may be attributable to parts produced in other countries. This is true, but applying the same logic China's surplus will also be underestimated by not counting the value added from Chinese parts in imports from Japan, South Korea and elsewhere. It would require a careful examination of trade data to determine whether the net effect of a fuller accounting was to overstate or understate the U.S. trade deficit with China. (China does run a large, but shrinking, trade surplus. Fast-growing developing countries are normally expected to run trade deficits.)

The piece also raises the issue of "China’s theft of foreign intellectual property." It is worth noting that if we impose U.S. style protection for patents and copyrights on China it is almost certain to be a net job loser for the United States. This is for two reasons. Other things equal, the more money that China pays Pfizer, Microsoft and other companies for their patents and copyrights the lower will be the value of the yuan against the dollar. This means that we will import more manufactured goods like tires and export fewer manufactured goods. 

The other reason that imposing these protections on China might be bad for jobs in the United States is that they would slow economic growth in China. These forms of protection typically raise the price of the affected goods by several thousand percent above the free market price. Such costly distortions will impose a substantial burden on China's economy, thereby impeding its growth. If China's economy is smaller, then it will buy less of everything, including fewer imports from the United States.

While the United States can take unilateral steps in its dealings with China, Porter is correct that at the end of the day the outcome will almost certainly depend on negotiations. This process will mean tradeoffs. For example, the more the United States pushes for items like strong patent and copyright protection the less it will be able to get from China in the way of concessions on the value of its currency or other steps that would promote manufacturing employment in the United States. In other words the "trade war" with China is at least as much a battle between conflicting interest groups in the United States.  

Comments (6)Add Comment
Illegal Trade Isn't Created Equal
written by Robert Salzberg, October 24, 2012 5:51
If you accept that nations have full sovereignty and can do what they want inside their borders, with exceptions for human rights violations, then you have to accept that intellectual property rights end at national borders unless nations choose otherwise.

Allowing sovereign nations to manufacture life saving medications for their own people while ignoring patent protections is an example of how patent protections stand in the way of human rights.

The U.S. is a huge illegal exporter of firearms and a giant importer of illegal drugs from countries to our South.

Does anyone think that the harm caused by the Chinese copying movies, music and various patented popular culture items does anything close to the damage caused by the U.S. supplying guns and cash to drug lords and gangs to our South?
Romney Supports Weaker Dollar, MSM Goes Mute
written by Last Mover, October 24, 2012 7:05
Has Romney secretly been reading Dean Baker while hiding in a Mormon temple to ask for forgiveness?

Romney finally takes a position that adds up and is ignored by MSM. By definition if Chinese currency is manipulated to create a lower ratio of value to the dollar, that makes the dollar stronger.

Romney wants to stop the manipulation and make the dollar weaker. And what does MSM say? Nothing. Not a peep other than playing it up as a threat to China. If Obama had said it, it would have gone viral as Weak Dollar machoism.

The related question is why does Romney the Great Free Marketeer who attacks the slighest hint of government control of prices anywhere want to regulate currency exchange rates? Whatever happened to Romney's coveted freedom for an entire nation to set whatever currency price it desires in a free global market?

Oh wait ... that's only for America the Free Market Nation, not other countries who don't respect anti-competitive property rights ... with the exception of course those who provide outsourcing opportunities for jobs raided by Romney and sent to them.
"Free" Trade
written by Peter K., October 24, 2012 9:46
David Leonhardt has a piece above the fold on the front page which essentially casts doubts on the arguments of the NAFTA free-traders and the centrists economists who like to bash Luddites.

He does hint at the importance of full employment. What the piece is lacking however is a mention of the popular movement against corporate free trade back in the late 90s (when we had full employment! Then came Sept. 11th) Unions and environmentalist campaigned against NAFTA and we had domestic riots at the Battle in Seattle over the WTO. After the housing bubbble, OWS continued in thae tradition of unfocused protest though without the riots.

I do agree that it would be wise to use the WTO against currency manipulators.
shut China out of Treasury auctions?
written by Brian Dell, October 24, 2012 12:36
Perhaps barring China from participation in US Treasury auctions, or even just threatening to, would force movement in the exchange rate. Interest rates would be somewhat higher but I think that would be appropriate since giving the Chinese an ownership interest in US debt when the proceeds of those debt sales finance current consumption in the US creates intergenerational inequity.
The bulls in the China shop ...
written by David, October 24, 2012 2:40
shut China out of Treasury auctions?
written by Brian Dell, October 24, 2012 12:36
Perhaps barring China from participation in US Treasury auctions, or even just threatening to, would force movement in the exchange rate. ...

The Walton clan and Wall Street are fairly happy with the current situation, so the chance of this happening is closer to 0% than to 100%.
Capital and current account surpluses
written by Jacques René Giguère, October 25, 2012 10:06
"China does run a large, but shrinking, trade surplus. Fast-growing developing countries are normally expected to run trade deficits."
If a country is not at full emplyment ( and the vast internal migrations show China is not), and is growing, the Capital=Current account equality might not hold. Capital is received in period 1 but used to buy imports in period 2. If the country is growing and attracts growing Foreign Investments,receipts in period 2 will be higher than expenditures paid by receipts in period 1.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.