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.