Category Archives: Protectionism

Self Initiated Trade Wars: Aluminum & National Security

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Today the Commerce Department launched an antidumping case against Chinese aluminum imports. The reason: Aluminum is [supposed to be] crucial for national security. Well…

The New York Times clarifies: Aluminum production has been declining before Chinese Imports ever started. Why? Because electricity, a key input in the production of  aluminium, is cheapest in Iceland. Also, only 10% of US aluminum imports come from China,

(source: US ALUMINUM ASSOCIATION)

Since electricity is expensive in the US, aluminum production plants plants that still operate in the US must be heavily subsidized (such as the NY Massena plant which receives subsidies to the tune of $73 million) or they are located near hydropower (as in Pacific Northwest, which used to supply about 40% of the nations aluminum) . Of note is that at its height, the aluminum industry employed only 1000 workers (to produce 40% of US aluminum!!) in the Pacific Northwest and now that computer server farms compete for hydroelectricity so that Alcoa, the main aluminum supplier is now moving production to Iceland.

How about National Security? The commerce department cites gives as its reason for the antidumping case a “Section 232 Investigation on the Effect of Imports of Aluminum on U.S. National Security.” It turns out that there is only 1 plant in the US producing aluminum for the US military… which produces 5% of US aluminum

Well, producers will be ecstatic, while Forbes Magazine notes that producers can then raise the prices they charge to those American consumers. That being the very damage that such tariffs do to consumer interests. What we end up with is a transfer of money from consumers to domestic producers, exactly the reason why domestic producers so like such tariffs.

Some of this is just straight textbook international trade. The politics are confusing, however, given that Trump proclaimed just a couple of weeks ago that “he does not blame China for the “unfair” trade relationship between the countries, despite long railing against the economic imbalance. He gave China “credit” for working to benefit its citizens by taking advantage of the US.” (BBC)

Finally, in a twist that comes across stranger than fiction, the Commerce Department is “self initiating” the antidumping investigation. Generally US administrations respond to requests by the industry or labor to investigate trade related matters, but every now and then presidents become eager to make their points without a mention that the industry has been injured. This is historic, the last time this happened was under President Bush (Sr) 25 years ago.

 

“Let The Sunshine In” – Just not into the US and Europe. Solar Panel Update

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The NYT has an update on the US – Chinese solar panel dispute. 

While green technologies are key to reducing the energy consumption in the US, sadly the focus is only on rules of origin: who produces the green technology, not how much it can help us reduce carbon emissions.  The US would like to keep cheap Chinese solar cells out. After a first victory that imposed huge subsidies for US producers and huge tariffs (24%-36%) on Chinese solar imports, the Chinese turned around and started to source key components from Taiwan. Since only Chinese solar cells had been subject to the US tariff, the new cheap "Taiwanese" cells soon flooded the US market. Much to the chegrin on US solar cell producers who wanted to maintain higher prices in the domestic market. This "loophole" is now to be closed by having high tariffs imposed on any solar modules that contain Chineses parts. The winners: "Solar World Industries of Amercia" (which is actually a subsidiary of a German company!) , the loosers (as usual): consumers and sadly also now the environment.

In Europe the threat of a 67% tariff resulted in a negotiated price floor that Chinese companies agreed to and voluntary export restraints to end the "oversupply" of solar cells. 

Currency Wars

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The world at war; the weapon: depreciation. Brazilian Finance Minister Guido Mantega has warned in remarks reported from Sao Paulo. "We're in the midst of an international currency war, a general weakening of currency," he said in remarks reported by the Financial Times newspaper. "This threatens us because it takes away our competitiveness." Japan, South Korea and Taiwan have intervened recently to pull down the value of their currencies, the newspaper noted, and the dollar has fallen by about 25 percent so far this year against the Brazilian real. Such a decline increases the price of Brazilian exports on the US market. 

Barry Eichengreen provides a summary of the economic implications of currency wars. Here are a few study questions

 

  • Why is China keeping its exchange rate artifically low?
  • Why are the US and Europe contemplating weaker currencies?
  • How are these policies related to beggar-thy-neighbor effects?
  • What are the alternatives to beggar-thy-neighbor policies?
  • Is it the currency war itself the source of the tensions between the US, Japan, and Europe,
    or is it the execution of the currency war the real problem? Explain    . 
  • Who is the winner in this war? 

 

Beggar Thy Neighbor

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The newswires are abuzz with the news of the Japanese Central Bank intervention.  Some commentators realize that the ancient term for "dollar mercantilism", "neo-mercantilism", or "competitive depreciation" is simply "beggar thy neighbor" (see Chapters 19). The Economist Magazine has an interesting take on the issue. IF the Japanese intervention floods the market with dollars and IF this would lead to inflation in Japan – the effect might actually be positive for all!

