Saturday, July 31, 2010

China accused of offering foriegn aid to America

One of the hidden benefits of internet communication is that you end up with a written transcript of your conversations. In reference to reports of China subsidizing its paper industry, my friend Chris recently asked me:

"According to Milton Freidman, the Chinese subsidizing paper for us to buy would be a good thing, because they absorb the extra costs and sell it to us cheaper (the same as his Japanese steel analogy). But, this is eliminating jobs here in the US. So, wouldn't you think that ultimately the most important thing is jobs? Apparently Congress things so. Wouldn't banning or placing tariffs on Chinese imports be a good solution to create jobs in the US again?"
Chris is referring to what Friedman said about allegations that Japan was subsidizing its steel industry, and what it would do to the American economy:

As Friedman said, channeling the wisdom of Adam Smith, Americans will simply get cheaper steel. The American steel industry will shrink, and steel workers will get other jobs in America. These jobs will be created because the Japanese will have American dollars to spend and will spend it on other American goods. Other American industries will grow, compensating for the loss of the steel industry. Meanwhile American consumers will benefit because their steel purchases were subsidized by the Japanese taxpayers. Friedman compared this to receiving foreign aid.

Chris was right to compare the two examples. Chinese paper will be no different. If it's true and Americans buy cheaper paper from China, the American paper industry will get smaller while other American companies get bigger as exports increase.

So the actual number of jobs will not change. The tariffs would make imported paper more expensive, so Americans will buy less of it. This means less American dollars abroad, so the increases to exports will not happen. The difference is that we will protect the visible jobs we can name, at the expense of the invisible jobs that will happen, but we can't say where.

A tariff is supposed to be a tax a company pays to import something to America. But in reality, a tariff is a tax consumers must pay for the right to buy things produced in other countries. If there is a $5 tariff for a unit of paper, the paper will cost the American consumer $5 more than it should. The paper company already paid that $5 to the government and will have to charge the customer for it.

Can tariffs create jobs?

The second part of the question is if tariffs should be used to create American jobs. Let me be clear, tariffs absolutely create jobs, just as blinding half the population would create jobs to take care of them, or burning Paris would create construction jobs.

But those are terrible things to do. Creating jobs is not a goal in and of itself. It's the creation of goods and services that make a society wealthy, not keeping people busy.

George Will has a Friedman anecdote that sheds light on this:

"He went to Asia in the 1960s and was proudly taken by the government to see a public works project. They were building a canal. He was struck everyone was digging the canal with shovels. Friedman says, why no heavy earth-moving equipment?

"They said, oh, this is a jobs program. So Friedman says, why don't you give them spoons instead of shovels?"
Who cares how many people are kept busy? It's productivity that matters. As an industry gets more productive, it doesn't create more jobs - it destroys them. As Paul Krugman wrote:

"The kinds of jobs that grow over time are not the things we do well but the things we do badly. The American economy has become supremely efficient at growing food; as a result, we are able to feed ourselves and a good part of the rest of the world, while employing only two percent of the work force on the farm. On the other hand, it takes as many people to serve a meal or man a cash register as it always did; that's why so many of the jobs our economy creates are in the food service and retail trade. Industries that achieve rapid productivity growth tend to lose jobs, not gain them."
Using tariffs to protect American jobs is not a new idea. It's not even a new idea during times of high unemployment. The Smoot-Hawley Tariff of 1930 was the exact same idea. Tariffs were established on some 20,000 imported goods. It did not work and the United States sank deeper into the Great Depression. Imports went down, as did exports.

As I've said before, reject any scheme to improve an economy or increase wealth by being purposely inefficient. Jobs should be created as a side effect of improvements to our society. If you aim to improve the quality of peoples lives by offering new goods and services, the jobs will follow.


  1. There is one think I am curious about. How do you think "good for people" vs. "good for the economy" plays on this subject; do you see it as win-win?

  2. I think it depends on who you are. Interest of customers, suppliers and the government really differs. Since most of us are rational,here are the different perspectives and attitudes following.
    As customers, we want free trade in order to "save money and live better":
    (1)To buy cheaper goods
    (2)To leave the pollution in other countries--in the case of paper industry, deforstation and polluted water,the by-product reduce our quality of life.
    As suppliers, we want profit.So we need the fairplay, instead of beaten by a competitor assisted by his dad. Notice that it was companies like Newpage who urged the government to charge Counter-Subsidy Duties.
    As government,things get complicated. To protect or to leave alone an industry depends on so many things: whether it's infant industry and what kind of strategic trade policy we are using in this stage of our development, what degree of dependence on foreign trade will not menace us,etc.

