Saturday, March 29, 2008
Smoot-Hawley Under The Heading Of Carbon Tariffs
As I write the situation seems to be getting sharply worse. The rice crisis appears to be real. Sitting here trying to recalculate my forecasts for EM growth taking that into account is giving me fits.
I am genuinely concerned that environmental concerns are being used as a proxy for protectionist economic legislation and may have severe consequences. I would like to discuss this article from a Canadian source about carbon taxation:
Imposing carbon tariffs on emerging economies with low manufacturing costs and high greenhouse gas emissions could drive some manufacturers back to Western countries, according to two economists.I am going to break my rule and cite a great deal of this because of the extreme economic threat I perceive:
Jeff Rubin, chief strategist and economist at CIBC World Markets, thinks such tariffs could emerge quickly. Countries in Europe are already becoming publicly intolerant of emissions elsewhere and the next president of the United States is expected to institute a cap on greenhouse gas emissions alongside the trading of carbon credits.
Because of China's focus on cheap but dirty coal to power its fast-growing economy, the country's estimated greenhouse gas emissions in 2007 were higher than those of the United States. Further, China and other less developed countries now emit more greenhouse gases than the U.S. and developed countries.The argument that is being shopped around is basically a protectionist one. Now, in the current economic crisis, which btw is a global crisis of loose lending and over-extension of credit, which led to a nearly global rise in real estate prices, and probably global over-capacity in some industries, to institute a system of carbon taxation will act like Smoot-Hawley did (see Wikipedia article for a start):
Given this increasing imbalance, Mr. Rubin said in his report the "only leverage is through trade access," specifically a "carbon tariff."
Mr. Rubin predicted such a tariff, based on $45 a tonne of carbon dioxide and equivalent - about the current price on the carbon trading market in Europe - would collect $55-billion annually. It equates to a 17-per cent levy on all Chinese imports to the U.S. - almost six times greater than current import tariffs.
At a price of $45 a tonne for carbon, Mr. Rubin projected the U.S. inflation rate would be increased by about 0.6 percentage points from the current core U.S. inflation rate of 2.5 per cent.
The Hawley-Smoot Tariff (or Smoot-Hawley Tariff Act) was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels, and, in the opinion of most economists, worsened the Great Depression. Economists have now generally regarded this Tariff Act (i.e., tax increase on imported goods) as the greatest policy blunder in American economic history, coming as it did after the 1929-30 recession and preventing the economy from a full, natural recovery which had already started by the Spring of 1930. Many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half.Back then, Canada imposed retaliatory tariffs before Smoot-Hawley even passed.
Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and nontariff trade barriers on worldwide trade during the period 1929–1932. He included not only Hawley-Smoot but also the tariff increases in other countries. He concluded that real international trade contracted by about 14% because of declining GNP in each country; by 8% because of increases in tariff rates; by 5% because of deflation-induced tariff increases; and 6% because of the imposition of nontariff barriers.
The Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the U.S.", quadrupling previous tariff rates.
Europe is in an extremely protectionist mood, and I believe one of the reasons for the non-scientifically based focus on carbon is that it serves as a justification for tariffs. If the next president does institute carbon tariffs, the result will have a real impact on world trade.
I believe that many politicians are being deeply dishonest about their "environmental" concerns. I also believe that instituting a carbon tariff will cause Asian growth to slow remarkably and further destabilize the world economy. The rise in food prices is very dangerous because it has an impact on the ability of emerging market countries to support consumption increases necessary to rebalance trade. If you add to the situation by doing something like this, you could recreate the conditions which caused the Great Depression.
WE SHOULD STOP THE RHETORIC AND THINK VERY SERIOUSLY while we still can.
We have no proof at all that CO2 is dramatically affecting global temperatures or will. We have a bunch of models that don't predict previous temperature changes, so how can we believe that they are accurate in future predictions? We have a lot of hysteria on the subject, but it is mostly occurring in the political realm. Follow the money.
Once again you have a finger on the pulse - four words - trade war with China.
If they get pissed off enough to hurt themselves badly, they can probably hurt us worse given their dollar and treasury holdings...
Obviously the carbon tax bit is more broadly based than the US, so you have to look across national lines if you want to blame political parties. There are a lot of them involved in the individual countries. It is interesting how very liberal parties and quite conservative parties in the West seem to be pushing this carbon thing in tandem. I think closet protectionism is the guiding force behind a lot of the political move towards carbon regulation.
I don't agree that every policy decision made has been wrong, nor do I think it's fair to say that the Bush administration isn't Republican.
Aside from the obvious fact that he represented the choice of the party when he was nominated twice, what about all the Republicans in Congress? Are you going to claim that they aren't Republican either? Presidents don't pass laws by fiat. As you point out, Dems contributed to many of the recent policy decisions.
Maybe you mean "conservative" instead of Republican?
In any case, Dems are pushing the carbon taxation thing pretty strongly. I wish there was a party that was truly against it.
