Sunday, May 22, 2005

China and the Sugar Industry Tax Consumers


China to Raise Tariffs On Clothing Exports, from the Washington Post:

The Chinese action would raise export duties on 74 categories of Chinese clothing from token amounts announced late last year to a range of 12 to 48 cents per garment, starting June 1.

If the Chinese government must reduce the amount of the world textile trade that their country is taking, or face retaliation from other countries, this is a very smart move. Essentially China gets to tax the United States, Europe, etc. and be thanked for doing so by the governments of those countries. Such is the odd nature of international trade these days.

The Chinese government is going to tax textiles being exported by China. Therefore when an American picks up a shirt at the mall it will include a new tax to the Chinese government and this is seen as a good thing by the American government. An alternative would be for the American government to tax imports. Then the tax paid by the American consumer would go to the United States government instead. It seems odd that the American government thinks it is better to pay a tax to the Chinese government than to the American government but that seems to be what their policy and statements support.

Another alternative (to regulate trade) is to use quotas (or tariffs so large they are effectively quotas - for example a 10 cent tariff [import tax] on plain t-shirts would still allow foreign competition to compete in the marketplace [even with the extra tax], however, if the tax were $10 a shirt it would effectively be impossible to compete). Quotas benefit those who are protected from foreign competition (the companies themselves, rather than either government, get to pocket the "protection tax"). The American sugar industry support system is a very good example of this. CAFTA (the Central American Free Trade Agreement) is in political danger because those businesses currently pocketing huge amounts in "protection taxes" on American consumers are fearful their special deals under current laws will be weakened.
International trade is a very complex topic. The arguments for how to make trade "fair" not just "free" are worthwhile. I believe it is healthy to debate the topic. Free market capitalism includes the tenet that free trade benefits the economies of trading partners (due to comparative advantage) also requires that the government regulate the free hand of the market when needed. And international trade includes instances where regulation is needed.

The question of what would be a "fair" international trade agreement for textiles is much more complex than understanding the effect of China's announced move to tax exports. That move is pretty obviously a win for the Chinese government: they get to effectively tax citizens of other countries. Just as companies in the United States are the beneficiaries of the current law that lets them collect the benefits of the "protection tax" (on sugar) from the American consumer (and those beneficiaries remember to pass on a share of the benefits to the politicians that provide them the bounty).

We need to increase the economic literacy of the public so they can effectively participate in the debate over international trade. This debate is going to remain an important topic for decades. It is hard to believe more than a few thousand people in the United States really want to have hundreds of millions of people pay excessive sugar prices (over twice what the rest of the world pays) to benefit a very few. Why politicians support those who give them large amounts of money is not hard to understand. Even those politicians who tend to support free trade seem to find excuses to oppose free trade for those who give them money.

No comments: