The Safeguard clause–Article XIX of the GATT–allows any member country such as the United States to impose immediate tariffs or import quotas on a good or service, even at extremely high rates, without having to demonstrate that a foreign country or business is engaged in any sort of anti-trade or anti-business practices such as dumping. The Safeguard clause is often referred to as the Escape Clause because it allows countries to escape from having to prove that they were harmed by someone other than themselves.
The only two proofs required by the Safeguard clause are that any one company can demonstrate that it has experienced harm, serious injury, or threat of serious injury, and that the country’s imports of goods generally related to that company’s production increased in the preceding year.
This is from Lauren Landsburg, “Taken to the Cleaners,” Featured Article, Econlib, March 5, 2018.
An economist friend asked on Facebook over the weekend whether President Trump had the authority to take his actions on tariffs without Congressional action. I answered that he did and that when Lauren’s piece came out he would see why.
This article does two main things: (1) lays out the dismal economic effects of tariffs and (2) explains the law under which those tariffs can be imposed. It’s a nice treatment even for those who understand the economics of tariffs because we don’t usually see that degree of detailed institutional understanding.
An excerpt on the economics:
Economists are skeptical of dumping arguments on a second ground as well. Why would it be so bad for American citizens to be able to buy goods cheaply? If a foreign government wants to tax its own citizens to subsidize U.S. consumers, who are we to look that gift horse in the mouth? Every single person in the United States is a consumer. We all eat, we all buy clothes, we all wash our laundry and dishes and faces, we all breathe, we all live in an apartment or house, we all try to stay warm and safe, we all listen to music or read or do other entertainment or enrichments when we can, we all try to thrive as well as survive. We also all use rubber bands and aluminum foil. We are all consumers first. If some foreign government wants to give us a boon, which might even keep us from having to use our own taxpayer money to help our own poorest citizens buy inexpensive goods or have more choices, we ought to say, “Yes, thank you!”
The whole piece is well worth reading.
READER COMMENTS
Mike W
Mar 6 2018 at 11:02am
President Bush imposed safeguard tariffs on steel in 2002. Steel exporting countries appealed to the WTO and, because the U.S. did not provide support for their action, it ruled against the U.S. The tariffs were repealed in 2003.
Mike W
Mar 6 2018 at 11:11am
I didn’t read far enough into the Landsburg article, he mentions Bush’s safeguard tariff.
But, what about the argument that a tariff is justified in order to maintain a strategic steel making capacity?
According to the OECD, between 2000 and 2016 China’s steel production capacity increased from 149 million metric tons (mmt) to 1,164mmt; India’s capacity increased from 34mmt to 126mmt; Russia from 66mmt to 92mmt. The U.S. capacity went from 116mmt to 113mmt.
Is it potentially detrimental to U.S. interests to have the world price for the commodity steel set by rival states?
Philo
Mar 6 2018 at 11:18am
The consumer’s experience with “dumping” is positive. When I go to the supermarket to buy apples, expecting to pay, say, $2/pound, I sometimes find that apples are on sale for $1/pound. For a time the supermarket is using apples as a “loss leader”; they are “dumping” apples on the hapless consumer. But consumers don’t usually object!
Perhaps the supermarket is trying to gain an unfair advantage over other supermarkets. But if dumping (= selling at a loss) is effective, other supermarkets can use it, too. And to the U.S. steel company executives who complain about, say, Chinese dumping of steel we can say: if dumping works, why don’t you do it, too?
Thaomas
Mar 6 2018 at 11:25am
We had a choice in November 2016 about who should be President. The majority made the better decision and we are stuck with the result.
Jon Murphy
Mar 6 2018 at 12:39pm
@Mike W
But, what about the argument that a tariff is justified in order to maintain a strategic steel making capacity?
Personally, I find the national defense argument very weak for several reasons:
1) Currently, only 3% of US steel consumption goes toward national defense. That means the US steel industry could shrink by 97% and still have the capacity to supply defense needs
2) China accounts for something like 3% of US steel imports. The vast majority come from allies like Canada, Korea, Japan, etc. If the US were somehow blockaded during a war (highly improbable), we could still get steel from friendly sources in our own continent.
3) What is the fear that China controls prices? The concern is they would somehow raise prices high, to monopoly levels, and keep prices there. But this runs afoul of the 2nd Law of Demand: “[T]he longer the time allowed to adjust amount demand in response to a price change, the greater is the change in amount demanded, that is, the greater the elasticity…For example, if the price of water were doubled, consumption would immediately decrease some–but would decrease by a great deal more within a few months, after people had more economically made adjustment to their water-using equipment[.]” Source (page 28). In other words, people initially make little adjustments to a rise in prices but the longer prices stay high, the bigger their adjustments become. To stick with the water example, if the price of water spikes quickly, people may water their lawn less or wash their car less, but that’s about it. If the price of water stays high, people may rip out their lawns and go for rock gardens (eg, Arizona), may shower together to save water, may move to disposable plates rather than washable dishware, etc.
