Ellison Chair in International Floriculture
Ellison Chair in International FloricultureTeaching, Research, Extension and Service

3 misconceptions that need to die

by

HT to Sid Raisch for this link — http://www.fool.com/investing/general/2011/10/25/3-misconceptions-that-need-to-die.aspx, Morgan Housel, October 25, 2011

At a conference in Philadelphia earlier this month, a Wharton professor noted that one of the country’s biggest economic problems is a tsunami of misinformation. You can’t have a rational debate when facts are so easily supplanted by overreaching statements, broad generalizations, and misconceptions. And if you can’t have a rational debate, how does anything important get done? As author William Feather once advised, “Beware of the person who can’t be bothered by details.” There seems to be no shortage of those people lately.

Here are three misconceptions that need to be put to rest.

Misconception: Most of what Americans spend their money on is made in China.

Fact: Just 2.7% of personal consumption expenditures go to Chinese-made goods and services. 88.5% of U.S. consumer spending is on American-made goods and services.

I used that statistic in an article last week, and the response from readers was overwhelming:Hogwash. People just didn’t believe it.

The figure comes from a Federal Reserve report. You can read it here.

A common rebuttal I got was, “How can it only be 2.7% when almost everything in Wal-Mart(NYSE: WMT  ) is made in China?” Because Wal-Mart’s $260 billion in U.S. revenue isn’t exactly reflective of America’s $14.5 trillion economy. Wal-Mart might sell a broad range of knickknacks, many of which are made in China, but the vast majority of what Americans spend their money on is not knickknacks.

The Bureau of Labor Statistics closely tracks how an average American spends their money in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories alone make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA).

Even when looking at physical goods alone, Chinese imports still account for just a small fraction of U.S. spending. Just 6.4% of nondurable goods — things like food, clothing and toys — purchased in the U.S. are made in China; 76.2% are made in America. For durable goods — things like cars and furniture — 12% are made in China; 66.6% are made in America.

Another way to grasp the value of Chinese-made goods is to look at imports. The U.S. is on track toimport $340 billion worth of goods from China this year, which is 2.3% of our $14.5 trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a long shot.

Part of the misconception is likely driven by the notion that America’s manufacturing base has been in steep decline. The truth, surprising to many, is that real manufacturing output today is near an all-time high. What’s dropped precipitously in recent decades is manufacturing employment. Technology and automation has allowed American manufacturers to build more stuff with far fewer workers than in the past. One good example: In 1950, a U.S. Steel (NYSE: X  ) plant in Gary, Ind., produced 6 million tons of steel with 30,000 workers. Today, it produces 7.5 million tons with 5,000 workers. Output has gone up; employment has dropped like a rock.

Misconception: We owe most of our debt to China.

Fact: China owns 7.8% of U.S. government debt outstanding.

As of August, China owned $1.14 trillion of Treasuries. Government debt stood at $14.6 trillion that month. That’s 7.8%.

Who owns the rest? The largest holder of U.S. debt is the federal government itself. Various government trust funds like the Social Security trust fund own about $4.4 trillion worth of Treasury securities. The Federal Reserve owns another $1.6 trillion. Both are unique owners: Interest paid on debt held by federal trust funds is used to cover a portion of federal spending, and the vast majority of interest earned by the Federal Reserve is remitted back to the U.S. Treasury.

The rest of our debt is owned by state and local governments ($700 billion), private domestic investors ($3.1 trillion), and other non-Chinese foreign investors ($3.5 trillion).

Does China own a lot of our debt? Yes, but it’s a qualified yes. Of all Treasury debt held by foreigners, China is indeed the largest owner ($1.14 trillion), followed by Japan ($937 billion) and the U.K. ($397 billion).

Right there, you can see that Japan and the U.K. combined own more U.S. debt than China. Now, how many times have you heard someone say that we borrow an inordinate amount of money from Japan and the U.K.? I never have. But how often do you hear some version of the “China is our banker” line? Too often, I’d say.

Misconception: We get most of our oil from the Middle East.

Fact: Just 9.2% of oil consumed in the U.S. comes from the Middle East.

According the U.S. Energy Information Administration, the U.S. consumes 19.2 million barrels of petroleum products per day. Of that amount, a net 49% is produced domestically. The rest is imported.