I think you are substituting assessment by "desired result" for assessment by "policy plus possibility". The success or failure of any particular government policy must be judged against the underlying background. Your mistake is to assume that any government can somehow escape the accumulated effects of past policies.
We are in a demographic transition of no mean proportions. Blame the Pill if you wish, but the reality is that Europe and Japan really aren't sustaining their native populations by breeding. The US is slightly better, but still needs immigration. All these nations (and China) face increasing problems related to handling retirees.
Regardless of party, the US faces a future with higher taxation, lower growth, higher public debt, and a lower percentage of the population working.
Anyone who believes the fundamental situation can be changed by electing a person of a different party is a dingbat. Any party has to deal with the realities of the present. We are not going to throw the old folks into the streets to starve. We are not going to ban them from the hospitals. We probably will ration government-
paid medical care by age somewhat, but that's about all. Medicare and Medicaid are now so big that they are the CAUSE of escalating private medical costs and lower rates of insurance among the population. Neither program pays the true reimbursement cost for medical care, so the cost is shifted to the non-governmental paid portion of the population.
Among the proposals that I consider rational are the expansion of prescription benefits (limited and targeted towards assets). It is far cheaper to defer many medical problems to later rather than have people moving in and out of hospitals. Many of the medications we have now extend people's active lifespans. Extending the period of pretty good health of our retired population is key to managing the transition.
It is not true that the grandpas and grandmas have no economic function. Many of them are helping with childcare or working. A great many of them do volunteer work. The transition of women into the workforce has left a societal gap which younger retirees often fill.
Many of the people screaming about either party are essentially demanding impossible results from our politicians. They are not gods, they cannot change reality, and the reality is that the US has failed to save for the future needs of the population and now must pay for it.
Every attempt to change that reality is just making things worse. You can't bubble your way out of it, you can't shrink SS benefits to very small levels without taking a severe consumer spending hit, and you can't monetize work that used to be done for free and change the fundamental wealth and savings pattern of the population. You can't import cheap labor without depressing wages for a portion of the population and sharply boosting public spending for that cheap labor.
Politicians of both parties are engaged in a giant shell game.
I believe that Bush has been one of the more responsible politicians of his time. However every time he tried to discuss fundamental social issues, he got lambasted for it. A delusional electorate will get the outcome it deserves rather than the outcome it demands. The pity of it is that any politician who tries to speak honestly on the underlying unaddressed problems gets attacked by other politicians and demagogues.
You can address this from a moral POV - what right do we have to proclaim our unbelievably wonderful and humanitarian principles when we are really looking after our own pocketbook and are playing with policies that appear likely to starve people to death? Or you can address this from a pragmatic POV. Why does anyone in the west believe that China won't look after its own interests if we impose tariffs? And won't following purported environmental policies that amount to a trade war which grievously depresses economic conditions globally lay the foundations for another world war?
But no one should ignore the underlying REALITY in favor of swimming around in a sea of temporarily enjoyable and profitable DELUSION. This is the western tendency that SW was trying to address, because it isn't functional. I believe however that it exists across political lines.
One of my brothers claims that the problem with our politics is an electorate that believes what it wants to believe and will not support politicians who are honest. I tend to think that the average voter will, but that our journalism has gotten so bad that the average voter rarely hears about the fundamentals, and thus is subject to all sorts of political spin.
Note that it is ludicrous to characterize the status quo in international trade as "free trade".
China's exchange rate peg is equivalent to a tariff greater than 60%, and Japan's manipulation of its exchange rate through support of the yen carry trade has had the same effect as a 30% tariff.
"Mises projected that without a market economy there would be no functional price system, which he held essential for achieving rational allocation of capital goods to their most productive uses. Socialism would fail as demand cannot be known without prices, according to Von Mises." Wikipedia
And so too will fail the current mercantilist trade regime in which prices are falsified by exchange rate manipulation.
It continually amazes me that any economist who considers himself/herself a champion of free trade will express anything but outrage with respect to this state of affairs.
The theory of comparative advantage implicitly assumes that the inputs used to produce traded goods are properly valued by the price system.
When prices are falsified, markets cannot optimally allocate. Efficient and competent producers are put out of business by inferior competitors.
If energy-inefficient Chinese manufacturers were not subsidized by the exchange rate peg, a significant fraction of them would not be in business -- or the higher prices of their products would reduce consumption of them both at whom and abroad -- and carbon emissions would be reduced.
Falsification of prices through exchange rate manipulation is a heinous and unnatural act. It should not be surprising that eventually one consequence of it should a countervailing heinous and unnatural act.
Smoot-Hawley II, here we come!
Since anyone can call themselves an "environmentalist", and those who do may number in the millions -- and "many" can easily mean "a few dozen", and one can easily find a few dozen twits in any group of a million -- your statement is undoubtedly "true".
But I have no doubt that 98+% of those calling themselves "environmentalists" would regard such measures as very meaningful improvements.
A couple of years ago, it probably would have been easy to drum up support for a tariff scheme under which China would have gotten a big break for goods that were made or transported using ethanol-derived energy...
