The Folly of Bilateral Protectionism, China Solar Panels Edition

As you may recall, after a string of very public bankruptcies (*cough* Solyndra *cough*), US solar panel producers - and the Obama administration folks who happily subsidized them - were quick to blame China.  If only the Chinese cheaters were purged from the US market, they argued, America would become a global solar panel powerhouse, and the green jobs would flow like (highly subsidized) milk and honey.  To achieve this purge, the "domestic" industry (led by Germany's SolarWorld) petitioned the US government for steep anti-dumping and anti-subsidy (countervailing) duties on Chinese imports, and the administration - using US laws that tilt greatly in favor of domestic protectionism - was quite willing to oblige.

However, a new story from the Financial Times' Ed Crooks shows just how wrong-headed that move has turned out to be, and provides yet another lesson in basic trade economics.  Prices for panels have risen (slightly), but American producers and workers haven't benefited in the least.  Instead (and as I repeatedly predicted), jobs and output are down here, and other imports - not US panels - have replaced the Chinese ones that have been effectively banned from the US market.

Behold, the folly of bilateral protectionism - and the reality of trade diversion - in all of their glory:

In one respect, the duties do seem to have been effective. US imports of cells from China have dwindled, from an average of 11m per quarter in 2011 to just 900,000 in the first quarter of 2013. 

The pay-off in US manufacturing and jobs, however, has been elusive. The US has capacity to produce about 1,845 megawatts of solar panels per year, according to IHS, a research company. That is down from 2,027MW a year ago. 

The Solar Foundation, an industry-backed think-tank, found that solar companies lost about 8,200 manufacturing jobs last year, about 22 per cent of their total, and expected to regain only about 2,600 this year. 

SolarWorld itself has continued to cut jobs in Oregon.... 

Robert Petrina of Yingli Green Energy, the Chinese group that was the world’s largest solar panel manufacturer last year, said it was untrue that the duties have had no effect, citing higher cell prices in the US than in some other markets such as South Africa, as evidence of the distortions they were causing.... 

Yingli has been sourcing cells from Taiwan to avoid being caught by the duties on Chinese products. It had its second-best quarter on record in the US in the three months to March and is on track to double its sales to US utilities this year. 

Another source of supply to the US has been a surge in imports from Malaysia. The US imported almost as many Malaysian solar cells in the first three months of this year, as in the whole of 2011. 

Analysts said much of the increase was probably caused by First Solar, an Arizona company that was the world’s second-largest manufacturer of solar panels last year. It has 85 per cent of its production capacity in Malaysia, and is building several large solar plants in the US....

As I mentioned when the original decision to impose duties on Chinese solar panels, part of the reason for the trade diversion at issue here is because the Chinese producers achieved a small victory during the investigation, omitting solar panels made in third countries (like Taiwan) from Chinese parts.  This allowed a few Chinese companies to lawfully circumvent the AD/CVD order and still ship large quantities of their product to the United States.  That said, the surge of Malaysian and other imports make clear that even closing this "loophole" would do nothing to help US producers and workers for one simple reason: other countries' producers are still cheaper than their American counterparts.

Yet another reminder that protectionism doesn't work, and all those US subsidies were a horrible waste of taxpayer dollars, regardless of those dastardly Chinese cheaters.

New Preliminary Anti-dumping Duties on Wind Towers Provide the Same Old Lessons

On Friday, the Department of Commerce announced preliminary anti-dumping duties on wind towers from China and Vietnam ranging from 20.85% to 72.69% and 52.67% to 59.91%, respectively.  The announcement itself is pretty boring: as with DOC's May announcement re: prelim AD duties on Chinese solar panels, the "non-market economy" methodology in these cases pretty much ensures pretty high anti-dumping duties (hence, the myriad calls for reform).  Nevertheless, the New York Times' write-up of Friday's preliminary decision - again, like the solar panels case - provides a few good lessons about US trade remedies:

First, the NYT article reveals the glaring disconnect in protectionist rhetoric about trade in green goods.  After noting that the imported wind towers also are subject to preliminary anti-subsidy duties (announced in May), the article provides the wind industry's response:

How the tariffs will affect the market is unclear. Like solar, the wind industry has been under pressure to bring down the cost of producing power to better compete with conventional fuels, a task made more difficult by the low price of natural gas and the expiration of an important subsidy at the end of this year. Wind industry executives say that the looming end of the support, a production tax credit, has already led to a decrease in demand for equipment and layoffs.

“On one hand, you say this is good for American manufacturing to have tariffs if they’re truly dumping towers below their cost into the U.S.,” said Michael Garland, chief executive of Pattern Energy, a wind developer. “On the other hand, it’s not going to solve the bigger problem we have, which is a dysfunctional Congress that can’t get anything passed. Because there’s this cliff that everybody’s facing at the end of the year, you’re not going to have any manufacturing in the U.S. anyway."

Yes, you read that correctly: after praising duties on (allegedly) subsidized Chinese and Vietnamese wind towers, Mr. Garland immediately turns to... advocating more US subsidies.

You cannot make this stuff up.

Second, the NYT article demonstrates once again that, in today's globalized economy, bilateral protectionism typically won't resuscitate an ailing or uncompetitive industry because other low-cost imports will fill the void (aka "trade diversion"):

On the solar side, there are also questions about the impact of the duties. The major Chinese solar manufacturers have been able to keep prices low and skirt the tariffs by purchasing cells, the component of the panels to which the tariffs apply, elsewhere.

Imports of Chinese panels and cells decreased in May to $124 million from $226 million the year before, according to the Coalition for American Solar Manufacturing, an industry group that supports the trade cases. But shipments from other countries like Malaysia, Taiwan and the Philippines were up sharply. In the case of Malaysia, shipments were up by 950 percent over the previous May, to $135.5 million, exceeding China, according to the coalition.

Finally, the article shows that duties aren't the only economic harm that trade remedy cases - or the threat of such cases - can inflict on consumers:

Although the overall solar market continues to grow, executives and analysts warned that uncertainty about the outcome of the trade cases, which are only at the preliminary stage, could damp enthusiasm for future projects because costs are unclear.

“I’m paying X rate today. Am I going to have to pay a duty on that six months, a year down the road?” asked John Smirnow, a vice president of the Solar Energy Industries Association, a trade group that is advocating for negotiations between China and the United States to occur simultaneously to the legal cases.

Given that US solar producers have received a boatload of their own state and federal subsidies and are suffering from overcapacity, uncertainty surrounding potential duties on dumped or subsidized solar imports definitely isn't limited to American consumers - something that no one who supports US subsidies seems to acknowledge.

Maybe they will if a few foreign AD/CVD investigations start.

More on the "Predictable" Solar Panels Decision and Trade Diversion

When I first wrote about last week's preliminary decision by the US Department of Commerce to impose big anti-dumping duties on imports of Chinese solar panels, I noted (among other things) that any final duties probably wouldn't lead to a long-term increase in US solar manufacturing but instead would simply cause Chinese production to move to other low-cost destinations (and, of course, raise US prices).  I reported on one Chinese manufacturer - JinkoSolar - publicly announcing its intentions to increase production at one of its Canadian affiliates in order to avoid the solar tariffs, and a new report from Platts makes clear that JinkoSolar is definitely not alone:

[D]espite prophecies of doom and gloom on both sides of the case leading up to that decision, the ultimate outcome of the ruling may have a smaller impact on the US photovoltaic market than advocates predicted.

US manufacturers, led by Oregon-based SolarWorld (a unit of the German solar giant), accused Chinese firms of illegally dumping panels in the US at prices far below what is possible in the US. Without US government action, they argued Chinese PV producers would solidify their domination of the global solar panel market and quickly eliminate the US solar panel manufacturing industry.

And US solar developers said tariffs would make it more expensive to build new solar power projects here, potentially smothering US PV development.

But after the DOC decision, [two] of the largest Chinese PV manufacturers--Suntech and Yingli Green Energy--said they are already prepared to shift their production and use their global supply chains to sell the US panels that will not be subject to tariffs, and with only a small increase in prices.

