PLAYING THE GAME
There are several proposals that seems to make sense when one observes it, but they really do not work. One of these proposals is Mercantilism.
Mercantilism is a set of strategies used by governments to curb the importation of goods and services while maximizing the exportation of goods and services.
It is like a private company trying to minimize expenses while maximizing sales, thus creating a surplus that will make it prosperous.
The problem is that Mercantilism – we use it in capital in order to name the strategy – works taking advantage of first mover advantage. The next round of negotiations, Mercantilism will face the reality of counter measures from the commercial partners.
Why Mercantilism is so prevalent in the minds of politicians?
The answer is Mercantilism favor some economic agents that profit from the Mercantilist measures and these agents sponsors the politicians campaigns or even, in case of dictatorships, the state is the Mercantilist agent.
There are countries and economic blocs that employ Mercantilist tactics to protect their exports and block importation.
Europe has hundreds of thousands of Mercantilists tactics in place to block importation. Some are reasonable and based on technical reasons, like sanitary measures blocking importation of livestock from areas of foot and mouth disease.
Some of the European regulations are ill disguised market protection measures, like demanding Europeand approval for the car. Seems technical? Not really. The demands are in place and are increased in order to make it less attractive to American, Japanese, South Korean and Chinese manufacturers to sell cars to Europe and makes the vehicles more expensive, making them less attractive to the European consumers.
The regulations work both ways. Americans create regulations to impede the importation of European cars by demanding some other characteristics that increases the cost for both exporter from Europe and the consumer in America.
WTO – World Trade Organization
The WTO was created to arbiter the dispute between members, enforcing regulations. The WTO is like the UN, a forum where disputes can be solved and trade agreements can be observed and enforced.
As any collegiate organization, the WTO is plagued by complacency with some countries, undermining the authority of the organization.
It is not just that the WTO decides along the lines of rich countries or the contrary, decides against rich countries. The main problem of the WTO decisions is the casuistic approach to the disputes, trying to dispense unequal treatment to unequal trading partners thus making it an even field for trade.
This seems to be a sensible and important objective for fair trade, but the details of how this is actually done hurts everyone more than just leaving the disputes to be settled bi-laterally.
One of the ridiculous roles WTO has played is against OPEC or more clearly, the amnesty WTO dispenses to OPEC when they stablish quotas for production of oil and actually manipulate the markets by cutting oil production in order to increase oil prices and create hardship to millions of families that depend on oil for heating and transportation.
The WTO GATT Article XI explicits declares “No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.”
Cartels are forbidden in the majority of the countries in the world and yet OPEC flaunts the rules all around without repercussion.
Why should any country other than members of OPEC and WTO respect the regulations? Because some countries are allowed to flaunt the rules and others will be punished by the same arbiters.
This opens the door for corruption and favoritism, with so many failures that most participants, rich and poor believe that the WTO is flawed and favors the others.
Some of the WTO rules allow for countries to enact barriers to force price negotiations, although this is morally wrong, some of the powerful traders use it to force the hand of exporters. One of the simplest form is to the importing country to flag one producing area under suspicion of unsanitary practices. This can suspend all importation during several weeks, forcing the exporting country to store large amounts of production at their cost, just for the importing country to accept the products at a lower cost. The exporting country takes the deal, which is better than pay for storage or losing the product altogether.
TARIFF WARS
Most economists claim that lowering importation tariffs is good for the country, even if the trading partners keep their own tariffs high or even if they impose an exportation tariff.
The idea, which is correct, is that if the imported goods have better quality and price than the goods produced locally, it is advantageous to the importing country to keep getting these at lower prices than forcing the population to buy at higher prices.
This is true in a healthy world economy, even if there are some uncooperative countries that fail to lower tariffs.
So, why most countries actually want to introduce import tariffs?
Because the analysis of what is actually beneficial to the economy is not uniformly distributed through the multiple agents in the economy. Some economic agents are the poor consumers of food staples and some of the agents are rich wholesale importers of cars. The equilibrium of these demands are produced by the politicians who represent these groups, favoring their base.
Tariffs are usually collected by the government, thus it is a source of income for the government and again, a door to be opened by unscrupulous agents in the government, that may or may not apply the tariffs, using some tricks as reclassification of goods or even obtaining a special permit.
A form to reclassify a good imported maybe evaluating the product. Say it is a biscuit and it may be exempt of tariffs. If it is a cake, it is surcharged with 25% tariff. The difference? The packaging may declare it as a biscuit and not a a cake.
A another scheme may classify dedicated processors as an industrial good, exempt of tariffs and general purpose computers as consumer goods, thus subject to tariffs. One can classify pickup trucks as utilitarian vehicles exempt of tariffs or like SUVs with a big trunk, because most pickup trucks are never used as trucks, but as SUVs.
DUMPING
A reason for imposing tariffs is the practice of reducing the export prices at or below manufacturing costs with the intent of driving the producers away from the market and thus increasing the monopolistic power in the future.
This can happen in different ways and it is hard to know weather this is really dumping or just advantageous conditions. Sometimes the fertility of the land and abundance of sunlight and water can create two crops per year, instead of one. This could drive the costs down and competitors could claim it is unfair. This maybe unfair, but it is completely honest, just like someone working two shifts may draw higher productivity.
