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Editorial: Unintended consequences (or: Beware what we ask)

A bill has been introduced in the U.S. Senate that would impose a punitive tariff on Chinese imports, according to Michael M. Phillips in The Wall Street Journal of September 19, 2003. This is in response to a hue-and-cry among the U.S. manufacturing community, including elements of the plastics processing industry, asking the U.S. government to impose tariffs on products coming out of China. Sometimes the pleas are explicit, and sometimes they are expressed in code language, such as a plea for the politically irresistible ?level playing field.? Attempts to level the playing field with tariffs, however, can bring unintended and undesirable consequences.

Speaking of playing fields, one example of unintended consequences comes from the world of football. The analogy isn?t exact, but it is still instructive. The prospects of a football pass being unsuccessful remind me of the unlikelihood of tariffs working out as hoped.

Barry Switzer, former head coach of the collegiate Oklahoma Sooners football team and professional Dallas Cowboys football team, was a dedicated apostle of the running game. He is credited with expressing the view that when you throw a pass, three things can happen, and two of them are bad. The pass could be incomplete, it could be intercepted, or, sometimes, it could be completed. Even if the pass were caught by the intended receiver, the player could be tackled for a loss, or might fumble the ball.

Football has changed a lot since then, but the basic observations about a pass are still true. The odds are high that if you throw a pass, unintended consequences will prevail. Likewise if you impose tariffs.

To look at a very specific example of how tariffs can bring about consequences very different than what were intended, take the disastrous U.S. tariff against the Canadian lumber industry. The lumber fiasco is a matter of public record, covered by The Wall Street Journal, New York Times, Reuters, the Associated Press, PR Newswire, and no doubt others.

According to Associate Press writer Katherine Pfleger, in an article published October 31, 2001, the Bush (the Younger) administration in late 2001imposed a tariff on Canadian lumber after finding that Canada was ?dumping? its softwood lumber in the U.S. at artificially low prices. (Softwood lumber comes from fir, pine, and other cone-bearing trees.) A 12.6% duty was to be added to the 19.3% tariff put on Canadian softwood lumber in August of 2001 because the administration found the Canadian government was unfairly subsidizing its lumber industry.

About a year later, The Wall Street Journal reported, in an Oct. 21, 2002 article by Andrew Caffrey, that something unpredictable happened when the U.S. government slapped duties on Canadian lumber. Instead of tolerating reduced incomes, Canadian companies boosted export volume to the U.S., at even lower prices, to make up income that would otherwise be lost.

Caffrey pointed out that this is ?an example of how trade policy can sometimes backfire and produce results that defy classic economic theory, especially in a global economy that is producing a glut of industrial and commodity products.? Some lumber mills closed on both sides of the U.S./Canada border, people were put out of work, and Caffrey concluded that ?...it seems like the mill owners are swinging two-by-fours at each other.? Not a very productive state of affairs.

In December of 2002, the U.S./Canada Partnership for Growth, an economic development organization, put out a press release entitled ?Unintended Economic Consequences Of Lumber Tax Increasingly Apparent To All Sides.? The bipartisan organization bluntly stated, ?...the 27% tax on Canadian lumber to the U.S. is not working,? (my italics). It went on to address ?unintended consequences? and ?consequences no one can predict.? It concluded that ?The lumber tariff has backfired...?

On September 5, 2003, (about a month ago) the PR Newswire reported that more than 100 members of the U.S. Senate and House, including members of both parties, have called on the Bush administration to get rid of these tariffs, and resolutions have been introduced in both Houses urging free trade in lumber between the U.S. and Canada.

Forgive us the pun, but the government is a lumbering beast, not given to perceiving the complexities of problems and addressing them accordingly. The government is more likely to wield a blunt instrument than a surgical tool.

Mind you, we are not arguing that the U.S. should practice a pure laissez-faire free-trade approach. We leave that theory to the economists in their ivory towers. In the real world, unfair trade behaviors are being practiced all the time, and they should have consequences. For example, since China is now a member of the World Trade Organization (WTO), it should comply with the membership requirements, regarding currency exchange rates, for example, or face some sort of sanctions. But that is a topic for another day.

Meanwhile, as regards tariffs, even if we get what we ask for, we might not get what we hoped for. The principle is this: We should beware what we ask for. We might get it.




Merle R. Snyder
Editor

TAGS: Business
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