Managing trade

December 4, 2011

Virtually all economists believe trade is win-win:  free (or free-er) trade makes all countries better off.  But it’s not easy to convince others, many of whom see conspiracy and doom behind getting cheap goods from China or cheap services from India.  Surely that’s bad for us, they might say.

The correct answer is no, it’s not bad for us, but it’s a hard sell. Former colleague Bernie Yeung suggested another approach:  Even if you don’t buy free trade, when you see what “managed trade” looks like in the real world, with international firms manipulating trade policy shamelessly, you may be more sympathetic.  We’ll see.

Antidumping is a kind of trade policy that is initiated by a domestic firm who feels that foreign firms have been pricing unfairly;  Unfairly is usually interpreted as being “lower than we think they should be pricing.”  (This is a slightly more narrow version of the Dave Backus interpretation of unfair: “not what I want.” )  If the domestic firm can prove to the US regulators that foreign firms are behaving “unfairly,” the foreign firms face large tariffs, making their products less competitive with domestic alternatives.

Several of our faculty have been discussing anti-dumping in our Global Economy sections for MBA students this fall.  The discussion has centered around the dumping cases between the US and China on solar panels, with both sides claiming “unfair” practices by the other.   The short version:  we claim dumping, lawyers make money, panels are still made in China, they threaten dumping, we pay more for solar panels and gain a small number of menial assembly jobs.

The longer version.  A series of NYT pieces (here, here, and here) cover the saga.  The most recent reports show that the Chinese are setting up assembly plants in other countries, including the US, to avoid higher tariffs on imports from China.  China is also contemplating a dumping case of its own, targeting US made polysilicon, an input into the production of solar panels.  An antidumping duty on polysilicon would not only do little to save US solar panel jobs, it will likely threaten US jobs producing polysilicon.  Since polysilicon is extremely energy intensive, and the US can produce cheaper energy than China (hydro v coal), polysilicon is something the US should logically produce (we would say it’s our “comparative advantage”), and ship some of it to China for use in solar panels.  (Which, by the way, is what the US does now, while trade barriers are low.

The net result of the dumping cases?  We gain a few low-skilled assembly jobs in the US, lose jobs producing polysilicon, pay more for solar panels, and increase pollution (via coal-fired power plants in China).

How good does that sound?

Posted by Dave Backus for Kim Ruhl

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