"We're fully prepared to handle this situation and we believe that we can continue to supply the US market" without paying tariffs, said Helena Kimball, head of marketing for Yingli, in an interview. "The requirement to source third party cells will have a slight impact on costs since we will need to outsource what we currently produce efficiently in-house. However, we believe that this will minimally impact market prices."

Andrew Beebe, Suntech's Chief Commercial Officer said Suntech has similar plans.

"As a global company with global supply chains and manufacturing facilities in three countries, including the United States, we are providing our U.S. customers with hundreds of megawatts of quality solar products that are not subject to these tariffs," Beebe said in a statement... 

GTM Research Solar Analyst Shyam Mehta said Chinese companies will likely use one of two strategies to avoid US tariffs: either shift production outside of China, as Suntech's Beebe described, or use Taiwanese suppliers to make cells, which would be assembled into modules in China through a process called "tolling." 

"We estimate that tolling cells to Taiwanese firms would increase Chinese costs by 6-12%, which is meaningful but manageable," Mehta said.

As I mentioned last week (and in the Platts piece), neither of these strategies is illegal, and the only thing domestic producers can do to stop it is to file a new AD/CVD petition targeting the countries to which Chinese production was diverted.  Given these facts, the Platts article concludes that any final AD/CVD order should have few, if any, long-term benefits for US solar manufacturers:

Some Chinese suppliers will likely shift a portion of their operations to the US as a result of the tariff decision, Mehta said, but in the long term, other countries with lower production costs will likely benefit.

"We see the impact of this decision on US manufacturing as positive, but spurring limited investment in the future and likely only temporary relief for existing U.S.-based suppliers," Mehta said.

So, think of these tariffs as a sort of "sugar high" for petitioner SolarWorld and other US manufacturers - they'll get a little bump in terms of (consumer-hurting) prices and production, but it won't last.  However, the pain felt by US consumers will continue, as they're forced to pay above-market prices for their solar panels.

According to the Wall Street Journal, it seems that the markets have caught on quickly to these realities:

U.S. solar stocks such as First SolarFSLR +0.91% enjoyed a brief burst of jingoism last Thursday, when the Commerce Department announced antidumping tariffs on Chinese photovoltaic-equipment makers. As of Monday, though, trade-war fever had subsided: First Solar hit a fresh 52-week low of $13.37, down from almost $128 a year ago.

The initial bounce reflected hope that tariffs would shield U.S. solar profit margins against the price deflation brought on by rampant Chinese investment in manufacturing capacity.

But protectionism is just another form of subsidy, which has defined solar power's boom and bust. Generous subsidies generated artificial demand in such tropical paradises as, er, Germany. Their sudden curtailment, as governments tightened belts, then battered growth forecasts—although not before they had helped encourage all that Chinese investment. Last year, global capacity to manufacture solar cells was more than twice the level of demand.

If the U.S. were the world's biggest solar market, a tariff might offer its domestic manufacturers more than a fleeting hope. But Pavel Molchanov of Raymond James expects the U.S. to account for just 11% of demand this year, against Europe's 53%. Updating analysts earlier this month, First Solar mentioned Brazil, India, Australia and, yes, China as growth opportunities.

If the Commerce Department's action is merely the opening salvo of a trade war, it could ultimately damage the overseas ambitions of the remaining U.S. manufacturers as other countries enact similar measures. Above all, the ultimate objective in the solar-power industry is to reduce its costs so that it can eventually compete with other forms of power without the aid of subsidies. This latest one works in precisely the opposite direction.

SolarWorld's stock witnessed a similar collapse today, losing much of the gains that it made on Friday following Commerce's big announcement.  Apparently it took Wall Street all of one day to figure out that last week's preliminary determination has done nothing to dramatically alter the future of the American and global solar markets.  Of course, had these companies' shareholders just read this blog, they could've avoided the financial pain of today's big crash.  Now, they're forced to stick with these stocks until the next sugar high comes along.

But, hey, at least these folks had the opportunity to get out early and avoid the inevitable result of yesterday's preliminary duties.  US solar panels consumers have no such luxury.

US-China Solar Panels Decision Expected, Instructive

The US Department of Commerce announced today preliminary anti-dumping duties on Chinese solar panels.  As expected (and predicted), the duties were pretty high: they ranged from 31.14% to almost 250%, but the vast majority of Chinese producers/exporters, including all of the big boys, were assigned duties around 31%.  In response to today's determination, I released the following press statement through my firm which echoes some of the things that I've said previously about the case:

American consumers and Beijing will decry today’s decision, but it’s unlikely to further inflame bilateral trade tensions because high anti-dumping duties were widely expected. Solar panel prices collapsed in 2009, leaving producers around the world, including those in China and the United States, with expensive inventory that often had to be unloaded below cost. Because US law requires Commerce to measure dumping from a ‘non-market economy’ (NME), such as China, based on third-country production costs rather than any actual ‘predatory pricing’ behavior, today’s outcome was all but certain, regardless of the actual intentions of China’s exporters or government. Nevertheless, the decision will likely be used as a rhetorical weapon by US solar panel producers and members of Congress seeking to demonize “unfair” Chinese trade practices, as well as by the Chinese government and other critics of the United States’ current trade remedies policies with respect to imports from NMEs.

In short: today's preliminary decision will evoke a lot of screams from pretty much everyone involved in the dispute, but because the (extremely dubious) NME methodology and 2009-2010 market conditions pretty much guaranteed high dumping margins, the announcement probably won't add to existing tensions between the US and China with respect to trade remedies or bilateral trade in "green" goods like solar panels and wind turbines.  Indeed, given that AD duty rates on NME imports can be much, much higher than 31% (for example, a 2006 GAO study found that NME rates for investigated exporters averaged about 50%), I wouldn't be surprised at all to learn that Beijing and Chinese producers quietly breathed a sigh of relief when hearing today's news.

So, sorry, trade reporters, no "trade wars" will be starting tomorrow.  It'll just be the same old stuff from all parties involved.  Yes, this may include (perhaps) a new Chinese trade remedy investigation of US exports in response to Commerce's determination, but even that move would be neither novel nor unexpected.  Just more of the same - and precisely what you'd expect from two countries with rapidly increasing bilateral trade flows (and a few controversial trade policies).

That's not to say, however, that today's decision isn't instructive.  It actually provides us with several insights, just none of the hysterical "trade war" variety.

First, today's decision should put to rest the notion that the Obama administration is somehow rigging the proceedings to result in very low tariffs on Chinese imports in order to encourage the proliferation and use of "green energy" in the United States.  These duties, if they become final, would very likely put a significant dent in American purchases of Chinese solar panels.  Moreover, it appears that the Commerce Department even took the unusual step of using, at the request of the US solar industry, Thai production costs to determine the level of dumping, instead of Indian costs (which they almost always use in Chinese AD cases).  Considering that petitioners advocated this atypical move, it's all but certain that it increased preliminary duty margins.  That's not something that a soft-pedaling agency acting pursuant to a secret Presidential mandate would do.  Instead, it's quite clear that, as I've repeatedly stated, the agency's actions are on "autopilot" based on existing laws and regulations - laws and regulations that are extremely sympathetic to domestic producers and their unions. [Ed. note: edits above are based on the helpful comment from Andy Schultz below. I totally forgot about this change - my apologies... although this should serve as a helpful reminder that I'm not representing anyone in a Chinese AD/CVD case right now!]

Second, today's decision makes clear that the breathless claims of the Obama administration and domestic petitioners that the elimination of Commerce's ability to impose countervailing duties (CVDs) on NME imports would make US manufacturers and workers vulnerable to a devastating tidal wave of unfair Chinese imports.  As you'll recall, that was these folks' primary argument when begging Congress to pass a law overturning the decision of the Court of Appeals for the Federal Circuit in GPX Int'l Tire Corp. v. United States that Commerce lacked the legal authority to impose CVDs on NME imports.  I and a few others argued at the time that this claim was nonsensical because, among other things, the agency could still impose AD duties on these same imports, and those duties tended to be much higher than the concomitant CVDs.  Although Congress all-too-willingly complied with the administration's desperate request and passed the new (and constitutionally suspect) CVD/NME law, today's decision confirms our reality-based view (for whatever that's worth).  [Note: speaking of the CVD/NME issue, there's not a peep from Commerce about "double counting."]