Labor costs can differ all around. There are places where food is much cheaper and thus labor is very cheap. This puts a lot of pressure on workers in developed countries, for their wages are higher and may drive industries away from developed countries to emerging ones, taking the industrial jobs with them.
How the cheap labor can be equalized in order to make it a level playing field?
It will be equalized in the future, but can not be made equal by fiat, because the cheap labor is likely the key reason why some countries are more competitive in the manufacturing arena of competition. In time, countries get more developed and the working population demands more for their labor and this resource cost advantage diminishes.
The main problem is time. It takes time for a broken country like Japan and Germany or even the European countries to recover from war – WW II – and labor costs to rise. It took time for developing countries like Brazil, Colombia and Peru to have their labor costs risen to the current levels. Meanwhile, industries may transfer from where the cost of labor is higher to where the cost of labor is cheaper.
The other problem is government interference. The possibility of having government keeping the wages artificially low in some countries, with prohibition of permanent move from the fields to the cities. This creates a new serfdom arrangement, where the companies import the serfs from the fields, have them working at base level wages, keep them housed in the company owned dormitories and when the demand for products fall, they are expelled to the fields again, because they lack the paperwork to remain in the city.
Government interference also play a role in the worker’s rights. Workers in most of the world are protected by laws – each law of their own jurisdiction – that sets minimum standards of payment, sometimes the government allows for inhumane working conditions, as in labor camps where workers have no salaries at all. Some jurisdictions have used these camps to have 10% of the whole population as forced labor.
POPULIST POLICIES
Although it is true that in time all labor costs will converge in all countries to values that are equivalent although across different purchase powers, it is of real little relevance for workers who are unemployed or that are dealing with a weak labor market.
Government do use tariffs to increase the appeal of local manufacturing, transferring wealth from those who consume these goods under tariffs to those who produce these goods. This can be made even worse if the government ends up transferring wealth from the poor people buying these goods to the rich owners of factories that produces these goods, with little or no advantage for the workers who produce these goods.
It is always a bad decision to impose tariffs, because in the majority of the cases, the subsidies end favoring the wealthy entrepreneurs.
These measures can be perceived by the population as nationalistic and some politicians will pander this to the populace, who is ignorant that the wealthy is going to get most of the benefits of a tariff.
FAIR TRADE
This is a somehow proper justification for tariffs.
Countries do have barriers for importation of goods based on nothing more than market protection and favoring their own industries. This is even worse in countries with prevalence of SOEs – State Owned Enterprises.
One will be surprised to learn how much of Volkswagen is owned by the state of Lower Saxony. VW used to be owned by the federal government and likes to be considered “listed”, but in reality 20% of the votes is owned by the State of Lower Saxony, with some other retirement funds owning some sizeable chunks of it. In China, VW is in a joint venture with the Chinese Communist Party, with little say over management.
Another surprise is the 13% stake of the French government in Peugeot. The French government owns 15% of Renault and the Chinese Communist party owns another 15%. Peugeot owns Citroen and thus, the French government keeps its share of it.
This is one reason why there is little importation of cars from the outside of the EU into France. The government is a significant owner of the auto industry and creates regulations to bar entry of competitors. These barriers include the demand for unique certifications only obtainable in Europe making it a less attractive market.
The same happens in China, who behaves like the rules of the WTO are valid outbound but are void inbound. China creates barriers to safeguard national security, public interest and ethics, meaning that one will have to produce proof of being innocuous to their interests before being able to export to China This is a sham, for the record so far is that China imports only the goods they are interested and if they have the chance, they break the Intelectual Property of the good and starts exporting them.
The last round of punitive tariffs were on Chinese Electric cars, that are flooding the markets all over the world. These vehicles ride on the Green Wave the leftists politicians pushed on the countries all around the world and favors Chinese production, due to the majority of the production of the automobile batteries are supplied in China and a total of 60% of the global production of electric vehicles are based in China.
The Chinese Communist Party government is pushing for this effort to sell cars below cost as a national strategy. Riding on the Green Wave and dominate the international market with low price cars that will drive out the local production and stablish themselves as the sole producer of the transportation of the future.
As per now, the Americans and Europeans have slapped a 100% tariff on Chinese electric vehicles, making them less attractive. Moreover, China has bet a lot of their efforts in exporting these cars before the tariffs took place, so there are plenty of Chines electric vehicles stored in harbors, pending sales.
Local consumers of electric vehicles are being punished, but these are the wealthiest people who can afford to buy a brand new car and for once the government is taking money from the wealthier group and not from the poorest.
CONCLUSION
There is more to the tariffs than one can derive from the headlines on the news. One must get interested in the macro and micro economic analysis of what is being played and at least have an informed opinion.
For some people maybe a surprise that several automakers are owned by the government and thus being used as tools of the governments as well as serving themselves from government. This bastardly interaction makes competition unfair and shows the actual face of a non democratic government.
Tariffs are an instrument to meddle into the market and a blunt one that is hard to manage and get the desired effects. The only time where tariffs work is when an obvious distortion created by some nation to push competition out of the market.
The WTO lack of legitimacy to be the arbiter of the market because it has sabotaged itself permitting China to break its rules as well as the OPEC cartel. With no relevance it is becoming a collection of plush jobs for governments to reward their dearests with high salaries.