To bring this back to China, if China were to gain a monopoly power and raise prices, even if they were to maintain their monopoly power with the mere threat of lower prices, it is unlikely they would succeed. As long as the price of steel remains high, people will seek/develop alternatives. Maybe someone develops a super-lightweight but super-strong material that renders steel obsolete (like Kevlar for ships). It’s impossible to know what path things would take. What we do know is the Law of Demand says that people will adjust, and thus it is highly improbable anyone who gains monopoly power through predatory pricing will be able to maintain monopoly profits.
4) One final point: It seems to me if the Chinese were dumping steel and the fear was the US would not be able to defend itself should war arise, the logical thing for the government would be not to encourage exports (since steel is a scarce material and sending it abroad means less to use here), but rather to encourage imports and stockpile the cheap steel. Buy up the Chinese steel at below-market prices. This will mean less steel for China to use AND will be costing them money, diverting funds away from their military while also proving the US with cheap war materials. It’s like the Lend-Lease program except without the obligation to pay it back!
Mark
Mar 6 2018 at 12:40pm
Mike W-
It’s not set by rival states but by the party who ultimately pays for the rival state’s (or even his own state’s) goods/services: the consumer. So very much in that sense, they are anything but “rival states”.
Mike W
Mar 6 2018 at 1:49pm
Here’s the administration’s rationale for the tariffs:
“If China has merely expressed concern over Trump’s plans, it’s because China is not really the target of the planned tariffs. China’s massive state-owned steel and aluminum firms may ultimately lie behind the world’s glutted markets, but Chinese products account for only a fraction of U.S. imports (2.2 percent for steel and 10.6 percent for aluminum). The real problem is that other countries—including allies like Canada and the European Union—have responded to years of Chinese dumping by subsidizing their own industries and imposing broad tariffs on Chinese steel. American antidumping measures have traditionally been more narrowly focused. In a sense, Trump is only catching up with what the rest of the world is doing already.”
Links to the Commerce Department’s reports supporting the tariffs and the Defense Department’s memo endorsing them are contained within the article.
http://nationalinterest.org/feature/the-world-cries-wolf-us-tariffs-24719
Jon Murphy
Mar 6 2018 at 3:04pm
@Mike W
If that’s the Administration’s rationale for the tariffs, then it is factually incorrect. If this was merely action against China, then we could say “Trump is only catching up with what the rest of the world is doing already.” But these are tariffs against all imports, including against our allies. This is a massive step beyond what the world was doing. The Anti-dumping tariffs were more in line.
By the way, I did read the DOC and DOD reports. They’re partly where my response comes from.
Hazel Meade
Mar 6 2018 at 10:21pm
I’m tempted to write an article called “The left wing case for free trade”. The reason is that, first of all right now I sense a certain receptiveness to the ideas behind free trade on the left, and secondly, there is at least one argument that could be made that would fit nicely with the left’s general view of how the economy works. Leftists usually argue that when profits increase the benefits are not passed onto workers, but are pocketed by corporations and their shareholders. Given that, what would you expect to happen when tariffs are imposed? Suddenly steel companies and washing machine manufacturers can charge higher prices for goods. Why would a leftist think those higher prices would be passed onto workers in the form of higher wages and benefits? They wouldn’t. If you look at this situation from a left leaning perspective, the steel tariffs do nothing but line the pockets of the shareholders and executives of steel companies.
Now, in reality some of those gains may get passed on to workers, eventually – profits go up, more investors invest in expanding domestic steel making capacity, demand for workers rises, wages follow. However, the labor market is much larger than the market for steel, so there will be a very diluted effect on wages. And then we must account for the effect on prices of goods produced using steel – rising prices for consumer goods will reduce workers spending power, and thus their real wages.
(In fact, stepping out of the pretend-left-wing-mindset, we know that the gains will cancel themselves out and more, because we know that it will have a net negative effect on the national economy, because we won’t be able to benefit from comparative advantage.)
Thus from a left-leaning perspective, a leftist *should* favor freer international trade, because the increase in competition squeezes out profits and causes real wages to rise by reducing the prices that workers pay for consumer goods.
Michael Byrnes
Mar 7 2018 at 7:11am
@ Hazel Meade
Interesting comment! I’m one of those left wingers who is pro free trade.
There’s an aspect of the redistribution arguments of my fellow left wingers that has always bothered me – the idea that wealth is a fixed pie and that for some to become better off, others must suffer. (I am a left winger and thus not opposed to redistribution, but even so I think “fixed pie” is a myopic and negative view that may perhaps become a self fulfilling one.)
Those on the right, on the other hand, have obviously advocated the “grow the pie” view when it comes to issues of taxation and redistribution.
But shift the issue to immigration and trade, and much of today’s right (along with what seems like a substantial but declining share of the left) adopts the fixed pie view. The ultimate rationale for tariffs and strict limits on immigration is the same one that the left uses to advocate for higher taxes, more redistribution – there’s a limited amount of wealth and within that limit we need to maximize our share.
Much like the aphorism that there are no atheists in foxholes, there are no (or few) believers in economic growth in foxholes, either.