Third, the Chinese industry's response to today's announcement also underscores the folly of bilateral protectionism due to the reality of "trade diversion."  As noted in the New York Times, if these tariffs are ultimately imposed, the result might not be more US production, but instead a shift in production to other markets:

Isabelle Christensen, the marketing director of JinkoSolar, another Chinese manufacturer, said that the company had already established a factory in Canada and could probably shift production there if necessary.

“We can begin ramping up our manufacturing facility in Canada fairly quickly,” she said, matching what the company produces in China for the American market in a matter of months.

According to an industry-watcher I spoke with today, JinkoSolar is not alone: other producers he interviewed also expressed similar plans.  And, assuming these solar panels are properly marked and produced in Canada or other AD-duty-free jurisdictions, there's nothing that the United States government or the US industry can do about it except launch another AD/CVD investigation.  And, if they do, this silly game of "whack-a-mole" will continue.

That's not to say, of course, that today's decision is harmless, and this brings me to my fourth and final (for now) point about today's decision: US consumers stand to get pummeled if it becomes final - a point made clear by Mark Perry's creative revisions to the aforementioned NYT article (all edits his):

"The United States Commerce Department said Thursday that it has decided to impose tariffs (taxes) of more than 31 percent on Americans who purchase solar panels imported from China, after concluding that Chinese producers had generously“dumped” lowered the prices of solar panels on the American market for to less than it costs to manufacture and ship them,saving Americans millions of dollars.  

The tariffs, which are retroactive to 90 days before the decision, are in addition to anti-subsidy tariffs (taxes) of 2.9 percent to 4.73 percent that the department imposed on American consumers in March. Since Chinese panels make up a large portion of the American market, the combined anti-dumping and anti-subsidy tariffs are likely to mean a substantial increase in the price of solar panels here for American consumers. 

According to Commerce's fact sheet, these American consumers imported $3.1 billion worth of Chinese solar panels in 2011.  If a 31% "dumping" tax had been added to those imports, American consumers would've paid an extra $1 billion to Uncle Sam for the "right" to buy solar panels from China.  Ouch.

And let's please not forget that most members of Congress applaud the government's tax-collection efforts and, in fact, just passed a law to make sure that they can continue unabated.  Why such votes go unchallenged by the media, most voters and, sadly, even a "free market" think thank or two defies all logic.

Maybe today's solar panels decision will help change that, but I doubt it.

[Concluding note: If you're not worn-out by the analysis above, Cato's Dan Ikenson has more on today's decision, noting the abject insanity of the Obama administration's (and certain Congressmen's) "subsidy and tax/tariff" plan with respect to solar panels and other "green" goods.]

Best Case Scenario: Tire Tariffs Cost $900k Per US Tire "Job" Saved

I've been traveling over the last few days, and am thus a little late to this story, but it's just too good to pass up. As readers of this blog know, I've been a vocal critic of President Obama's 2009 decision to impose  - at the request of the United Steelworkers Union - tariffs on Chinese tires pursuant to Section 421 of US trade law.  The last two-plus years have repeatedly revealed just how warranted that criticism is.  Now, a new study by the Peterson Institute's Gary Hufbauer and Sean Lowry puts a very precise price tag on those tariffs and finds that - at best - they cost a small fortune per US job allegedly saved as a result of their imposition:

In his 2012 State of the Union address, President Obama claimed that "over a thousand Americans are working today because we stopped a surge in Chinese tires."  The tire tariff case, decided by the president in September 2009, exemplifies his efforts to get China to "play by the rules" and serves as a plank in his larger platform of insourcing jobs to America. However, our analysis shows that, even on very generous assumptions about the effectiveness of the tariffs, the initiative saved a maximum of 1,200 jobs. Our analysis also shows that American buyers of car and truck tires pay a hefty price for this exercise of trade protection. According to our calculations, explained in this policy brief, the total cost to American consumers from higher prices resulting from safeguard tariffs on Chinese tires was around $1.1 billion in 2011. The cost per job saved (a maximum of 1,200 jobs by our calculations) was at least $900,000 in that year. Only a very small fraction of this bloated figure reached the pockets of tire workers. Instead, most of the money landed in the coffers of tire companies, mainly abroad but also at home.

Ouch.  AEI's Mark Perry uses the study to provide a simple economics lesson that cannot be repeated enough:

The authors point out "While this figure ($900,000 per job saved) seems extravagant, it is consistent with prior research. Studies repeatedly show that the consumer cost of trade protection typically exceeds, by a wide margin, any reasonable estimate of what a normal jobs program might cost." In other words, it would cost the economy much less overall to not impose the tire tariffs and instead direct compensation towards workers in the tire industry in some other way.

In fact, it would have been cheaper to just idle the 1,200 tire workers and pay them their full salary, of let's say $75,000 per year, than to impose tariffs that cost the economy almost $1 million per worker. This is a good example of why economists don't as a group support trade protection and instead favor free trade: the total costs of protectionism always outweigh the total benefits to the protected industry, resulting in a net loss and making the overall economy worse off, not better off.

Indeed.  Of course, as with any protectionism, the problem is that the USW (via jobs, dues and bragging rights) and President Obama (via union votes and campaign donations) benefited directly from these tire tariffs and got to mask those benefits behind some sweet, sweet China-bashing, so it's unlikely that common sense and the opinions of vast majority of economists - both conservative and liberal - are going to change their minds about the tariffs' "benefits" anytime soon... no matter how much they cost.

But I digress.

The whole Peterson study is worth a read and has garnered some good press and commentary, but the thing that a lot of analysts have missed is that the startling $900,000 figure is actually the very best case scenario because it's very, very likely that the tariffs didn't directly cause even a fraction of those 1,200 new US tiremaking jobs. First, the tariffs were imposed in Fall 2009, just as the United States was clawing its way out of the depths of one of the worst economic crises ever.  As the authors note in footnote 10 of their paper: "Of course it seems likely that the general improvement in economic conditions between the fall of 2009 and the fall of 2011 was responsible for a good part of the rise in tire manufacturing employment."  "Likely" is an understatement.  In fact, if you look at Figure 5 of the study, you can see quite clearly that US tiremaking jobs collapsed (and rose and collapsed and rose again) right in parallel with the US economy, and they were already trending back upward before Obama's glorious tire tariffs took effect:

Clearly, the tariffs weren't some magical launchpad for US tiremaking jobs.

Second, the blocked Chinese tires weren't replaced by US tires (thus spurring more US jobs) but were instead replaced almost entirely by imports from other countries - something that even USTR Ron Kirk predicted would happen back when the tariffs were first imposed.  This wholly expected trade diversion is made clear by Figure 1b in the paper:

Thus, it's extremely likely that President Obama's claim that his tariffs saved (or created) 1,200 American jobs is nonsense, and that the actual number of such jobs far lower.  (And, obviously, it's extremely disingenuous for the President and his team to be taking credit for all those jobs.)  If this conclusion is correct (and, let's face it - it is obviously correct), then the tire tariffs imposed in 2009 cost the American economy (disproportionately lower-income US tire consumers) way, way more than $900,000 per job.

In President Obama's 2012 State of the Union address, he said that the Section 421 tariffs on Chinese tires would serve as the model for his new China Trade Enforcement Team.  At the time, I opined that "Obama's vaunted tire tariffs - literally the centerpiece of his 'new' unfair trade enforcement initiative - have nothing to do with unfair trade and have proven to be an abject failure." Now we know that that failure was really, really expensive. So if we can expect President Obama's China Team - and his second term more broadly - to result in more such "successes," we better start saving our pennies right now.