Where is it imported from? Only a small fraction comes from the Middle East, and that fraction has been declining in recent years. So far this year, imports from the Persian Gulf region — which includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates — have made up 9.2% of total petroleum supplied to the U.S. In 2001, that number was 14.1%.

The U.S. imports more than twice as much petroleum from Canada and Mexico than it does from the Middle East. Add in the share produced domestically, and the majority of petroleum consumed in the U.S. comes from North America.

This isn’t to belittle our energy situation. The nation still relies on imports for about half of its oil. That’s bad. But should the Middle East get the attention it does when we talk about oil reliance? In terms of security and geopolitical stability, perhaps. In terms of volume, probably not.

A roomful of skeptics
“People will generally accept facts as truth only if the facts agree with what they already believe,” said Andy Rooney. Do these numbers fit with what you already believed? No hard feelings if they don’t. Just let me know why in the comment section below.

Fool contributor Morgan Housel owns shares of Wal-Mart. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

If You Keep Digging You’ll Come Up in China

by

During the first week of August, a group of green industry folks (including myself) attended and presented at the Dalian International Horticulture Forum. Two of my colleagues have provided excellent commentary regarding our excursion so I am including links to their comments below:

Chris Beytes – GrowerTalks e- newsletter
Dr. Marvin Miller – America in Bloom newsletter column

Enjoy!

Japan, the Persian Gulf and Energy

by

Over the past week, everything seemed to converge on energy. The unrest in the Persian Gulf raised the specter of the disruption of oil supplies to the rest of the world, and an earthquake in Japan knocked out a string of nuclear reactors with potentially devastating effect. Japan depends on nuclear energy and it depends on the Persian Gulf, which is where it gets most of its oil. It was, therefore, a profoundly bad week for Japan, not only because of the extensive damage and human suffering but also because Japan was being shown that it can’t readily escape the realities of geography.

Japan is the world’s third-largest economy, a bit behind China now. It is also the third-largest industrial economy, behind only the United States and China. Japan’s problem is that its enormous industrial plant is built in a country almost totally devoid of mineral resources. It must import virtually all of the metals and energy that it uses to manufacture industrial products. It maintains stockpiles, but should those stockpiles be depleted and no new imports arrive, Japan stops being an industrial power.

The Geography of Oil
There are multiple sources for many of the metals Japan imports, so that if supplies stop flowing from one place it can get them from other places. The geography of oil is more limited. In order to access the amount of oil Japan needs, the only place to get it is the Persian Gulf. There are other places to get some of what Japan needs, but it cannot do without the Persian Gulf for its oil.

This past week, we saw that this was a potentially vulnerable source. The unrest that swept the western littoral of the Arabian Peninsula and the ongoing tension between the Saudis and Iranians, as well as the tension between Iran and the United States, raised the possibility of disruptions. The geography of the Persian Gulf is extraordinary. It is a narrow body of water opening into a narrow channel through the Strait of Hormuz. Any diminution of the flow from any source in the region, let alone the complete closure of the Strait of Hormuz, would have profound implications for the global economy.

For Japan it could mean more than higher prices. It could mean being unable to secure the amount of oil needed at any price. The movement of tankers, the limits on port facilities and long-term contracts that commit oil to other places could make it impossible for Japan to physically secure the oil it needs to run its industrial plant. On an extended basis, this would draw down reserves and constrain Japan’s economy dramatically. And, obviously, when the world’s third-largest industrial plant drastically slows, the impact on the global supply chain is both dramatic and complex.

In 1973, the Arab countries imposed an oil embargo on the world. Japan, entirely dependent on imported oil, was hit not only by high prices but also by the fact that it could not obtain enough fuel to keep going. While the embargo lasted only five months, the oil shock, as the Japanese called it, threatened Japan’s industrial capability and shocked it into remembering its vulnerability. Japan relied on the United States to guarantee its oil supplies. The realization that the United States couldn’t guarantee those supplies created a political crisis parallel to the economic one. It is one reason the Japanese are hypersensitive to events in the Persian Gulf and to the security of the supply lines running out of the region.

