Jelly Roll Capital Equity Research

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A Word on Chinese Tariffs and Free Trade

Today, the Bush administration announced that it will place a 10.9-20.4% tariff on imports of paper imports from China. The tariff is meant to offset various subsidies given by the Chinese government to its paper industry, which American paper producers claim is the reason it cannot compete on a cost basis with foreign goods.

Although “saving domestic jobs” is a worthy goal, and the tariff will certainly protect the American paper-making industry, is it really beneficial? In short, no. Many more people consume paper than produce it, and that consumption has suddenly become 10-20% more expensive. These sort of subsidies often go unnoticed because there is no specific payment line on the bill for them - unlike sales tax, for example - but they are nonetheless forms of taxation and have a very real cost. Now, there is nothing wrong with taxing people to provide a public good; we should be thankful for things like the military and public roads that are supported by tax dollars. But do we really need to insulate the paper industry from foreign competition and allow for artificially higher prices? This obviously depends on whether or not you are employed or heavily lobbied by the paper industry, but I believe the general answer is that no, Americans shouldn’t have to support a comparatively inefficient producer.

The real purpose of this convenient example is to address one of the most important economic questions of our time. Everyone knows about the looming obligations of socialist spending programs like Social Security and Medicare/Medicaid, but fewer are concerned about the costs of “unfree” trade. No nation has become prosperous without trading with other nations, and that is why the regression in trade policies - of which the China paper tariff is only one example - worries me. Free trade does accrue some benefits, but by and large to keep the benefits of free trade, a nation must continue to trade freely. While China certainly isn’t the exemplar of free trade policies, taking retaliatory or preemptive protectionist measures isn’t going to make the situation better, nor will it promote the general interest.

Its far too early for me to start criticizing the various stupid proposals the 2008 presidential candidates are sure to make, but I guarantee someone - probably Hillary Clinton - will promote some blatantly anti-free market idea. Seductive arguments might be made about how we can economically have our cake and eat it too, but just remember that economically free nations are prosperous nations. You can’t legislate prosperity nor equality. Free trade might not be perfect for everyone, but it is definitely the best choice a nation can make for the health of their economy. I am no fan of Larry Kudlow, but if our government begins taking an increasingly anti-free trade stance, I guarantee that the economy and markets will struggle.