A Quick Reminder re Trade Diversion and the Folly of Bilateral Protectionism

I've frequently cautioned that a big flaw in U.S. restrictions on trade with single countries like China is the fact that such bilateral protectionism typically doesn't lead to increased domestic production or employment and instead simply shifts production to other low-cost countries.  From Mark Perry's great Twitter feed comes yet another example of the obvious reality that is trade diversion:

Chinese bike manufacturers are beginning to look at expanding into new markets in Southeast Asia in the face of rising labor costs and restrictive export duties to Europe, said Xiao Yun Huo, vice secretary general of the China Bicycle Association.

The CBA is researching regulations, tariffs, government policies and market information in countries like Malaysia, Indonesia and Vietnam to determine whether it makes sense to shift some production there to remain competitive in today’s fast-changing world, Huo said through a translator during an interview on Thursday in Shanghai.

China is the industry’s leading bike exporter with 55.72 million units shipped outside the country last year at a value of $2.9 billion, according to the CBA. Exports fell 4.2 percent last year. China produced 83.45 million bikes last year, an increase of 2.3 percent.

Manufacturing has already begun shifting inland from China’s coastal cities as labor costs have risen, and now producers are beginning to look overseas to keep prices competitive on low-end mass production.

Although China far dominates other export countries, factories in lower cost locales like India are starting to pick up more business. India’s Hero Cycles recently announced a deal with Wal-mart to produce bikes for the retail giant, and opened a U.S. office to support its expansion. China producers have also been hurt by steep anti-dumping duties to Europe, Huo said. The 48.5 percent duties were extended until 2016 last year, although the EU Commission is reviewing that ruling.

The CBA is also looking to emerging markets in India, Indonesia and Dubai to market China-made bicycles. CBA, which hosts the China Cycle show in Shanghai, organized a new show in Vietnam called Intercycle last year, and is looking at a possible new exhibition in Indonesia, Huo said.

The article above makes clear that the European tariffs and other factors raising Chinese bike manufacturers' costs are causing a shift in production not to Europe but to other low-cost destinations like Vietnam and India.  The lesson, as always, is that for many labor-intensive goods, US efforts to raise costs in China (e.g., demanding a stronger Yuan) or to impose tariffs on Chinese imports will do nothing to increase US jobs.  It will, however, raise prices for those goods in the United States (to the benefit of a few discrete producers and at the expense of all US consumers) and increase production and jobs in Vietnam, India, Indonesia and elsewhere.

Somehow I doubt that's what our protectionist politicians had in mind.

Surprising Developments in US-China Solar Panels Case Are Anything But

The New York Times reports today that the new US antidumping and countervailing duty investigations of Chinese solar panels is proceeding exactly as expected - by everyone other than the folks who petitioned for the case, of course:

Chinese solar panel manufacturers are preparing to shift steps in their production processes to South Korea, Taiwan and the United States in response to the filing of a trade case against them in Washington, and are working on a way to retaliate against U.S. exports to China, Chinese solar industry executives and officials said Monday.

Preparations to redesign supply chains and retaliate come after the U.S. Department of Commerce opened an anti-dumping and anti-subsidy case against Chinese solar panel manufacturers on Nov. 9, at the request of SolarWorld Industries America and six other U.S. solar companies. The Commerce Department said it was considering anti-dumping tariffs of 50 percent to 250 percent on Chinese solar panels, plus a request by SolarWorld for anti-subsidy tariffs of more than 100 percent.

After hastily hiring trade lawyers, Chinese solar panel manufacturers are increasingly gloomy about their chances of winning the case, said Ocean Yuan, the president of Grape Solar, a big importer of solar panels based in Eugene, Oregon. Many trade lawyers in Washington have reached the same conclusion because the Commerce Department handles anti-dumping complaints against China under special rules that heavily favor U.S. manufacturers. China accepted the rules as part of its joining the World Trade Organization in 2001.

Mr. Yuan said that Grape Solar was already in negotiations with several Chinese manufacturers, whom he declined to identify, to do final assembly of solar modules in Oregon as the last step in new supply chains that would start in China then run through South Korea and Taiwan to avoid the likely tariffs.

The Chinese solar panel industry is also seeking legal advice on filing its own anti-dumping and anti-subsidy trade case against the United States with China’s Commerce Ministry, Chinese solar industry executives in Beijing said Monday. The most likely target would be U.S. exports of polysilicon, the main material used to manufacture conventional solar panels, said Wang Shijiang, a manager at the China Photovoltaic Industry Alliance based in Beijing....

The United States exported $873 million worth of polysilicon to China last year while importing only $4 million worth of the material, according to GTM Research, a renewable energy consulting firm based in Boston....

An executive at a Chinese solar manufacturer said his company had already begun making elaborate preparations to move solar cell production out of China for panels destined for the U.S. market.

Chinese manufacturers have studied moving solar cell factories directly to the United States but have largely rejected it in favor of other countries because it takes so long to comply with the many American regulations for opening new factories that use a lot of chemicals, said the executive, who spoke on condition that neither he nor his employer be identified.

Frank Haugwitz, a solar industry consultant based in Beijing, said Taiwan had a very large solar cell manufacturing sector with capacity equal to more than five times the U.S. market, and a significant chunk of that capacity was not being used.

Solar cells fabricated in Taiwan or South Korea from Chinese wafers will be shipped to the United States for final assembly, Mr. Yuan of Grape Solar said.

Final assembly involves a lot of labor in bolting components together, for which regulatory approvals tend to be simpler than for solar cell manufacturing. The final assembly typically accounts for a little less than a fifth of the total cost of making a solar panel.

The U.S. trade case was filed against solar panels for which either of the final two steps — turning the wafer into a cell or assembling cells into a panel — was done in China. So if Chinese manufacturers shipped solar cells from Taiwan or South Korea back to China for final assembly into modules at their existing factories, these products would also be hit by any steep tariffs that the United States might impose.

Ben Santarris, a spokesman for SolarWorld Industries America, a subsidiary of SolarWorld of Germany, said that there was only one small Chinese-owned factory in the United States doing final assembly of modules. “Chinese manufacturers would have to build significant production capacity here for final assembly” to reduce appreciably their exposure to any tariffs, he said.

The single Chinese module assembly site, located near Phoenix, Arizona, and owned by Suntech Power, has a capacity equal to about 3 percent of the American market, according to GTM Research.

Companies based in China manufactured 41 percent of the panels installed in the United States in the third quarter of this year.

Mr. Santarris also said that solar cells manufactured in Taiwan or South Korea and imported by the United States would not be immune to trade cases — despite close U.S. trade relations with both countries — if they were discovered to have broken trade rules, as in benefiting from government subsidies.

So, to recap: the US investigation on solar panels is a little more than a week old, and it's already inciting trade diversion (i.e., a shift in production from China to places like Korea and Taiwan), Chinese retaliation against US exporters and (perhaps) a small amount of new, low-value assembly work in the United States.  Since all of these efforts to avoid new US tariffs aren't free, US consumers will inevitably end up paying more - probably a lot more - for solar panels in the very near future.  And it's highly unlikely that the economic gains from a few new jobs in US solar panel assembly will offset the economic (and environmental!) losses imposed on American families and businesses who will be forced to pay higher prices.  And, of course, if any foreign producers figure out how to be cost-competitive and start shipping large quantities of low-priced solar panels to the United States, the domestic producers have threatened to file new trade cases against those imports, and domestic prices will go even higher.  Sweet.

So those are the likely results of the new solar panels investigation, and it's pretty much what most of these cases produce.  What the case is not going to produce, however, is a strong and vibrant domestic solar panel industry because, among other things, US regulations are too onerous for the domestic industry to be globally competitive. (And if you think this is merely because of lax labor and environmental standards, you'd probably be wrong: it's not like South Korea is a polluter's paradise with horrible labor conditions. And the United States does have one of the highest effective corporate tax rates in the industrialized world.)  If we improved these regulations and lowered these taxes, then maybe the aggrieved US industries could compete and maybe, just maybe, some of these expensive and often counter-productive trade investigations wouldn't occur. 

Crazy thought, I know.

