April 08, 2016
Let me start this one by saying that I think Trump’s threats of a 45 percent tariff on Chinese imports are a bad idea. We should take steps to lower the value of the dollar against the yuan, but the public threat of large tariffs is probably not the best way to go. The route is obviously through negotiations where we would have to give up things, like protections for Microsoft’s copyrights and Pfizer’s patents.
But that aside, the fact that a particular policy is unwise should not be a license for the media to say absurd things to discredit it. The NYT seems to take this path in an Upshot piece by Michael Schuman that purports to tell readers, “how a tariff on Chinese imports would ripple through American life.”
The piece tells readers:
“But if there were a 45 percent tariff on Chinese goods, at least part of that would probably be passed onto consumers in the form of higher prices. Americans would end up buying fewer Chinese things, and fewer things from anywhere else. …
“For this reason and others, quite a lot of the money spent on Chinese goods actually ends up in the wallets of Americans. A study by the Federal Reserve Bank of San Francisco figured that 55 cents of every $1 spent by an American shopper on a “Made in China” product goes to the Americans selling, transporting and marketing that product. Suppressing Chinese imports would harm shopkeepers and truck drivers.
“In fact, making Chinese-made goods more expensive would ripple through American shopping malls. An extra $20 for, say, children’s clothing from China is $20 not spent on a new baseball glove for a child, or a birthday gift for a grandmother. A tariff on China would dent the sales of all kinds of products, even those made in the United States.”
Note what is being argued here. Higher prices on imports from China will lead to less consumption in the U.S. economy. That means an increase in the savings rate. (This is definitional. If you don’t consume you save.)
Many economists have been troubled by the low savings rate in the United States. I have never seen any models that try to explain low savings as the result of cheap imports from China and other countries, but apparently this is what Mr. Schuman and the NYT would have us believe. I look forward to article writing up this theory linking savings rates to import prices.
If it’s not clear, this argument is silly. People will likely spend the same with the tariffs as they did without the tariffs. They will buy fewer goods imported from China, end of story. No need for the truck drivers to fear mass layoffs.
Then we get:
“And the Chinese government’s response would probably be tariffs of its own on American goods and services rather than lowering barriers for American companies doing business in China.”
This could be true, but it is worth pointing out that the U.S. only exported $116 billion of goods and services to China, compared to imports of $482 billion. And many of these exports to China were parts and components that were subsequently re-imported back into the United States, as the piece points out. This doesn’t leave China all that much room for retaliation.
Perhaps the real point comes when Schuman tells readers:
“Because the Chinese market has become critical for many American companies — whether Apple, Starbucks or Boeing — any steps taken by the Chinese government to curtail their ability to operate in China would be bad news for them.”
Certainly in the case of Apple and Starbucks we are not talking about the exports of any significant amount of U.S. made products. We are talking about the profits of two very large corporations. Of course it would be bad news for them if China curtailed their ability to make profits in China, but it’s not clear that many workers in the United States would be troubled if the share price of Apple or Starbucks fell due to their loss of the China market.
The piece is also misleading in telling readers it is not likely that tariffs would lead companies to bring back many jobs to the United States saying, “a more plausible destination would be other emerging economies with lower costs.”
The policy doesn’t have to bring jobs back from China to have an impact on the domestic labor market, the United States trade deficit with China is still growing at a rapid pace. In the last two years the deficit increased by almost $50 billion. That corresponds to slightly less than 3 percent of current manufacturing output, which would correspond to roughly 350,000 jobs in manufacturing. This is the potential benefit if the United States could have just kept our trade deficit with China from growing the last two years, with no offsetting increase in the deficit with other countries.
As this piece acknowledges, trade has imposed real costs on large segments on the U.S. workforce. It is totally reasonable for people to look to alternative policies to reverse this effect. Trump’s plan for large tariffs may not be a good approach for addressing the problems caused by trade, but they should not be an excuse for misrepresenting the issue.
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