'Getting Tough on China' Is an Expensive and Terrible Idea

By Jordan Weissmann

Last night's foreign policy debate offered up yet another helping of the China bashing that's become a familiar ritual during this year's presidential campaign. Mitt Romney repeated his promise to label Beijing a currency manipulator. President Obama reminded the nation's factory workers that he slapped a big fat tariff on Chinese tires back in 2009. Thankfully, both men stopped short of vowing to deport the giant pandas from the National Zoo. 

If you want a sense of just how silly all this protectionist talk really is -- and an example of why petty trade battles are a rather poor idea in general -- you really can't do any worse than that tire tariff, which the Obama administration approved after the United Steelworkers won a case at the U.S. International Trade Commission that accused China of flooding the U.S. market with cheap wheels. When the Peterson Institute of International Economics ran the numbers in April, they found that the measure probably cost U.S. consumers an annual $1.1 billion dollars by 2011 and at best added 1,200 American jobs.

Why so little bang for our buck? Because instead of purchasing more tires that were Made in the U.S.A., we just found other low-wage countries to buy them from. 

Chinese car tire imports (in dark green on the graph below), dropped precipitously after the tariffs. But imports from countries such as Indonesia and Mexico (in chartreuse) rose to pick up the slack by the middle of 2010. These imports were pricier than Chinese tires, but still cheaper than the ones produced domestically. All told, the tariffs ultimately added about $816 million to our annual import tab. 

Petersen_Tire_Imports.PNG

While consumers were suddenly stuck shelling out more for tires from abroad, U.S. tire manufacturers also raised their prices, as evidenced by shifts in the producer price index. As a result, the Institute calculates that the tariffs may have put an extra $295 million in the coffers of American tire companies such as Goodyear. 

But our employment numbers didn't have much to show for it. From the time the Tariffs took effect to the end of 2011, employment in tire manufacturing rose by 1,200. Were all of those workers hired as a result of the tariff? It's hard to say. U.S. car and truck sales rebounded dramatically during this period, which may have had as much to do with the boost as the blockade on Chinese treads. 

Tire_Manufacturing_Employment.PNG

What is clear is that we probably paid other costs. The Peterson study notes that, after the tire tariff went into effect, China handed down its own tariff on American chicken, a move many interpreted as retaliation. That alone may have cost the United Stated $1 billion in agricultural exports. The Institute also suggests that extra $1.1 billion we spent on tires likely put a crimp on other household spending, possibly costing us thousands of retail jobs. 

So this is what "getting tough on China" got us. Consumers spent $1.1 billion extra to put tires on their cars in 2011. Most of the money went to factories in other low-wage countries. And we sold a lot less chicken. Great deal, no?

This article available online at:

http://www.theatlantic.com/business/archive/2012/10/getting-tough-on-china-is-an-expensive-and-terrible-idea/263993/