Obama's Tire Tariffs: A Very Valuable Failure

A few months after President Obama's 2009 decision to impose steep tariffs on Chinese tires under Section 421 of US trade law, I noted that it was looking to be an abject failure in terms of its core (and only) objective: helping the US tire industry and its workers.  Well, it's now been two years, and a (relatively) new report from the US-China Business Council (h/t Andy Roth) proves unequivocally that my initial impressions were dead-on:

Two years ago, the Obama administration imposed punitive tariffs on imported low-end tires from China. The objective was to protect and restore low-end tire manufacturing jobs in the United States. But do trade tariffs create jobs? Were tariffs the right or wrong remedy?

The answer: Probably the wrong remedy. US imports of the low-end tires involved in the case have actually increased substantially since the tariffs were imposed—but have shifted from China to other countries. And, there is no objective evidence that the tariff boosted US tire manufacturing jobs.

The paper goes on to show that, according to US government data, "[t]he biggest beneficiaries of the tariffs are probably tire producers in Korea, Thailand, Indonesia, Mexico and other countries that replaced supply from China."  Of course, anyone who understands trade diversion could have predicted this outcome (and a lot of us did - including US Trade Representative Ron Kirk who hilariously told a Brazilian delegation that they should welcome the President's decision because they'll export more tires to the US).  Unless US manufacturers are the second-most competitive producer of widgets on the planet, tariffs on imports from the #1 widget producer will almost always result in an increase in imports from other countries' widget producers, not from the US producers.  This is not just basic economics, it's also common sense - very well-documented common sense.

The only thing not mentioned in the new USCBC report is another commonsense outcome of protectionist tariffs - pain for American consumers in the form of higher prices.  In the case of tires, I've cited anecdotal evidence of such price increases, and a previous USCBC report documented significant price increases in the 10-month wake of President Obama's decision.  It'd be good to see more such analysis in the future.  And, of course, there's that sweet Chinese retaliation against US exporters in direct response to the Section 421 announcement.

Now, while the President's tire tariffs have proven to be an abject failure, they still provide us with an extremely visible and valuable lesson about anti-China protectionism: it inevitably produces higher prices for US consumers and retaliation against US exporters yet rarely helps US manufacturers and workers - something to think about when you hear campaigning politicians in both parties peddling China protectionism as some sort of magical solution to the United States' current economic woes.

It just doesn't work like that, and they should know better by now.

Game On: Highly Subsidized US Solar Panel Industry Preps Anti-Subsidy Case Against China

I wish I could say that this development is in any way surprising, but, well, that's just not true (emphasis mine):

Solar manufacturers including the U.S. unit of SolarWorld AG (SWV) are preparing a trade complaint against imports from China, as they seek help from President Barack Obama to counter subsidies to their competitors, according to people familiar with the matter.

The case, which would be filed at the Department of Commerce and the U.S. International Trade Commission in Washington, would be one of the largest targeting China, with political implications as both nations race to develop clean- energy technologies.

The companies argue that China’s subsidies to solar companies violate global trade rules and provide those manufacturers with an unfair advantage, according to the people, who spoke on condition of anonymity because no complaint has yet been filed....

In the first seven months of this year, China shipped $1.4 billion of solar panels to the U.S., more than the $1.2 billion of panels it sent in all of 2010, according to U.S. International Trade Commission data. Imports from South Korea, the Philippines and India also jumped.

The collapse this month of Solyndra LLC, a California maker of solar panels that had $535 million in U.S. loan guarantees, has renewed demands from lawmakers and union leaders that the Obama administration pursue unfair-trade complaints against China for out-sized subsidies to its clean-energy companies.

“The American solar industry is facing unparalleled challenges, and without the leadership of your administration this industry may disappear,” Senator Ron Wyden, an Oregon Democrat, said in a Sept. 8 letter urging Obama to initiate a countervailing duty case against imports from China or to file a case at the World Trade Organization.

China provided $30 billion in credit to its biggest solar manufacturers last year, about 20 times the U.S. effort, Jonathan Silver, executive director of the Energy Department’s loan program, told a congressional panel Sept. 14...

There are two obvious reasons why this news is anything but shocking for anyone who reads this blog:

• First, because many world governments, including the US and China, have spent tons of taxpayer money"invested" heavily in green technology manufacturers and banked on exports as part of their economic recovery strategies, I've long predicted  - and subsequently reported on - an inevitable spike of domestic and multilateral (WTO) trade disputes over illegal subsidies to "green energy" companies.

• Second, a trade dispute was particularly inevitable in the case of solar panels because of (i) the very public struggles of not just the scandal-plagued Solyndra, but also several other domestic solar technology manufacturers and (ii) the very public blame for these failures that domestic unions, manufacturers and the Obama administration have placed on China.  Heck, I (incorrectly) predicted such a dispute just last week.  (Guess I was just a little too psychic... or something.)

That said, the (possible) case is still pretty astonishing for one reason: its blatant chutzpah.  As alluded to above, the US solar industry, including the aforementioned Solyndra, has received BILLIONS of their own subsidies from the US government.  Under the Department of Energy Loan Program alone (which has dispersed a total of $38.6 billion and counting in subsidies), the following solar companies have received buckets of taxpayer money:

• 1366 Technologies, Inc. - Solar Manufacturing - $150 million
• Abengoa Solar, Inc. (Mojave Solar) - Solar Generation - $1.2 billion 
• Abengoa Solar, Inc. (Solana) Solar Generation $1.446 billion
• Abound Solar - Solar Manufacturing - $400 million 
• Agua Caliente - Solar Generation - $967 million 
• BrightSource Energy, Inc. - Solar Generation - $1.6 billion
• Cogentrix of Alamosa, LLC  - Solar Generation - $90.6 million 
• First Solar, Inc. (Antelope)- Solar Generation - $680 million 
• First Solar, Inc. (Desert Sunlight) - Solar Generation - partial guarantee of $1.88 billion 
• First Solar, Inc. (Topaz) - Solar Generation - partial guarantee of $1.93 billion
• Fotowatio Renewable Ventures, Inc. - Solar Generation - partial guarantee of $45.6 million
• Mesquite Solar 1, LLC (Sempra Mesquite) - Solar Generation - $337 million
• NextEra Energy Resources, LLC (Genesis Solar) - Solar Generation - partial guarantee of $852 million
• Prologis (Project Amp) - Solar Generation - partial guarantee of $1.4 billion
• SolarCity Corporation (SolarStrong) - Solar Generation - partial guarantee of $344 million 
• SolarReserve, LLC (Crescent Dunes) - Solar Generation - $737 million 
• SoloPower - Solar Manufacturing - $197 million 
• Solyndra Inc. - Solar Manufacturing - $535 million 
• SunPower Corporation, Systems (California Valley Solar Ranch) - Solar Generation - $1.187 billion

By my (admittedly lawyer-esque) math, that's about $16 billion in total or partial loan guarantees (read: subsidies) to the solar industry as part of the DOE loan program alone.  I'm not sure where Mr. Silver's getting his numbers, but they definitely seem low (shocking, I know).  And those DOE loans are definitely not the only subsidies out there: according to the United Steelworkers Union's 2010 "Section 301" petition requesting a WTO complaint against China's solar industry subsidies, the United States government had doled out more than $100 billion in subsidies to the US solar industry.  And that was back in 2010, so the number's certainly even higher now.

So, for the direct and indirect recipients of all of this sweet, sweet government cash to turn around and complain about their competitors receiving - yep - sweet, sweet government cash is pretty much the height of hypocrisy.  Or, as I stated back in 2010 regarding the USW complaint:

Obvious translation [of the union complaint]: Sure American manufacturers received $100 billion worth of green subsidies in order to crush their foreign competitors, but China's producers received lots more, and theirs have been far more effective! No fair! In essence, the USW is openly complaining that the Chinese are better cheaters than we are, and the union thus wants the US government to call in the WTO's referees in order to stop China's cheating.  Talk about chutzpah.  

Exit question: if USTR ends up filing a WTO dispute on the USW's grounds, does that mean we'll have our first ever official case of "subsidy envy"?

The answer to that cheesy question was clearly "yes," and the solar industry's, ahem, green envy obviously  hasn't subsided since then (nor has my cheesy sense of humor).  And, as the DOE's recent statements make clear, the industry's Blame China strategy appears to have very vocal and eager supporters in certain parts of the Obama administration.  Perfect.