Extra Credit: How would you use the large open economy Mundell Fleming Model (Chapter 19) to explain how the massive sale of yen by the Japanese Central Bank could benefit not only Japan but also the US (and other countries).  Hint: Think Liquidity Trap, and The Paradox of Thrift…

Solution: Combine 1, 2, for an alternative view (see 3, which is the "great vacation" view of the great recession. I contrasted these views before…).

Love (Hate) Triangle

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Today the Japanese Central Bank intervened (for the first time in 6 years in international currency markets). BBC has the story:

Japan moves to combat rising yen 

The Japanese central bank stepped in to sell yen and buy dollars, a day after the yen hit a 15-year high against the dollar.

It is the first time in six years that the Bank of Japan has intervened, and further action has not been ruled out. A strong yen makes Japanese exports more expensive, and reduces profits when earnings are repatriated.

In early trading on Wednesday, the dollar rose to 85 yen, after hitting 83.09 yen on Tuesday. Investors welcomed the intervention, sending Japan's Nikkei share index up by 2.9% at first, with the index eventually closing 2.34%higher at 9,516.56.

Economic harm

But in a brief news conference, Finance Minister Yoshihiko Noda said: "We have conducted an intervention in order to suppress excessive fluctuations in the currency market. "We will closely monitor currency developments, and take firm action including intervention… The yen's rapid appreciation "harms the stability of the economy and finances. We cannot tolerate it."

Japanese exporters praised the intervention. "From the standpoint of aiding the competitiveness of Japan's manufacturing industry, we applaud the move by the government and the Bank of Japan to correct the yen's strength," carmaker Honda said in a statement. Honda's shares closed up4%, while Sony, another big exporter, ended 4.2% higher…  A recent government survey suggested many companies were considering moving production overseas if the yen stayed high.

The record low for the dollar is 79.75 yen, reached in April 1995. Mr Noda did not reveal the size of the intervention, although the Dow Jones news agency reported that Japan's Ministry of Finance had initially sold between 200bn and 300bn yen ($2.4bn-$3.6bn).

But who is buying the Yen? The Japanese economy has been anemic since the early 1990s (the Japanese stock index has fallen by roughly 66% in the last 20 years).

 

Source 

Ok, so the Chinese government has been buying Japanese bonds, but their $20 billion purchases this year, cannot be the whole story.  Reuter's makes an attempt to explain the recent movements using interest parity (yield spreads) and sterilization – none of it convincing.  The one interesting piece is that the REER has actually not moved much less than the nominal exchange rate because of Japanese deflation.

 

 

Here is a final thought: when will we hear about Japanese "Mercantilism?" 

The Wall Street Journal spells out the Love (Hate) triangle all its juicy details:

China has been diversifying its $2.5 trillion reserves away from the dollar, causing some to worry that less Chinese buying of Treasurys would cause U.S. interest rates to and make it more difficult for the government to borrow.

But Japan’s dollar buying in currency markets Wednesday shows Chinese reserve diversification might actually lead to even more demand for Treasurys.

Here’s how. As China diversifies out of U.S. dollar-denominated assets such as Treasurys, it is buying debt denominated in the currencies of some of its biggest trading partners. Not wanting to lose competitiveness themselves, those trading partners in turn buy dollars to keep their currencies cheap.

As part of the diversification push, China has been a major buyer of yen, snapping up $27 billion in yen so far this year according to Japanese Ministry of Finance. Analysts say China’s buying has helped an already strong yen get stronger.

Now, Japan, feeling under pressure to weaken its currency, turned around and bought dollars, most likely in the form of Treasurys. It isn’t clear exactly how much dollar buying Japan will have to do to protect the yen from getting stronger, but it’s likely to more than offset China’s diversification into the yen. If the past is a guide, Japan spent $320 billion in its last intervention from 2003 to 2004. And this time the currency markets are 73% far larger, with $568 billion dollar-yen trading a day,  according to the Bank for International Settlements.

Japan is not alone in this phenomenon. China has also bought South Korea’s currency, the won. And South Korea routinely intervenes in currency markets, buying dollars to keep its currency from rising too quickly, again offsetting China’s move out of the dollar. 

Mercantilism in a Large Open Economy

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Dani Rodrik expounds the virtues and pitfalls of the Chinese exchange rate manipulation. For a change, he does not focus on US-Chinese economics, but on the impact of the undervalued Yuan on poor countries. 

a) use the large open economy diagram to show how the absence of FX intervention no the part of the Chinese Central Bank, and the associated one-time depreciation of the Chinese yuan, would affect China and poor countries

b) explain why the artificially weak Yuan is equivalent to Mercantilism or Neo-Mercantilism. 

c) If China implements high tariffs on imported goods, do you think that its propensity to import is big or small?

d) What would such a tariff mean for output in poor countries that reply on China as a trading partner?and How does this relate to Rodrik's point abou the poor countries' core problem? 