Regardless of other supplies, Japan will always import nearly 100 percent of its oil from other countries. If it cuts its consumption by 90 percent, it still imports nearly 100 percent of its oil. And to the extent that the Japanese economy requires oil – which it does – it is highly vulnerable to events in the Persian Gulf.

It is to mitigate the risk of oil dependency – which cannot be eliminated altogether by any means – that Japan employs two alternative fuels: It is the world’s largest importer of seaborne coal, and it has become the third-largest producer of electricity from nuclear reactors, ranking after the United States and France in total amount produced. One-third of its electricity production comes from nuclear power plants. Nuclear power was critical to both Japan’s industrial and national security strategy. It did not make Japan self-sufficient, since it needed to import coal and nuclear fuel, but access to these resources made it dependent on countries like Australia, which does not have choke points like Hormuz.

It is in this context that we need to understand the Japanese prime minister’s statement that Japan was facing its worst crisis since World War II. First, the earthquake and the resulting damage to several of Japan’s nuclear reactors created a long-term regional energy shortage in Japan that, along with the other damage caused by the earthquake, would certainly affect the economy. But the events in the Persian Gulf also raised the 1973 nightmare scenario for the Japanese. Depending how events evolved, the Japanese pipeline from the Persian Gulf could be threatened in a way that it had not been since 1973. Combined with the failure of several nuclear reactors, the Japanese economy is at risk.

The comparison with World War II was apt since it also began, in a way, with an energy crisis. The Japanese had invaded China, and after the fall of the Netherlands (which controlled today’s Indonesia) and France (which controlled Indochina), Japan was concerned about agreements with France and the Netherlands continuing to be honored. Indochina supplied Japan with tin and rubber, among other raw materials. The Netherlands East Indies supplied oil. When the Japanese invaded Indochina, the United States both cut off oil shipments from the United States and started buying up oil from the Netherlands East Indies to keep Japan from getting it. The Japanese were faced with the collapse of their economy or war with the United States. They chose Pearl Harbor.

Today’s situation is in no way comparable to what happened in 1941 except for the core geopolitical reality. Japan is dependent on imports of raw materials and particularly oil. Anything that interferes with the flow of oil creates a crisis in Japan. Anything that risks a cutoff makes Japan uneasy. Add an earthquake destroying part of its energy-producing plant and you force Japan into a profound internal crisis. However, it is essential to understand what energy has meant to Japan historically – miscalculation about it led to national disaster and access to it remains Japan’s psychological as well as physical pivot.

Japan’s Nuclear Safety Net
Japan is still struggling with the consequences of its economic meltdown in the early 1990s. Rapid growth with low rates of return on capital created a massive financial crisis. Rather than allow a recession to force a wave of bankruptcies and unemployment, the Japanese sought to maintain their tradition of lifetime employment. To do that Japan had to keep interest rates extremely low and accept little or no economic growth. It achieved its goal, relatively low unemployment, but at the cost of a large debt burden and a long-term sluggish economy.

The Japanese were beginning to struggle with the question of what would come after a generation of economic stagnation and full employment. They had clearly not yet defined a path, although there was some recognition that a generation’s economic reality could not sustain itself. The changes that Japan would face were going to be wrenching, and even under the best of circumstances, they would be politically difficult to manage. Suddenly, Japan is not facing the best of circumstances.

It is not yet clear how devastating the nuclear-reactor damage will prove to be, but the situation appears to be worsening. What is clear is that the potential crisis in the Persian Gulf, the loss of nuclear reactors and the rising radiation levels will undermine the confidence of the Japanese. Beyond the human toll, these reactors were Japan’s hedge against an unpredictable world. They gave it control of a substantial amount of its energy production. Even if the Japanese still had to import coal and oil, there at least a part of their energy structure was largely under their own control and secure. Japan’s nuclear power sector seemed invulnerable, which no other part of its energy infrastructure was. For Japan, a country that went to war with the United States over energy in 1941 and was devastated as a result, this was no small thing. Japan had a safety net.