Furthermore, and as if this all weren't sketchy enough, the Bloomberg article points other things that should cause us all to question the solar industry's little ol' Blame China plan.  Most importantly, the article shows that solar imports from other countries are also on the rise, so even if the US industry's new anti-subsidy petition against Chinese is successful, the most likely result - along with, obviously, higher solar panel prices for US consumers - isn't the resurgence of US solar manufacturers but instead the very common "trade diversion" (i.e., a simple shift in imports from China to these other low-cost suppliers).  So we'll all pay more, and no new net jobs will be created.  Sweet.

In a similar vein, the fact that a German-owned company with plants all over the world (and which has just cut 200 jobs in California) is leading the US anti-subsidy charge against only Chinese imports should definitely give us pause.  As Cato's Dan Ikenson has explained repeatedly, US-based companies with major foreign operations have often used US trade remedies actions to cripple their foreign competition and bolster their own import sources, rather than to increase domestic output and employment.  I have no idea if that's what SolarWorld or any other members of the US industry are up to, but it's definitely something to keep in mind.

So to recap: the highly-subsidized and seriously-struggling US solar panel industry - led by a German-owned manufacturer with global sourcing operations - is targeting highly-subsidized Chinese solar panel imports which, along with imports from several other non-targeted countries, have surged in the last few years.

Welcome to the Green Subsidy Game, folks.  Be sure to grab a good seat; the show's just getting started.

The Unbearable Asininity and Immorality of Donald Trump's China "Policy"

I was really hoping to stay out of the whole "Donald Trump is Running for President" thing, because I truly believed (and pretty much still do) that (a) the spectacle was just a really good, and slightly depressing, publicity stunt for the reality TV star; and (b) anything I said would just give the guy another free commercial (albeit for an extremely limited market).  Thus, any discussion of this unserious "candidate's" completely unserious "trade policy" - which is literally nothing more than the immediate imposition of tariffs on all Chinese imports - was really just a waste of my and, by extension, your time.  

But then I saw the (admittedly early and utterly unpredictive) polls, and then I read that he's deathly serious about running for President, and then I went on the Laura Ingraham Show and found that smart conservatives like Laura (and a lot of her listeners) actually sympathized with Trump's "get tough on China" plan.

So here I am wasting a quiet Easter Weekend screaming into the interwebs about Donald Trump's - Donald Freaking Trump's - China trade policy.  I hate to say it, but this really does need to be done.  So let's just hold our collective noses and get this over with.

As noted above, Trump's entire trade policy boils down to slapping unilateral tariffs on all Chinese imports as soon as he gets into office.  Here's the man himself describing his big plan to NBC News:

"I would tell China, very nicely, fellows, you are my friend, I like you very much. I've made a lot of money on China by the way, a lot of money with China. I would say we are going to put a 25 percent tax on all your products coming in, and that's going to do a number of things," Trump said.

"Number one: as soon as they believe it's going to happen, they will behave so nicely, because it would destroy their economy,” said Trump in an interview with NBC’s Today show on Tuesday.

Playing up to voter fears on the loss of jobs to China, Trump said the transfer of cash to the Chinese was down to Beijing’s controversial currency peg.

"When you see what China is doing to us, what we're going to lose this year, $300 billion to China. And they are taking all of our jobs, and they are doing it through manipulation of their currency," Trump said.

Trump's China policy is wrong on just about every possible level: factually, legally, economically, strategically, morally and even politically.  Let's systematically address each of these now.

1. Trump gets his basic facts wrong. 

Before we get to Trump's tariff policy itself, it's important to understand the serial fallacy of Trump's basic factual assertions, i.e., that (a) China's currency remains extremely undervalued versus the US dollar; (b) China's currency policies are driving both the US-China trade balance and US unemployment; and (c) that the US trade deficit, and especially the United States' bilateral trade deficit with China, is a big problem for the US economy.

As I've noted here many times, China's currency policies are not nearly the vehicle of economic destruction that Trump and others claim them to be.  First, Trump erroneously focuses on the nominal US-China exchange rate (what the government says the currency is worth), rather than the real exchange rate (what the currency is actually worth).  It's the real rate that matters, as any "businessman" like Trump should know,  because it measures what tradeable goods and services actually cost.  And, as I've noted repeatedly here, the real dollar-yuan exchange rats has increased dramatically - almost 50% percent - since 2005.  Second, as the real value of China's currency has increased, American unemployment has gone from about 5% in 2005 to slightly under 9% today, and the US-China trade deficit has (except for the recession) steadily increased.  So there's no strong connection between China' currency and total American jobs or the trade balance (as the Congressional Research Service has repeatedly noted).

Next, Trump's assertion that $300 billion annual US-China trade deficit is a sign that America is "losing at trade" is the height of economic ignorance.  First, there's actually a strong correlation between US economic growth and an expanding US trade deficit.  As Cato's Dan Griswold recently wrote in a must-read paper on the subject:

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

And if fixating on the overall US trade balance weren't dumb enough, Trump goes one further and obsesses over an even more economically meaningless stat when he worries about the US-China trade balance.  As I've noted here repeatedly, the proliferation of global supply chains and multinational investment has rendered bilateral trade balances a totally unimportant trade policy metric.  Indeed, old school trade stats like these have become so obsolete that the WTO has launched a new global initiative to determine how better to account for actual trade flows.  The most common example of the indisputable obsolescence of the US-China trade deficit is the iPhone (and the iPod before that): each device imported into the US from China accounts for about $300 towards the bilateral trade deficit, yet the Chinese get only about six bucks worth of value from the item's assembly and shipment.  Meanwhile, the US-based Apple and its affiliates get hundreds of dollars from an iPhone's final US sale (for things like design, marketing, and even some manufacturing).

Even the idea that China is totally dominating the United States is absurd.  Yes, China has experienced impressive GDP growth, but (a) that's what developing countries do; and (b) America is still much, much wealthier, greener, and more productive.  Moreover, China's incessant quest for GDP growth through industrial planning has led to some pretty scary inflation (which is driving China's the increase in the Yuan's real value), some major league economic distortions (e.g., a frightening property bubble and an increasingly troublesome high-speed rail system), and a lot of other serious problems that, if not solved pretty quickly, could implode the entire Chinese economy.  Always the empiricist, Trump once "proved" how China was "eating our lunch" by noting how big and shiny China's cities are.  Well, on that, he's right, but that's because no one is actually living in them.  I mean, it's so easy to keep a city clean without the, you know, citizens.

There are several other factual problems with Trump's assertions, but let's just forget about these big flaws and examine Trump's actual policy - unilateral tariffs on Chinese imports to counteract Chinese currency "manipulation" (aka the "Trump Tariff").  As you'll see, it's just as wrong.

2.  The Trump Tariff has major legal problems. 

First and most obviously, the President can't just slap a tariff on Chinese goods.  The US Constitution (Article I, Section 8) gives Congress the sole authority to impose tariffs on foreign-made goods (i.e., "to regulate Commerce with foreign Nations"), so Trump would have to get congressional approval for his big China plan.   But considering that the most protectionist Congress in the last 20 years couldn't even pass legislation making currency undervaluation an illegal subsidy (and fretted for months over the WTO-consistency of the bill), does Trump really think that this new Congress - and its gaggle of free trade-supporting freshman - would agree to his plan?  Highly unlikely.

Second, there are several US laws that govern the imposition of remedial tariffs on Chinese (and other) imports, and these laws have strict procedural, evidentiary and substantive requirements that can't just be ignored.  Illegally subsidized imports from China (and other countries) are governed by the US countervailing duty law, while market-distorting surges in Chinese imports may be addressed under Section 421 (a China-specific safeguard).  President's Trump's remedial tariff would totally (and unlawfully) circumvent these laws.