Short term, look for turmoil in the financial markets as the Chinese react to the carbon tarriff in ways we'll find unpleasant. Dumping dollars for euros, for instance, would hurt both Europe and the US.
Long term, suppose the tarriff were to have the "desired" effect and China moves off coal plants to, say, nuclear plants. Picture if you will hundreds of nuclear plants built and operated by the same merchantilist interests who make lead-painted toys and poisonous pet food ...
The trade imbalance is already correcting. From here on out the efficiency of US manufacturers (provided they are allowed to be efficient) will win back business. China's peg to our currency will now generate a wave of destructive inflation it cannot weather.
So instituting a carbon tariff is not a very good idea at this time.
Also, I don't think Americans can afford another Great Depression. I especially don't like the idea of the violent outcome in which our soldiers would be involved.
If a carbon tarriff goes into effect on top of a 50% increase in rice prices (which comes after a roughly 20% increase in food prices inside China last year), the Chinese government is going to react sharply. They understand very well that economic distress will cause severe internal unrest and they will do their best to focus it outward on someone else, lest they lose (in the Chinese turn of phrase) the "Mandate of Heaven".
If one turned this around and considered it as if we were an EM country, I think one can understand how inevitable the repercussions will be.
US waging economic war against China
Outside the Box
By JOHN MANGUN
Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.
The New York stock market rallied some 400 points Tuesday night, prompting an increase in prices across Asia. Even the Philippines participated a little. US stock prices reacted favorably to the news that the Federal Reserve lowered interest rates. Bloomberg: “The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.”
But don’t get too excited because you must look not just at the “big” picture, but the “whole” picture.
Conventional and common wisdom talks about the recession facing the United States and the potential that an economic slowdown is confronting the globe. There is little indication that a “normal” economic slowdown is happening; normal meaning that production is dropping. It is not so much that production is going down but that the end-result of production, buying, is dropping. If you look around the world at virtually every country in every economic and wealth group, people are wealthier today on the average than at any other time in history. But if people are wealthier, why aren’t they purchasing? One word: inflation.
Prices are going through the roof around the world. Well, that is obviously the fault of high oil prices, right? For example, Kuwait reports that inflation is at a 15-year high. China is very worried and the United States is ignoring the issue in favor of trying to keep the financial system sound.
World inflation has been in a downtrend since 1990, but prices are expected to show heavy increases in 2008, potentially reversing a 15-year movement. Traditionally, high interest rates were a strong indication of inflation trends. In the last 20 years, inflation was best illustrated by a weak dollar and strong gold and commodity prices. And we now have the dollar at historic lows and gold at historic highs, with both of these trends showing little likelihood of changing.
Then we must ask, why is this happening? Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.
The United States could strengthen the value of the dollar. It has not. China is hurt because now Chinese products are very expensive in the United States, and this will reduce the US trade deficit with China. China must import huge amounts of oil and strategic metals which are very much more expensive now. China holds hundreds of millions of physical dollars, the value of which is now much less.
China has refused to revalue its currency to a realistic level to improve its trade position with the United States. China has used its huge dollar reserves as a sword against the United States by threatening to sell those dollars, and thereby causing the dollar to drop in value. In effect, the United States is using China’s strength against China.
In order for China to maintain the levels of its trade with the United States, it will be forced to lower the value of its currency. However, if it does that, it faces two major problems. Foreign direct investment (FDI) into China would become less expensive, and China is worried that more and cheaper FDI would spur China’s inflation. Further, a devalued currency would reduce the profit to China for its exported goods.
If China keeps it currency at its present levels, the United States will buy less. The United States wanted a stronger yuan to reduce trade, which China was unwilling to do. That objective is now achieved by a weaker dollar.
China’s dollar holdings are worth much less when buying goods like oil and metals that China depends on for its development and growth. Further, China has been talking and trying for some time to diversify its foreign-reserve holdings form dollars to other currencies and gold. Now, their dollars are worth much less when buying gold, yen and euros.
The current crisis hitting the financial institutions looks to me like a normal business-cycle shakeout not unlike the dot-com IPO fiasco of the 1990s, the savings-and-loan and foreign-country debt crisis of the 1980s and the personal credit crisis of the 1970s.
Back then, the US government bailed out Wall Street, Mexico and the banks, among others, without receiving much in return. This time, the “crisis” is being used to further the US economic position, long-term position, particularly with regard to China. From Sun Tzu: “All warfare is based on deception.” -- Business Mirror
Again a tariff is a tariff and the author is correct in calling the carbon tariff what it really is and that is the next smoot hawley economic catastrophy.
I just want the accademic scumbags pumping out the algorian hysteria to know that they should be held responsible for all the damage caused. They ought to recheck their science before its too late. Loss of tenure is just the start when it comes to the punishment that should be metted out once it becomes clear that their data is 100% fudged or pure fantasy. There is no such thing as a greenhouse gas but there is such a thing as a green house or the green house effect and it's a lot less hazardous than their big propaganda campaign is saying it is.