Tariffs, Tullock and China

This article from the New York Times discusses a bill passed by the U.S. House of Representatives that would give the Obama Administration greater power to impose tariffs on Chinese imports. The legislation, which passed with a bipartisan majority, is considered retaliation to Chinese currency manipulations. Although such actions might be questioned by the WTO and Treasury Secretary Timothy Geithner, it seems that both political parties are in favor of these measures. The welfare costs of such tariffs though are well known and are represented by the Harberger deadweight loss triangle. As a result of the tariff, Chinese goods become less competitive and the benefits of free trade are lost. Jiang Yu, a Chinese foreign ministry spokesman, seems to have alluded to this overall decrease in consumer surplus as he stated that the US should “resist protectionism so as to refrain from any damage to the interests of both peoples.”

Another critical issue is how these tariffs protections will be allocated. Although the Obama Administration “would not have personal control to turn sanctions on or off,” the legislation would give the Commerce Department discretion to place tariffs on countries that have “fundamentally undervalued” currencies. The issue is that giving the Commerce Department the ability to “place duties on imports” creates incentives for firms to compete for tariff restrictions in their industry. As Gordon Tullock might point out, the fundamental problem with this behavior is that it diverts resources to seeking this “prize” instead of investing into something more productive. If greater tariff powers are granted to representatives, then they could justify pursuing tariffs in favor of certain industries. This gives firms incentive to lobby and contribute financial resources to campaigns which in turn gives politicians an added incentive to create rent! It seems that the repercussions of China undervaluing their currency is that creates “legitimate” reasons for instituting tariffs on their goods which creates a market for campaign contributions in the United States, thereby leading to greater inefficiency and welfare costs.