Finally, the Trump Tariff would be inconsistent with two of the United States' most fundamental obligations under the WTO agreements: (i) Most Favored Nation (GATT Article I - the principle that a WTO Member must treat imports from all other Members equally) and (ii) the United States' tariff bindings (GATT Article II - the rule that a WTO Member cannot impose tariffs above the "bound rate" set forth in its tariff schedule).  Such a blatant violation of WTO rules would have serious consequences for the United States, as we'll discuss next.

3.  The Trump Tariff is economically ignorant.

Even assuming that Trump somehow convinced Congress to impose the Trump Tariff, its effects wouldn't be anything like Trump hoped or planned.  In fact, the tariff would end up causing a lot of pain (for both China and the US) for little or no economic gain.   First, as noted above, the Trump Tariff is blatantly WTO-inconsistent, so China would go straight to the WTO and easily win the right to impose retaliatory tariffs on US exports in the amount of the damage caused by the tariff.  Based on 2010 stats, the retaliation would be something like 25% (the proposed tariff level) of about $365 billion (total Chinese imports), or about $91 billion.  Considering that US exports to China totaled only about $100 billion in 2010, this WTO-legal retaliation would effectively close the United States' third largest export market - a devastating result for one of American exporters' fastest-growing markets (US exports to China have more than doubled since 2005).

Second, the economic pain wouldn't stop with US exporters because the Trump Tariff, just like any other consumption tax, would inevitably increase US prices of everything that American consumers currently buy from China.  Remember, US importers, not Chinese exporters, pay US tariffs and pass those on to American consumers.  This, of course, means that American families, many of whom are already struggling to get by, would end up paying more - a LOT more - for food, clothing, electronics, Smithsonian souvenirs, and everything else that now says "Made in China."  However, individuals wouldn't be the only ones screwed by the Trump Tariff - American businesses (and their many workers) would also be hit hard.  Because almost half of what we import from China is industrial supplies and materials or non-automotive capital goods - i.e., inputs used by American companies - lots and lots of these firms would inevitably pay more for the things that they need to remain globally competitive.  These higher costs, of course, also mean fewer employees, if not outright bankruptcy.  Awesome.

Third, it's highly unlikely that the Trump Tariff would lead to a significant increase in US manufacturing.  Sure, a few directly competitive US companies would benefit from that sweet, sweet import protection (by being able to milk US consumers for more money, natch), but the far more likely result is trade diversion - i.e., our imports would shift from China to other (more expensive) foreign countries like Vietnam, India or Mexico.  This is exactly what happened when the US imposed tariffs on Chinese tires under Section 421, and it's the very common result in anti-dumping and CVD cases.

Finally, even if the Trump Tariff succeeded in getting China to rapidly appreciate its currency (and, as noted below, it won't), it's far from certain that such appreciation would harm China's global competitiveness.  As Cato's Dan Ikenson stated last year: "RMB appreciation not only bolsters the buying power of Chinese consumers, but it makes Chinese-based producers and assemblers even more competitive because the relative prices of their imported inputs fall, reducing their costs of production. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the intended effect of the currency adjustment, which is to reduce U.S. imports from China."  As an intermediate producer and big assembly hub, China is importing more these days than they did during the last period (2005-2008) of nominal currency appreciation, so Ikenson's insights likely hold truer today than they did even a few short years ago.

In sum, the Trump Tariff would cause massive pain for very, very little gain.

4.  The Trump Tariff is strategically unsound.

Even if the Trump Tariff weren't legally and economically dubious, it's still an awful strategic play.  The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump's big, macho tariff is absurd.  First, Trump fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

But, you know, other than that, it's a fine plan.

5.  The Trump Tariff is immoral.

Leaving aside the Trump Tariff's legal, economic and strategic problems, perhaps most offensive is its immorality.  As noted above, one of the most obvious effects of the Trump Tariff would be higher prices for American consumers. Trump even seems to recognize this obvious fact, and when asked about it he calmly explained:

But that's a risk Trump is willing to take. He says his son can live with fewer toys, as long as jobs come back to the United States.

"I have a son, and he loves little airplanes ... Most of them are made in China ... He has so many of 'em," Trump told CNBC's Larry Kudlow last month. "If he had half of 'em, and if they were made in this country, I'd be very happy ... and he'd be just as happy."

Other than the fact that those jobs wouldn't come "back to the United States," this kind of statement is mind-blowingly insulting, even for someone like Trump.  As I've repeatedly explained on this blog, tariffs are regressive taxes that harm poor Americans far more than wealthy ones like Donald Trump because they force the former to pay a bigger share of their (much smaller) paychecks for basic necessities like food, clothing and shelter.  Tariffs on Chinese products are even more problematic because lower income Americans buy a lot more Chinese stuff than rich Americans.  In short, when prices at Walmart go up, Donald Trump doesn't notice, but a working mom sure does.  And the only ones who benefit from those higher prices are a few well-connected American manufacturers and their workers.  Nice.

And this gets back to the brazenness of Trump's "toys" statement: sure, he can tolerate his son only having 10 higher-priced toys instead of 20 Chinese-made toys, but what about the dad who can currently afford only one toy for his son?  Last time I checked, he can't buy half a toy (or tire or shirt or TV or whatever), so for many lower income American families, the Trump Tariff doesn't mean ten fewer toys, it means no toys (or tires or shirts or TVs or whatever).

Stay classy, Donald.


6.  The Trump Tariff is the exact opposite of fiscally conservative, libertarian or "Republican."

A lot of people have dismantled Trump's born again conservativism by noting how he until very recently supported things like universal health care and eminent domain abuse, but his protectionism is just as bad or worse.  Indeed, it's the height of statist redistributionism.  Trump forgets that American consumers are buying Chinese goods voluntarily - last time I checked China wasn't loading missiles with TVs and launching them into the US (although that would be kinda awesome).  And he freely admits that the goal of his policy is to force American businesses and families to subsidize (by paying higher prices) that small minority of American manufacturers who directly compete with China.  So not only is Trump saying that he knows better than us about what we should be consuming, but Trump's also saying that because we just can't help ourselves but buy cheap Chinese goods ("ooh, they're so cheap and pastic-y"), he has no choice but to enlist the full force of the US government to stop us from harming ourselves.  President Trump will tell us to pay more for less in order to line the pockets of a select few because we're just too dumb and helpless, and we can't be trusted to make the decisions that he, and he alone, deems "right."

It's for our own good, you see.  Now please someone, anyone, explain to me how this is the policy of a fiscal conservative?

(Answer: it's not.)

Look, the truth is that China presents some real challenges for American businesses and the US government, and they should both continue to smartly and lawfully pressure China to reform its troublesome policies (while getting the United States' own messy house in order).  But it's absurd to think that the Great Red Menace is coming to steal our jobs and eat our lunches.  In reality, China's economy is at a very precarious point, and if the Chinese government doesn't find a way to change course, the country's headed for a Japan-style collapse, as this recent article made clear.  But, hey, maybe that fact explains why Trump, while (fake) contemplating the presidency back in 1990, said the exact same things about Japan that he's saying about China today.

Then again, maybe just like 1990, Trump's once again pulling a fast one on all of us and is just sopping up some free publicity in order to hawk his ties board game cologne TV show.  Unfortunately, even if Trump's candidacy is a joke (and I still think it probably is), his China "policy" has gained real traction among the American public and some influential conservative pundits.

And that's far more disturbing than Trump's current poll numbers.

The US Government's Horribly Misplaced China Trade Priorities

It's no secret that the US Congress and many in the Obama administration have been somewhat obsessed with US-China trade over the last few years, and considering that China is a rising economic power and one of the United States' largest trading partners, a certain amount of US government attention is arguably warranted.  However, two recent columns from the Wall Street Journal shine a really bright and depressing light on just how misplaced Congress' (and the US government's more generally) priorities have been, and continue to be, with respect to US-China trade policy.

First, the WSJ's Peter Stein explains how the recent good news that two big US investment banks have gained new access to the Chinese market is not nearly as good as it could have, or should have, been:

On Friday, Chinese regulators confirmed that J.P. Morgan Chase & Co. and Morgan Stanley have both been given the green light to set up shop in China's domestic securities market.