The safety net was psychological as much as anything. The destruction of a series of nuclear reactors not only creates energy shortages and fear of radiation; it also drives home the profound and very real vulnerability underlying all of Japan’s success. Japan does not control the source of its oil, it does not control the sea lanes over which coal and other minerals travel, and it cannot be certain that its nuclear reactors will not suddenly be destroyed. To the extent that economics and politics are psychological, this is a huge blow. Japan lives in constant danger, both from nature and from geopolitics. What the earthquake drove home was just how profound and how dangerous Japan’s world is. It is difficult to imagine another industrial economy as inherently insecure as Japan’s. The earthquake will impose many economic constraints on Japan that will significantly complicate its emergence from its post-boom economy, but one important question is the impact on the political system. Since World War II, Japan has coped with its vulnerability by avoiding international entanglements and relying on its relationship with the United States. It sometimes wondered whether the United States, with its sometimes-unpredictable military operations, was more of a danger than a guarantor, but its policy remained intact.

It is not the loss of the reactors that will shake Japan the most but the loss of the certainty that the reactors were their path to some degree of safety, along with the added burden on the economy. The question is how the political system will respond. In dealing with the Persian Gulf, will Japan continue to follow the American lead or will it decide to take a greater degree of control and follow its own path? The likelihood is that a shaken self-confidence will make Japan more cautious and even more vulnerable. But it is interesting to look at Japanese history and realize that sometimes, and not always predictably, Japan takes insecurity as a goad to self-assertion.

This was no ordinary earthquake in magnitude or in the potential impact on Japan’s view of the world. The earthquake shook a lot of pieces loose, not the least of which were in the Japanese psyche. Japan has tried to convince itself that it had provided a measure of security with nuclear plants and an alliance with the United States. Given the earthquake and situation in the Persian Gulf, recalculation is in order. But Japan is a country that has avoided recalculation for a long time. The question now is whether the extraordinary vulnerability exposed by the quake will be powerful enough to shake Japan into recalculating its long-standing political system.

Japan, the Persian Gulf and Energy is republished with permission of STRATFOR.

Stratfor is a private intelligence company delivering in-depth analysis, assessments and forecasts on global geopolitical, economic, security and public policy issues. A variety of subscription-based access, free intelligence reports and confidential consulting are available for individuals and corporations.

2010 Business Year in Review

by

Care to take a guess at the top events affecting businesses in 2010? The struggling economy was voted the top business story of the year by U.S. newspaper editors surveyed by The Associated Press. The rest, as they say, is history.

1. Economy struggles: Climbing out of the deepest recession since the 1930s, the economy grows at a healthy rate in the January-March quarter. Still, the gain comes mainly from companies refilling stockpiles they had let shrink during the recession. The economy can’t sustain the pace. The lingering effects of the recession slow growth. The benefits of an $814 billion government stimulus program fade. Consumers cut spending in favor of building savings and slashing debt. Businesses hesitate to hire. Cities and states lay off workers. Growth slows through spring and summer. Unemployment stays chronically high. In May, the number of people unemployed for at least six months hits 6.8 million — a record 46 percent of all the unemployed. Pointing to the deficits, Congress resists backing more spending to stimulate the economy. The Federal Reserve seeks to fill the void by announcing it will buy $600 billion in Treasury bonds to try to further lower interest rates, lift stocks and coax consumers to spend. As the year closes, the economy makes broad gains. Factories produce more. Consumers — the backbone of the economy — return to the malls. Congress passes $858 billion in tax cuts and aid to the long-term unemployed. Yet more than 15 million Americans are still unemployed. Economists say a full economic recovery remains years away.

2. Gulf oil spill: An explosion at a rig used by BP kills 11 workers and sends crude oil gushing into the Gulf of Mexico. The spill devastates the fishing and tourism industries along the Gulf Coast and causes environmental damage that may last for decades. BP sets up a $20 billion fund to compensate fishermen, restaurateurs and others whose livelihoods were damaged. The oil giant still faces civil charges and a criminal investigation by the Justice Department and lawsuits from hundreds of individuals and businesses. BP’s stock market value shrinks by more than $100 billion after the April 20 disaster before bouncing about halfway back.

3. China’s rise: China passes Japan as the world’s second-biggest economy. The World Bank says it could surpass the United States by 2020. China’s gross domestic product is spread out over 1.3 billion people — amounting to about $3,600 per person. That compares with GDP in the U.S. of about $42,000 per person. In Japan, it’s about $38,000 per person. China’s thirst for raw materials and other products helps the rest of the world recover from the recession. Still, the U.S. and Europe complain that China gives its exporters an unfair competitive edge by keeping its currency artificially low.

