Tuesday, July 10, 2012

Why Mish is wrong about tariffs

Mish reports that,
Mitt Romney has pledged to designate China a "currency manipulator" and impose duties on its imports if the yuan isn't allowed to float freely.
If Romney increases tariffs, says Mish
three things will happen, all of them bad:
  1. Prices will rise
  2. Growth will slow
  3. China will retaliate with tariffs of its own or by buying more goods from Europe instead of  goods from US produces 
In essence everyone will pay higher prices for goods and services in hopes of bring back a few hundred manufacturing jobs (while losing tens-of-thousands of jobs in the ensuing economic slowdown).
On Point 1, Mish is correct. Prices would rise. But is that bad if it means your neighbor returns to work?

On Point 2, Mish is clearly wrong. If Americans resume manufacturing shoes and shirts, computers and car parts for one another, the net effect would be increased consumer spending, not only nominally, due to higher prices, but also in real terms, as millions of the presently unemployed once again receive a pay check.

On Point 3, Mish fails to explain where China will buy oilseed, pulp and paper, copper and other commodities it presently buys from the US, or why it would matter if China did buy elsewhere since all are fungible commodities that the US can sell to those who would otherwise have bought what China buys from sources other than the US.

As for the rest of China's US purchases, they're pretty much a drop in the bucket.

What's more, it's difficult to see China deliberately hurting the US when the terms of China's trade with the US are currently so overwhelmingly in China's favor. But if Chinese tariffs were to hurt US exports significantly, they would tend to drive down the value of the dollar, making the US more competitive internationally, precisely Romney's objective.

Mish's final point, that tariffs would "bring back a few hundred manufacturing jobs," is highly misleading. Tariffs that truly protected American industry would bring back literally millions of jobs, many of them well paid.

So, yes, with tariff protection, Americans would end up paying more to buy from one another instead of buying wherever in the World they can get the lowest price. But which do Americans want:

to trash their neighbor's job to save a few bucks on a shirt, a pair of pants, or to save a thousand or two on the price of a car?

Or is America a nation where people actually give a damn about one another?

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