Implications Of The China Tire Tariff

Markets are generally unhappy about the news that President Obama recently approved higher tariffs for Chinese-made tires. Such protectionist moves reduce trade, and ultimately, prosperity for both nations involved. The Wall Street Journal's Real Time Economics blog has a nice survey of opinions from several economists'. They range from appropriate to panicked.

First, a rational reaction from J. Bradford Delong:

Barack Obama does something really stupid: tire tariffs. [..] The Trade Act, Section 421, gives the U.S. the right to impose tariffs in response to a surge. It doesn't make the surge a crime, or a violation. And it doesn't require the U.S. to impose tariffs-especially if imposing them would be a really bad idea for U.S. consumers.

I think this is, by far, the most accurate response on the page. Stupid is likely the best adjective to describe the action. It's likely intended to save or create U.S. jobs. In reality, it will just drive up costs for consumers and anger the Chinese. They have reportedly already filed a complaint with the World Trade Organization.

The most obvious fear I see here is that China will retaliate. According to a separate article in the Wall Street Journal, they have already begun investigations into the U.S. "dumping" poultry and auto products in the Chinese market. The last thing you want during a global recession is a trade war. That would slow recovery across-the-board.

Then there are the more panicked responses to the action. One such response can be found by Peter Boockvar of The Big Picture. He echoes Ben Stein in "Ferris Bueller's Day off," concluding:

Over 7 days right before and after the Smoot-Hawley act was passed in mid June 1930, the DJIA fell 15% but got most of the decline back by late July before falling more than 30% into year end. Let's hope the just announced tire tariff on China and their possible response is just a one off spat but global stocks are down as a result.

Smoot-Hawley was definitely bad, and any economist I've ever talked to has told me it was one of the major reasons for the severity of the Great Depression. But this isn't quite Smoot-Hawley -- yet. If a trade war does result, and the U.S. ramps up its protectionism in response, then such anxiety is legitimate. I don't see that happening, however. I just can't believe that Obama's economists would allow that. Whatever lobbyist pressures the administration is feeling, they can't compare to prospect of potentially creating a double-dip recession due to bad trade policy.