4. Real estate crisis: Housing remains depressed despite super-low mortgage rates. The average rate on a 30-year fixed mortgage dips to 4.17 percent in November, the lowest in decades. But home sales and prices sink further. Nearly one in four homeowners owe more on their mortgages than their homes are worth, making it all but impossible for them to sell their home and buy another. An estimated 1 million households lose their homes to foreclosure, even though the pace slows after evidence that lenders mishandled foreclosure documents. Some did so by hiring “robo-signers” to sign paperwork without checking their accuracy.

5. Toyota’s recall: Toyota’s reputation for making high-quality cars is tarnished after the Japanese automaker recalls 10 million vehicles for sudden acceleration and other problems. Toyota faces hundreds of lawsuits alleging that some models can speed up suddenly, causing crashes, injuries and deaths. Toyota blames driver error, faulty floor mats and sticky accelerator pedals for the unintended acceleration. The uproar damages its business. Toyota’s U.S. sales rise just 0.2 percent through November in a year when the industry’s overall sales climb more than 11 percent.

6. GM’s comeback: General Motors stock begins trading again. It signals the rebirth of a corporate icon that fell into bankruptcy and required a $50 billion bailout from taxpayers. GM uses some proceeds from its November initial public offering to repay a portion of its bailout. (Washington still holds about a third of GM’s stock.) GM’s recovery helps rejuvenate the industry. Sales of cars and light trucks rise 11 percent through November compared with the same period in 2009. Shoppers who had put off replacing their old cars return to showrooms.

7. Financial overhaul: Congress passes the biggest rewrite of financial rules since the 1930s. The law targets the risky banking practices and lax oversight that led to the 2008 financial crisis. The law creates an agency to protect consumers from predatory loans and other abuses, empowers regulators to shut down big firms that threaten the entire system and shines more light into markets that have eluded oversight. Republican critics say the law goes too far, imposing burdensome rules that will restrict lending to consumers and small businesses.

8. European bailouts: Greece and Ireland require emergency bailouts, raising fears that debt problems will spread and destabilize global markets. European governments and the International Monetary Fund agree to a $145 billion rescue of Greece in May and a $90 billion bailout of Ireland in November. The bailouts require both countries to slash spending, triggering protests by workers. Investors fear that debt troubles will spread to Spain, Portugal and other countries, weaken the European Union and threaten the future of the euro as its common currency.

9. Facebook growth: Facebook tops the 500 million user mark. It expands its dominance of social media and further transforms how the world communicates. If it were a country, Facebook would be the world’s third-largest. Facebook tightens its privacy settings after criticism that personal information is being disseminated without users’ knowledge or permission. Founder Mark Zuckerberg is named Time magazine’s “Person of the Year” and is the subject of a high-profile movie about Facebook’s creation.

10. iPad mania: Apple Inc. unveils the iPad, bringing “tablet” computing into the mainstream and eroding laptop sales. Apple is expected to sell more than 13 million iPads this year. The iPads sell about twice as fast as iPhones did after their 2007 introduction. The price of Apple stock rockets more than 50 percent in 2010. Competitors scramble to try to catch up. They include the Dell Streak, BlackBerry PlayBook, the Samsung Galaxy Tag and HP Slate.

Floral Industry Ready to Move Forward with Standard Data Protocols

by

Electronic ordering, receiving and invoicing using product distribution and tracking technologies that transformed the consumer products delivery system are about to become a reality in the floral industry.

Standard data protocols, including the Global Trade Item Number (GTIN, pronounced “gee-tin”) for boxes and the Universal Product Code (UPC) for bunches and bouquets, are now available.

The Floral Logistics Coalition, a consortium of six industry trade associations including SAF, says automation will help trading partners meet market demand and stay competitive.

Used for some time in other industries, the GTIN and UPC are part of an internationally recognized data standard behind bar-coding systems enabling supply chain partners to eliminate redundancies, reduce manual labor and minimize the chance for human error in the distribution process. Their implementation can help cut cost and error out of the floral supply chain, speed delivery and, ultimately, make a fresher and more consistent range of product available to the consumer.