Like other investment banks looking to enter the China market, neither can look forward to an awful lot for now. They're both restricted to 33% ownership of a joint venture with a local partner. They can underwrite stocks and bonds, but they won't have the licenses to trade those securities in the secondary market. Even UBS AG, whose UBS Securities is the most active foreign underwriter in China, made a net profit in 2009 of only around 109.2 million yuan ($16.5 million), according to publicly available data.

Foreign banks in general have struggled to build meaningful businesses in China. But the rules that hold back investment banks from doing more China business are unusually strict. Commercial lenders, by contrast, can set up banks in China that they own entirely, avoiding the perennial risk that their relationship with a joint-venture partner sours. In the asset-management industry, foreign investors can own 49% of a joint venture, giving them a bigger slice of the profits. The Street may have only itself to blame.

Foreign investment banks just weren't that into China, or at least its domestic stock market, back when China was negotiating admission to the World Trade Organization in the years before a deal was reached in 2001, says Zili Shao, chairman and chief executive of China for J.P. Morgan. As a lawyer, Mr. Shao worked on setting up China ventures for Goldman Sachs Group Inc., UBS and CLSA Asia-Pacific Markets, a unit of the French bank Crédit Agricole SA.

At the time, China's financial sector was a mess, and its stock market was a far cry from the major force that it is today. With plenty of market opportunities elsewhere, the need to press for access to China might not have ranked as a top priority at the banks. "That was a major underestimation," says Mr. Shao.

David Strongin, managing director of the Securities Industry and Financial Markets Association, says, "We vigorously and aggressively pursued opening China's market." But rules on foreign participation in China's securities industry were among the last unresolved issues blocking China's entry into the WTO, he adds, "so all leverage to negotiate was gone." He describes the current restrictions as "a huge impediment to competing in China."...

Today, says Mr. Shao, there's no discussion taking place about changing the status quo. In Washington, he says, the goal of boosting U.S. access to China's markets has taken a back seat to political pressure for China to revalue its currency. "There is a lot of debate about the currency," he says, "but no one is arguing for greater market access."

Speaking of currency, it's one of the topics in a great new WSJ editorial which explains just how little all that American political effort on China's currency - and the US-China trade balance - could end up getting us.  In the process, the piece hits on a lot of the issues that I've been discussing over the last year or so like China currency, global supply chains, import benefits, trade diversion, the trade deficit, and, of course, really stupid congressional rhetoric:

No sooner has a new Congress arrived in Washington than the anti-China-trade rhetoric has started anew. Senator Charles Schumer, whose Democrats still control his chamber, has said he plans to re-introduce legislation to punish China for its "currency manipulation." Tim Murphy, a Pennsylvania Republican, may push similar legislation he co-sponsored in the past, Reuters reports....

Leaders face many decisions on how best to put the American economy back on a growth track. To the extent that Congressional protectionists will present Chinese exporters as a threat to American prosperity despite all the other more pressing problems America faces, the argument over China's exchange-rate policy is a distraction the economy can't afford.

How much of a distraction is suggested by a paper out last month from the Asian Development Bank Institute. Economists Yuqing Xing and Neal Detert examined the supply chain of the iPhone to reach a surprising conclusion: Technically, the iPhone contributes to America's trade deficit with China.

The basic explanation is that data on bilateral trade are calculated assuming that the entire value of a traded good is created in the exporting country. If that ever made sense, it certainly doesn't in a global economy marked by increasingly complex supply chains.

In the case of the iPhone, Messrs. Xing and Detert note that the device was invented in America by an American company, Apple. The components are manufactured, either inside or out of China, by companies based in several other countries. The only part of the entire process that is unambiguously "Chinese" is the final assembly—a process that, in the estimation of Messrs. Xing and Detert, adds only $6.50 to the $178.96 wholesale value of an iPhone.

Yet that entire $178.96 value ends up attributed to China in the calculation of trade statistics. As a consequence, the iPhone contributed nearly $1 billion to China's bilateral trade surplus with America in 2008, and nearly $2 billion in 2009, the authors of this study conclude. If the trade data had been based solely on the $6.50 cost of assembling each unit, the iPhone would have added only $34 million and $73 million in those years, respectively, to China's surplus.

The ADBI study ought to be required reading on Capitol Hill. Most importantly, it raises the question of how much anyone really knows about what America's trade with China is. Critics of trade data, including us, have long asserted that bilateral statistics are misleading at best. As the bilateral trade deficit with China grew, deficits with South Korea, Taiwan and Singapore declined, confirming that China's comparative advantage lies in the assembly into finished products of components manufactured around the region, due to its low-wage, low-skilled labor....

Crucially, the trade data also miss the broader economic impact of "imports" like the iPhone. The benefits are clear and large, though hard to quantify precisely. First there are the gains to Apple itself. The ADBI study examines only the composition of the $178.96 manufacturing cost of the iPhone. The handsets typically retail for as much as 50% to 100% more than that. The difference consists of the value of Apple's intellectual property in having invented the iPhone, and also the value of marketing in persuading consumers to buy the hot new thing.

The ADBI study doesn't break down that figure, but others have performed similar research in the past. Economists at the Personal Computing Industry Center attempted in 2007 to estimate who profits from the iPod and how. They estimated that for an iPod retailing for $299, retailer and distributor margins account for $75 and Apple's own margin accounted for $80. In other words, more than half the retail price accrued to American companies—and their employees and shareholders—in some form.

None of these studies accounts for another huge way such imports drive growth by spurring innovative new businesses. Telecom companies like AT&T and, now, Verizon have profited by being able to offer data services to iPhone-toting consumers. Countless programmers around the world are now devising applications for the iPhone and iPad, which offer many businesses a convenient new way to reach potential customers.

All of which illustrates the basic truth that trade has always benefited the American economy. Congress can't afford to forget that, no matter how much Members would like to scapegoat Chinese factories for Washington's own policy mistakes.

So rather than launching a trade war with China over $6.50, here's a better agenda for the 112th Congress: Focus on policies that will help Americans and U.S. companies better capitalize on a global economy. That includes better tax policies to reward investment and entrepreneurship; environmental regulation that does not discourage manufacturing in America when it would make business sense; health-care policies that don't deter hiring; and free trade to let Americans import goods like iPhones that will spur new growth.

Like I said, great stuff.   And when you combine the two WSJ pieces, one very important thing becomes crystal clear: the United States government is totally wasting its time on meaningless issues like the trade balance and China's currency and totally ignoring far more important (and valuable) issues like access to China's market, particularly for globally-dominant American service providers.  In short, we're so irrationally focused on a measly $6.50 that we're letting billions of dollars slip out the back door.  Ugh.

One point of contention, however: contrary to Stein's assertions' the United States government does have a huge chance to quickly improve its companies' access to China's relatively closed services market, as well as many other developing countries' goods and services markets around the world: the WTO's Doha Round of multilateral trade negotiations.  Indeed, several studies (like this one) have shown that an ambitious Doha Round agreement on services could  improve global welfare by well over a trillion - with a "T" - dollars, with much of that going to US services companies and their employees.  And, as Phil Levy and I recently noted, there is a very real and immediate opportunity to complete the Doha Round in 2011.

Of course, Levy and I also noted that the fate of the Round rests squarely on the shoulders of President Obama and the US Congress - particularly in their ability to craft a bold offer on agricultural subsidies and industrial market access and convince (or push) other WTO Members to do the same.  Such a plan, however, requires a ton of effort and even more political will, and although the US government has (perhaps) hinted that it's getting serious about Doha, it's still futzing around with silly distractions like China's currency and the bilateral trade balance.  Those in Congress, it seems, are far more worried about $6.50 than they are those untold billions.

Obama, however, need not be so distracted, and next week's meetings with Chinese President Hu Jintao provide the President with the perfect opportunity to prove that he's above the nonsensical nincompoopery of self-interested politicos like Chuck Schumer and is instead ready to lead on trade.  At the meeting, Obama can show Hu that the US is deadly serious about the Doha Round, and that China should be too.  There's no time to waste, and the stakes are just too high to focus on anything else.

Especially a Senator from New York and $6.50.