    As for Friedman's theory, it is based on the hypothesis of perfectly competitive market and constant returns to scale. You may like to see James Brander&Borbara Spencer's model, since they found something new taking market and scale factor into the discussion.

    As for tariffs, there are fewer countries using tariff barrier to protect their domestic industries. Instead,more and more nontariff barriers can be found. how do you think that in this case, the government is charging Counter-Subsidy Duties instead of more intangible barriers such as Import Quotas System or TBT?

  3. This is a sincere question, because I don't know the answer. Does Friedman take TIME into consideration when he discusses job growth from the destruction of "bad jobs" such as the lobster-fishermen from one of your previous posts?

    Or what about the quality of life some jobs that are lost provide, compared to the quality of life from those gained?

    First we talk about the benefits of the job creation from proficiencies gained and jobs lost elsewhere - but how long before those men and women who are laid-off get a new job? Particularly in this economy? Particularly in a capitalist system that demands specialization of skills - limiting the scope of individuals' ability to transfer their labor. If your answer isn't "fast enough" then there are some good arguments to be shared about keeping jobs despite how "bad" or inefficient they are - or finding (perhaps state-run welfare type) ways of caring for people as we transition.

    I work in an industry where people fall through cracks all the time - and it's not as simple as waiting around trying to find a new job. Assets are lost to pay bills. Stomachs go unfed. Both lead to emotional and physical problems that are costly in and of themselves - but also make those workers less competitive in labor markets.

    Then there's the quality of jobs lost I asked about above. Going back to your lobster-fishermen article - my grandfather was a lobsterman. He didn't do it to put food on the table (he was retired), he didn't do it simply because he fit into the mold of the lobster-fisherman and needed a job. He fished because he loved being out on the water. He liked the smell of fish-bate. He loved the boat he built for fishing, the dock he built outside his beach-house, the buoys he painted, the traps he rigged. While I don't lament for the loss of dangerous or tedious jobs - some still provide value that can't be easily measured in terms of dollars. The loss of some jobs aren't simply improvements in efficiency - they're the loss of loved lifestyles.

    I'm all about providing better options for consumers, but when our work constitutes half of our waking lives, don't lobsterman, boat-builders, farmers, etc. have a right to their current jobs or job options? I have hard time picturing many of them being satisfied working retail or waiting tables.

    You say "Creating jobs is not a goal in and of itself. It's the creation of goods and services that make a society wealthy, not keeping people busy." - but what's the point of creating wealth? To generate happiness? But jobs can generate happiness too - and not just because of the income. Human beings are creative, constructive creatures and we are satisfied by serving those yearnings. We're not simply satisfied by trinkets and bright lights.

    And just like having a poor job can fail to make you happy - so can wealth. I thought that was a given. Hasn't everyone seen A Christmas Carol? lol

  4. 'Drew - Yes I do. Good for people, in this case, is cheap paper. You have to keep in perspective that the American paper industry is a fraction of the population, while the entire population benefits from cheap paper.

    leisurelf - I believe you're asking how the American government is getting away with using actual fees (counter-subsidy duties) to enforce protectionism instead of subtle "We had no idea we were restricting trade" tactics like technical barriers to trade or something non-monetary like import quotas.

    Easy. Politicians can ignore the rules of economics as they see fit. That's my whole point - mercantilism and protectionism are popular with the public and federal agencies will tolerate them for political gain.

    Jeremy - Your first point is a fair one - there is a transition period when workers change jobs, and it can involved learning new skills. This is one of the more reasonable places for government intervention. That doesn't mean it's the only solution, but it is entirely reasonable.

    As for your second point, that people get satisfaction from doing some non-productive jobs, so don't they have a right to them - No. No they do not. My followup piece touches on this subject with family farms.

    As someone who grew up with a family farm, I really can't see my grandfather arguing that other people should have to pay just because he wants to be a farmer. No one has a right to an obsolete job. I very much enjoy writing this blog, which is unprofitable, but I can't see why the taxpayers should have to give me a salary so I can do it full time.