Revving the Trade Engines

China announced new tariffs on US-made cars Wednesday—in our view, an incremental step in the wrong direction for all involved parties but not likely terribly impactful.

Rhetoric picked up again in the recent China-US trade spat, with China announcing Wednesday it will levy duties on some US-made cars, specifically those with large engines. As readers may know, the tiff has been continuously on again, off again, but it restarted more recently largely over the solar industry. In the wake of Solyndra’s recent failure, US solar panel manufacturers blamed, in part, overly stiff competition from Chinese producers, who are subsidized by the Chinese government. (No, the irony of a largely US-government-subsidized industry complaining about government subsidies to their overseas competitors isn’t lost on us.) China took offense at the suggestion, and as a result has turned up the volume on some of their own producers’ concerns—most recently, car producers.

Chinese auto manufacturers, particularly sedan and SUV manufacturers, claim US imports “materially threaten” their ability to compete. And so China’s placing a tariff on vehicles with engine capacities above 2.5 liters through the next two years. However, apparently few US companies expect to be significantly impacted by the tariff since they generally produce most of their China-sold products in China. And in terms of magnitude and scope, this is far from a large move.

More important than this story’s specifics is the apparent and concerning belief of some on both sides of the Pacific that tariffs and other anti-competitive measures (including subsidies) hold the key to supporting domestic manufacturing—whatever the industry. Now, if one sees the world market as a game, making one’s home country equivalent to the home team, it’s not hard to understand the gut response many have when proclaiming they’d rather local producers succeed than producers from other “teams.” But that’s not really how free markets work, particularly in a world dominated by mostly free trade. And in the real world, it makes sense countries have a comparative advantage in the production of certain goods—just like some football teams thrive on a run-oriented offense while others focus on the pass. But those different strengths needn’t detract from their overall ability to succeed on the field.

Just so, countries’ varying abilities to produce goods more efficiently than others needn’t detract from their overall success—rather, in a world of low barriers, they can simply trade with one another, thereby benefiting indirectly from everyone’s strengths. Thankfully, the ongoing China-US spat is far from a trade war. But it’s clearly worth watching for potential developments in the wrong (or right) direction.

As various economists have pointed out, China’s one of our best customers when it comes to exports. In fact, since its entry into the WTO, the compound growth rate of US exports to China’s been 18.1%, compared to 6.8% to the rest of the world—making China the third largest market for US goods. Also making the inclination of many—especially politicians—to slap tariffs on Chinese goods for various reasons (an overly competitive solar panel industry, currency manipulation, etc.) somewhat puzzling.

To be sure, China’s something of an odd creature—but that’s not terribly surprising given their command-style economy seeking to compete in a mostly capitalist world. To that point, following their annual economic conference, Chinese leaders announced they’ll likely pursue some course of fiscal and monetary easing in 2012 in an attempt to speed the economy again. Now, the fact the government can seemingly push a couple buttons to speed the economy and push a couple others to slow it down illustrates the oddities of China’s economic structure. But with a mostly authoritarian government, that (far from routinely reliable) ability is seemingly one linchpin helping hold China’s system together and keep its citizens mostly happy with the government.

But odd creature or not, the reality is China’s an increasingly important trade partner for the US. We’d prefer fewer tariffs and less currency manipulation, but such practices aren’t exclusive to China. Small spats like this aside, barriers to trade globally are falling, not increasing, which enhances the efficiency of the global economy. With free trade you don’t actually have to be the best at everything; you just have to be relatively better than some at a couple things. And that should be a comfort, not a source of angst.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.