U.S., China & Punitive Tariffs: Why Those Jobs Ain’t Coming Back

May 24, 2011

Okay, I’ve rambled ad nauseum on this topic for years. Whenever an American politician hoping to earn some anti-China/populist cred with the public before an election talks up how great a generalized tariff on Chinese imports would be, I try to point out how utterly ridiculous that idea is.

Most of the time, though, I just have common sense on my side. But in today’s Washington Post, there’s an article that actually shows what might happen when tariffs are applied.

The business sector is wood furniture. In 2005, the US Commerce Department imposed tariffs on beds, nightstands, and related furniture. The idea, of course, was to provide relief to US domestic manufacturers that were suffering from low-cost foreign competition.

What happened next? The Post uses the example of Lawrence Yen, a manufacturer from Southern China who ships furniture to the U.S. His China factory used to send 400 containers to the US each month, but now, it’s down to 60 per month.

So problem solved, right? Not so fast:

Yen opened a factory in Vietnam and began exporting to the United States from there. Others did the same. He is now building a big plant in Indonesia and hopes to sell even more to the United States.

America’s own furniture industry, said Yen, “can never compete with Asia.”

The result: Imports now account for about 70 percent of the U.S. market for beds and similar items, up from 58 percent before Washington intervened to try and protect domestic manufacturers from Chinese “dumping,” or the export of goods at unfairly low prices.

So was this a victory? Well, not for domestic manufacturers. Their slice of the home market continues to shrink, and they still face stiff competition from Asia.

What about China? I suppose if the goal was to hit Chinese exports, then yes, the additional duties did the job. In the long run, though, it doesn’t seem to have bothered folks like Mr. Yen all that much.

How about U.S. jobs? Most of the politicians out there who talk up punitive tariffs say that they are necessary because of manufacturing job loss. But as the furniture example shows, the global economy is like a balloon — poke it on one side, and it will bulge out at another.

In other words, yeah, you might be able to temporarily cut down on Chinese imports by imposing duties. However, that doesn’t necessarily mean those U.S. manufacturing jobs are coming back. That factory in Dongguan probably isn’t going back to Michigan or Ohio; a better bet is Vietnam or Indonesia (or even Western China).

I know a lot of pro-labor folks on the Left who are sympathetic to the punitive tariff scheme. I feel your pain, but assuming that the furniture example applies to other sectors, how do you argue against this reality?

In 2004, before tariffs went into force, China exported $1.2 billion worth of beds and such to the United States. The figure last year was just $691 million.

Over the same period, however, imports of the same goods from Vietnam — where wages and other costs are even lower than in China — have surged, rising from $151 million to $931 million. The loss of jobs in America, meanwhile, only accelerated. The number of Americans now employed making bedroom furniture is less than half what it was when the tariffs began.

Furniture workers in Dongguan, a throbbing industrial city near Hong Kong, earn about $170 a month, compared with less than $80 in Vietnam. Their American counterparts make about $12 an hour.

5 thoughts on “U.S., China & Punitive Tariffs: Why Those Jobs Ain’t Coming Back

  1. viki barefoot

    Then why don’t we put the balloon in a plaster jacket and apply tariffs to all goods shipped into the US? All goods from everywhere. I know that the cost of those goods would rise, but wouldn’t that then put their price on a par with our own manufactured goods? Buy American. Very powerful.

    We can’t continue paying for the leveling of the OWO. NAFTA is an example of water seeking it’s own level. Unfortunately we were the deep end of the pool.

    A reply would be wonderful.

    viki

    1. Stan Post author

      {groan} Okay, aside from the legal issue here (i.e. under the GATT, the US expressly promised not to do the very thing you’re suggesting), there is something called consumer welfare. If you were to raise the price on all the types of products supplied to the US by China, applied to every source in the world, you are essentially taxing every person in the US who uses those products. This would apply both to products imported and sold directly to consumers as well as those used as intermediates. Either way, the higher prices would filter down to everyone.

      I know this is a popular notion, but I’d like to know if people would still be on board with this once everything at Wal-Mart shot up 25%, iPads suddenly cost 800 bucks, etc. Just going by what happens in the US when gas prices go up, I suspect that support for the tariff would melt away dramatically.

      There are other problems with this scheme as well. Manufacturing, and a manufacturing infrastructure, cannot simply be assembled overnight. A lot of industries have been gone from the US for a long time, and the know-how has left too. Will you allow Chinese companies, with the requisite experience, to set up factories in Mississippi to make the cheap crap that now costs 25% more? I doubt it.

      1. Anon

        Well, I believe that US applied tariffs are, for the most part, below its bound tariff rates, so there’s some wiggle room within trade commitments. Not that the difference would be great enough to really insulate domestic industry, but I could see some good non-protectionist reasons for raising tariffs within those limits. Yes, it would essentially be a sales tax (an idea that has been thrown about anyway) on a class of goods, but that’s not necessarily a bad thing, particularly when an economy is far too consumption oriented. Consumer welfare is only a slice of the economic picture. There are circumstances in which prices should rise, and forces that prevent that from happening can actually be a malady. Export subsidies, currency manipulation, etc., tend to be frowned upon from a macro-economic perspective, even though, yes, they’re great for the end consumer inasmuch as they make stuff cheaper.

        I also think you’re missing an important distinction here. The point of a punitive tariff isn’t necessarily to protect industry alone. We have a trade remedy–safeguards (not punitive)–which is purely protectionist in purpose. A petitioner is not required to show any improper trade practice on the part of the target of the investigation, and they are applied to all imports, regardless of origin. The furniture case was an AD action. This is a punitive tariff, the purpose of which is to right an economic wrong of sorts. In other words, the goal of the US government in these actions isn’t to protect the domestic industry per se, but only to protect the domestic industry from competitors engaging in unfair trade practices. To the extent that the global trade regime incorporates anti-unfair-trade values, it permits this type of duty. So, if Mr. Yen’s factories in Vietnam operate without engaging in dumping, then, yes, it is a victory for the global economy, and the AD regime has served its primary purpose (maybe not the purpose of the industry that filed the petition, but the two aren’t the same). It’s certainly a victory for Vietnam.

        We can go on for days about the imperfections in any given AD/CVD regime (and the US system obviously has issues out the bunghole) and about whether or not Mr. Yen’s business in China was or was not actually engaging in dumping, but everyone uses AD/CVD’s, and I think their purpose is legitimate. Things are obviously tougher on China, since it is considered a non-market economy for these purposes, at least in the US, but I guess the decision to employ or not to employ, for example, price controls at home is a domestic policy decision, and other countries will be reluctant apply market economy rules as long as that type of thing is relatively common.

  2. colin

    Wow, quite interesting. I wonder if the tariff turns out to be a case of Pyhrric victory. Sure imports from “China” slows down, but then these chinese companies just go out using their business acumen and operating experience to start tapping the cheap labor pool outside of china, in fact bring online much more cheap labor.