Monday, October 19, 2009

Trade Diversion And The Folly Of Bilateral Protectionism

One of the main reasons that I and many other free traders opposed the President's politically-motivated decision to impose tariffs on Chinese tires under Section 421 of US Trade law was the immense likelihood that stopping Chinese imports would just increase other countries' US market shares, rather than significantly improving domestic tire production.  As I noted at the time, tire producers in Mexico, South Korea, Indonesia and elsewhere "gotta be quietly dancing in their offices because China - their main competitor for US market share - is now hobbled."  In fact, shortly after the Section 421 decision, USTR Ron Kirk had a rare moment of candor in Brazil when he basically admitted the same thing: "In the short-term [the tire restriction] could mean that we buy a lot more tires from Brazil."  (So much for assisting US tire manufacturers and workers, huh?)

Anyway, from today's Economic Times (India) comes further proof of the inevitable trade diversion that occurs when you ban China's (or any single country's) imports:
The US government’s move to levy anti-dumping duty on Chinese steel pipes has provided Indian manufacturers an opportunity to increase exports to the US. India’s steel pipe makers such as Maharashtra Seamless, Jindal Saw and Indian Seamless Metal Tubes are all set to more than double their exports to the US.

The US recently imposed preliminary import duties ranging from 10.9% -30.7% on steel pipes, used to deliver oil and gas, from China in order to protect the domestic pipe making industry from low-priced imports. As per industry estimates, China exported 1.9 million tonnes of steel pipes to the US last year....

Maharashtra Seamless produces 2 lakh tonne of seamless and electric resistance welded (ERW) pipes annually. Its exports to the US stood at 20,000 last year, which is expected to go up to 70,000 tonnes this year. India’s seamless, spiral and ERW pipe making capacity is close to 5 million tonnes currently....

Jindal Saw has saw and seamless pipe manufacturing facilities in India with a total production capacity of 1.6 million tonne. The company also has double joint and coating facilities in North America. It exported 7-10% of the total produce to North America last year and is expected to increase exports to 15-20% in the coming months.
So there you go: imposing tariffs on Chinese pipe imports ends up increasing Indian imports of the same product.  It's like a big, global game of whack-a-mole!

As I've noted previously, such trade diversion is part of a larger phenomenon regarding China's role in the global economy - that its producers historically have taken market share away from other foreign (mostly Southeast Asian) exporters rather than American manufacturers.  As such, it's completely expected that Indian and other foreign producers should rejoice every time a domestic industry or union files a request for protection from Chinese imports alone.  Their exports increase.  Good for them.

The only problem, of course, is that the point of bilateral protectionism is not to improve other foreign producers' shipments to the US, and domestic prices inevitably rise due to the removal of a low-cost supplier from the market (and increased transaction costs as importers hunt for new overseas supply).

So American production doesn't increase, yet US prices do.  Awesome.

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