It turns out the US has its own history of trade manipulation. Cartoonist E.W. Clay published the below cartoon in 1831 to lampoon the "American System" of Protection as a "Monkey System" where "Every one for himself at the expense of his neighbor!" 

File:Henry Clay - Project Gutenberg eText 16960.png 

(Source)


 The “American System,” was the first US government-sponsored attempt to invigorate
the national economy through trade manipulation.  It implemented Alexander Hamilton’s ideas, as outlined in his 1792 “Report on Manufacturers.” At the time he  proposed a protective tariff of 20-25 percent on imported goods – such as woolens, cottons, leather, fur,
hats, paper, sugar and candy, to protect the nation’s fledgling
industries from foreign competition.  Congress finally passed the  tariff in 1816. 

Industrial Policy Revival

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Dani Rodrik has a nice summary of the recent revival of Industrial Policy (aka Infant Industry Protection in Chapter 7) across industrial and developed nations. Much of Paul Krugman's work on "Strategic Trade" for his Nobel Prize emphasizes the role of industrial policy. Economists have never really warmed up to the term and its implications, since everyone agrees that its near impossible to pick winners. Now Rodrik has a new mantra: "the standard rap against industrial policy is that governments cannot pick winners. Of course they can’t, but that is largely irrelevant. What determines success in industrial policy is not the ability to pick winners, but the capacity to let the losers go – a much less demanding requirement." 

Sweet Deal

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Sugar is cheaper in Canada than the US – but Canada has almost no sugar growers. Which trade theory that focus on factor endowments or technology possibly explain that phenomenon? Easy: add tariffs and quotas, especially when enriched with the political economy of protection (Chapter 7).   The Wall Street Journal details that "the gap between what Americans and the rest of the world pay for sugar has reached its widest level in at least a decade, breathing new life into the battle over import quotas that prop up the price of the sweet stuff in the U.S."
 
The history of sugar quotas since 1816 (to subsidize plantations in the newly acquired Louisiana territory) is detailed in "The Great Sugar Shaft." Curiously, its
another cautionary tale of trade policy hysteresis.  
 
[SUGAR_p1]
Source: WSJ
 
Here are some questions from the WSJ-in-Education program
1. Suppose the world market for sugar is perfectly competitive, and
that the U.S. is insignificant in the world market for sugar. Also suppose that the
U.S. sugar market is perfectly competitive. What is the effect of the introduction
of a U.S. sugar quota on the price of sugar in the U.S. market?
2. What is the effect of a sugar quota on U.S. consumer surplus? Why do
U.S. sugar consumers oppose U.S. sugar quotas?
3. What is the effect of a quota on U.S. producer surplus? Why do U.S.
sugar producers lobby for U.S. sugar quotas?
4. Suppose sugar consumption is a cause of the current U.S. obesity
epidemic, and that obesity is a leading cause of type 2 diabetes. Does sugar U.S.
consumption have a negative externality? If so, is it possible that a U.S. sugar
quota improves economic welfare? Related article: Premier Wen Jiabao had sharp words
for Washington, ceding little ground on China's currency policy and suggesting that
U.S. efforts to boost its exports by weakening the dollar amounted to "a kind of
trade protectionism."
 

Global Trade Alert

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Global Trade Alert doesn't actually cover global trade but global trade restrictions. Its an incredibly informative database

on anything and everything that could impede trade.

Its most recent report documents that the global recession not only decreased demand for imports but also increased the supply of trade restrictions. "Since the first G20 crisis-related summit in November 2008, the governments of world have together implemented 297 beggar-thy-neighbour policy measures; that is, more than one for every working day of the year. Add another 56 implemented measures that are likely to have harmed some foreign commercial interests, the total reaches 353." 

and

"During the past three months the number of state measures announced which–if implemented would likely harm foreign commercial interests–has expanded from 134 to 188. The protectionism in the pipeline keeps growing–there is no respite here. This protectionist overhang could limit the contribution of exports to economic recovery. "

 

 

Protectionism

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The longer the global downturn lasts, the more tempting it becomes for governments to use protectionism to expenditure switch their way out of the crisis (See Chapter 15 and .

Global Trade Alert is an organization that expected exactly this trend and started to keep track of protectionist measures as the crisis unfolded. By now it has generated a rich database.

The database has become popular for news organizations to keep track of the sheer volume of tariffs and retaliations. Simon Evenett uses the database to document the "assault on world trade" ranking countries cleverly by  

– number of measures imposed (#1 Russia, 20 measures)

– number of product categories affected (#1 China, 329 products)

– percent of sectors affected (#1 Algeria, 68% of all sectors protected)

– number of trading partners affected (#1 China, 163 countries)

Test drive the web site and the database, pick your favorite country and  find out which measures were implemented, and which trading partner was affected. Can you surmise why particular countries choose protect particular industries or impose tariffs on particular trading partners?