Mike W
Mar 7 2018 at 8:50am
@ Hazel Meade,
Suddenly steel companies and washing machine manufacturers can charge higher prices for goods.
Playing the devil’s advocate on steel (and I think the argument the administration is making for the metals tariffs), the tariffs merely level the playing field between domestic steel producers and foreign imports at *unfair* prices. That is, domestic producers charge the same prices but foreign producers must raise their prices to cover the tariff.
Why are foreign producers that export to the U.S. charging lower prices than U.S. producers? Their governments are protecting them in response to Chinese low prices in the world market.
Why are the Chinese able to provide product at such a significantly lower cost? Because:
– The state provides capital to Chinese producers and requires only a return of capital but not a return on that capital..i.e., they are pricing at a zero cost of capital;
– Chinese labor costs are significantly lower than developed countries because the cost of living is significantly lower…i.e., China’s nominal GDP in about $12 trillion but its GDP on a PPP basis is about twice that,); and,
– Chinese shipping costs are lower because the state also supports the shipping industry.
In order to maintain long-term viability, the U.S. steel industry requires a minimum capacity rate of 80%. It is currently 73%. Without protective tariffs the U.S. steel industry could be significantly diminished in, say, a decade.
It is not in the strategic interests of the U.S…or the other free-market countries…for the Chinese to dominate world steel production.
Hazel Meade
Mar 7 2018 at 11:41am
@Michael,
Thanks that brings to mind another point. From a distributive standpoint, the fact that the gains from trade are widely distributed across the population ought to be a feature that the left can get behind. The left should be in favor of policies that produce distributed benefits, even if they have concentrated costs in one industry, because distributed benefits are more equitable. If you’re interested in egalitarian distribution of goods, falling consumer prices does that, while protecting jobs in specific industries is a lot more questionable.
David Seltzer
Mar 7 2018 at 12:01pm
I wonder if the tariff threat is aimed at China’s theft of intellectual property. I mean, if my car or dishwasher costs less, I will send a thank you note to the taxpayers in China, along with a box of chocolates.
Mark Z
Mar 7 2018 at 2:30pm
Hazel,
“I’m tempted to write an article called “The left wing case for free trade”. The reason is that, first of all right now I sense a certain receptiveness to the ideas behind free trade on the left, and secondly, there is at least one argument that could be made that would fit nicely with the left’s general view of how the economy works. Leftists usually argue that when profits increase the benefits are not passed onto workers, but are pocketed by corporations and their shareholders.”
I don’t think most leftists’ view of how the economy works is so amenable to free trade.
Most leftists don’t believe competition is effective at reducing at reducing prices (or don’t seem to care). If they held the view you’re attributing to them (competition driving down prices and profit margins, and this being good), they’d love Walmart (competitive market, low prices, low profit margin) instead of hating it, and they’d oppose raising the minimum wage.
If anything, I think there’s a tension between the left’s tendency to favor immigration and its economic worldview: hence why people on the left routinely claim that immigrants “only do the jobs Americans won’t do.” In fact, their defense of immigration seems to positively depend on their disbelief in the ability of supply changes to decrease prices. The political motivations on that front seem entirely orthogonal (immigrants, especially minority immigrants, being regarded as an oppressed class).
I do think there’s nothing theoretically inconsistent about favoring, say, high taxes and a large welfare state while also supporting free markets, as typified by 1990s Paul Krugman (“let the market rip” and tax and redistribute to address what one sees as morally inadequate outcomes). But that’s not the way things are trending (perhaps typified by Krugman’s own warming to regulations and even trade barriers in recent years). It’s telling that it’s congressional *Republicans* – not congressional Democrats – that are giving Trump blowback in response to his tariffs.
Jon Murphy
Mar 7 2018 at 3:13pm
@ Mike W
Chinese labor costs are significantly lower than developed countries because the cost of living is significantly lower
This is incorrect. Chinese wages are lower because their productivity is lower. Wages are a function of productivity. In technical terms, wages are approximately equal to the marginal product of labor (how much value a laborer adds to production).
Chinese workers are considerably less productive than most developed countries. China GDP per capita (a rough measure of productivity per worker) is $8,123. The OECD average is about 4 times higher at $37,311. Consequently, Chinese wages are lower.
TMC
Mar 8 2018 at 9:04am
I’m very sympathetic to free trade, but there is a case for tariffs if dumping is suspected. Consider the reason a country is willing to sell you steel for less than what it costs to make. It is to undermine the competition and put it out of business. Once this happens, the price of steel will rise to more than make up for the previous subsidies. Why else would they do it? I don’t know if that’s the case here, and it may not be. Trump is known to use both the carrot and the stick in negotiations. As he alluded to, this may be a stick to force a deal on NAFTA, or to further some other foreign policy agenda such as forcing China to make NK behave.
@Philo “And to the U.S. steel company executives who complain about, say, Chinese dumping of steel we can say: if dumping works, why don’t you do it, too?” It is not the steel companies fundings this, it is the offending countries. If the companies were Chinese, it’s Chinese government’s resources our steel companies are trying to defend themselves against.
@Thaomas Agreed, thank God. It could have been worse.
Comments are closed.