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Sunday, June 22, 2008 12:51 AM


Trade Wars, Health Care, and Wal-Mart


This post is about trade wars, tariffs, health care, and Wal-Mart. I will tie these themes together starting with a look at Wal-Mart and health care.

I have many disagreements with Jim Jubak, but he hits the nail on the head with Let Wal-Mart fix US health care.

I know who can fix our broken health care system -- and who can't:
  • Not presumptive Republican nominee John McCain. He proposes a tax credit of $5,000 per family to encourage us to buy private health insurance.
  • Not Democratic presidential candidate Hillary Clinton. She proposes universal health insurance supported by tax credits.
  • Not Democratic presidential candidate Barack Obama. He proposes a mix of public and private health insurance with government subsidies to those who don't qualify for government insurance plans such as Medicaid.
I say, let Wal-Mart Stores (WMT) do it. Hold your guffaws. Stifle your impulse to scoff. Control those sputters of rage.

Wal-Mart has done more to expand coverage and lower costs in the past year than any government program to come out of Washington in the past 10 years. And I'd bet the new programs that this company -- known for stiffing its own part-time workers on health care benefits -- has announced in the past year will do more to expand coverage and cut costs than anything likely to come out of a McCain, Clinton or Obama first term.

Letting Wal-Mart run the health care system would fix many of those problems. It's a company that understands how low prices can build market share and thus increase profits. Furthermore, it's a company with a culture of cutting costs that has shown no compunction in pushing suppliers to the wall over price. The Wal-Mart motto ought to be, "Make it cheaper, or we'll find someone who can." I'd love to see that attitude brought to bear in health care.
Inquiring minds will want to read the rest of the article. It's surprisingly good.

Jubak makes a compelling case. He never said this explicitly but I will. "We do not need higher wages or higher prices. We need lower prices and a dollar that buys more".

Tariffs Not The Answer

Instead, the clown in Washington DC have said "What we need is higher prices". They have done so repeatedly via tariffs. We have tariffs, on agricultural products, ethanol, and scores of other items already. We have bills that restrict the importation of drugs from Canada and Mexico. Those tariffs are increasing the prices consumers (and businesses) have to pay.

In a global economy, these policies simply cannot work. Like it or not, global wage arbitrage is here to stay. More tariffs are not the answer. Sadly the US trade commission has come to the opposite conclusion.

Trade Wars Escalate

Please consider U.S. Trade Panel Backs Duties on Chinese Pipe Imports.
The U.S. International Trade Commission ruled that domestic steel pipe makers are being harmed by competition from China, a decision that will lead to tariffs of more than 100 percent on imports of that product.

The decision, in a 5 to 0 vote, marks the first time the U.S. will impose duties to compensate for tax breaks and other government subsidies to Chinese competitors.

The finding by the independent trade body means that tariffs on the imports of the pipe used in plumbing and fencing set in a decision last month by the Commerce Department will take effect.

"This marks a fundamental shift in U.S.-China trade relations," said Gilbert Kaplan, a lawyer for U.S. pipe makers. "It's the first time we've confronted their subsidies by putting duties on imports."

Two types of tariffs will apply to the Chinese pipe: countervailing duties, used to counter subsidies, will average 37.2 percent; and anti-dumping duties, to compensate for goods sold overseas at prices below those at home, will be 69.2 percent on 31 of the largest producers. Other companies face higher duties.
Predictable But Stupid

This act is as stupid as it was predictable.

The bill effectively says "prices are not high enough, let's raise them". It will not save a single job. It will crush imports of these products and that means fewer doc jobs and transportation jobs. It will cause prices to rise for those that need pipes or fencing.

Steel makers will misguidedly cheer this bill, but fence installers sure won't. Consumers and businesses are being squeezed. No one anywhere can afford higher prices. For every steel making job we save (I doubt any), we will lose 10 times as many fence installing and doc unloading jobs.

Higher Prices = Less Demand. The economy and jobs are already weakening and this will increase that weakness.

The question is whether or not China retaliates. If the US demands higher prices, China could simply voluntarily tax all goods to the US with an export tax and make a statement "You want higher prices, here, you can have them". At least that way, China keeps the money instead of the US collecting a tariff.

If the US is dumb enough to demand higher prices, China can easily oblige. Is there anyone who doesn't see how insane this is? Dumb question. There will be scores of union workers spouting nonsense about "fair trade not free trade" etc etc who will not understand the logic even when it is spelled out to them letter by letter.

Pot Calling Kettle Black

The US is like the pot calling the kettle black. We accuse China of subsidizing steel, but our insane war on terror (a war that is impossible to win) is a subsidy to Boeing, GE, and scores of other companies that win no-bid government contracts. Furthermore, our purposeful debasement of the US dollar is not helping anyone other than those long commodities.

Personally I do not know how Paulson can live with himself. Day in and day out Paulson blatantly lies about a "strong dollar policy" while never once mentioning the two biggest factors in strength of currencies: interest rate differentials, and budget deficits.

Smoot Hawley's Effect On The Great Depression

Here is a refresher course on the Smoot Hawley Tariff and the effect it had on the Great Depression.
Under the direction of Senator Reed Smoot of Utah, the Republican party drafted the Fordney-McCumber tariff act in 1921 with an eye to increasing domestic firms' market share. Weakening labor markets in 1927 and 1928 prompted Smoot to propose yet another round of tariff hikes.

One thousand twenty-eight economists in the United States, organized by Paul Douglas, Irving Fisher, James TFG Wood, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox, signed a petition asking President Hoover to veto the legislation (New York Times, 5 May 1930). Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it "an economic stupidity.

Retaliation began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to raise rates against United States products. In May 1930, Canada preemptively imposed new tariffs on 16 products that altogether accounted for around 30% of U.S. exports to Canada. Imports plunged two thirds from $4.4 billion (1929) to $1.5 billion (1933), and exports fell from $5.4 billion to $2.1 billion—in both cases, far more than the 50% fall in Gross Domestic Product.

Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933
Although Smoot-Hawley did not cause the great depression, it did make it much worse.
The US is now about to repeat the same mistakes.

The big problem is a weak US dollar thanks to this insane war, Bush's government expansion projects, and Congressional spending run rampant (both parties).

Let me be blunt. Manufacturing and service sector wages in the US will come down. They have to come down. Tariffs cannot prevent wages from coming down without dramatically rising unemployment elsewhere.

We need lower wages, lower prices, and a dollar that goes further. In other words we need more Wal-Marts, fewer tariffs, and a balanced budget out of Congress. Instead, Wal-Mart is scaling back store plans, the US is initiating trade wars, and the US budget is a wreck.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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