“The entire floral industry needs to get on board with this quickly,” said Jim Wanko, executive vice president of the Wholesale Florist & Florist Supplier Association. “It can directly impact our ability to compete with other consumer goods.” Suppliers and wholesalers unable to conduct business electronically may soon find it difficult to do business with mass merchandisers, supermarkets and possibly some larger retail florists, Wanko said.

The Floral Logistics Coalition has been working for more than two years to define, test and refine the coding strategy so that the industry can move forward on the Floral GTIN Initiative. Best practices for box labeling, UPC item labeling and synchronizing data are being worked on by industry-wide committees.

The Coalition has created a website — www.floralgtin.com — as an online resource for growers, importers, distributors and their trading partners. On it are step-by-step implementation instructions, the full GTIN Implementation Guide, and a timeline designed to have the system operating by the middle of next year.

The Floral Logistics Coalition is made up of six industry trade organizations including the Produce Marketing Association (PMA), Wholesale Florist and Florist Supplier Association (WFFSA), Association of Floral Importers of Florida (AFIF), California Association of Flower Growers and Shippers (CAFGS), California Cut Flower Commission (CCFC), and the Society of American Florists (SAF). Also involved is GS1 US, the organization which oversees the international supply chain standard in the United States.

Industry members with questions about the GTIN Initiative should visit www.floralgtin.com or contact their respective organizations.

— Shelley Estersohn
<!– var prefix = 'ma' + 'il' + 'to'; var path = 'hr' + 'ef' + '='; var addy81512 = 'sestersohn' + '@' + 'safnow' + '.' + 'org'; document.write( '‘ ); document.write( addy81512 ); document.write( ” ); //–> sestersohn@safnow.org

Protectionism, part 2

by

Based on my earlier post, Anonymous makes the following comment:

Since you are an economist I would have expected your title to this entry to read “Depending on Where You Sit, Protectionsim Doesn’t Work Folks”. The tire retailers will sell tires no matter who makes them, China, Taliban or Americans. American tire makers do care. I would rather read your list of solutions for fair trade between nations instead and maybe find out the extent that Chinese tire manufacturers are competing on an even playing field their US counter parts. By the way, you need to update this entry because the Major Indicies ended up today, I guess on news of US China trade disputes? Come on Charlie, lets leave the politics out of economics.

First, I am delighted to receive the comment (we bloggers really appreciate them) and I can also appreciate the sentiment/perspective that Anonymous provides. I will be the first to admit that I am sometimes too transparent in my political leanings, but I have always encouraged readers to “understand where folks are coming from when we read or listen to them. To me, it is important to know enough to know the difference.” (click here for citation)

But I think, in this case, the economics underlying these types of scenarios does point out the shortcomings of such a protectionist strategy.

For example, let’s use the graph above (HT: Mark Perry) to demonstrate the probable effects of the tariffs on consumer and producer surplus, where:

Pw is the tire price in the U.S. before the tariff and Pw+t is the higher tire price after the tariff. As a direct result of the tariff protection for inefficient domestic producers, their output expands from Q1 to Q3, and imported tires decrease from Q2 to Q4.

As a result of higher tire prices and fewer tires purchased, American consumers as a group will be worse off by the area (-a, -b, -c, and -d), which represents the loss of “consumer surplus” from the tire tariff.

American tire manufacturers will be better off by an amount represented by the area +a, because they have both increased sales (to Q3) and raised prices (to Pw+t) as a result of their protection from more efficient Chinese tire producers.

The U.S. government will collect tariff (tax) revenue on imported Chinese tires by an amount represented by the area c, which is the product of tire imports (Q4-Q3) times the tariff (t). If we can assume that the tariff revenue in area c will be redistributed efficiently to the economy, we can treat that as a net gain to the economy (this could obviously be argued by supporters of the tariff).

But when you add it all up, considering the costs of the tire tariffs, American consumers are made worse by the area (-a + -b + -c + -d). (Note: This area could be quantified as a specific dollar amount if we had information about the supply and demand for tires.)

When we consider the benefits of the tire tariffs, U.S. producers are better off by area +a, and the government is better off by area +c.

So there is a net loss to the system in that the costs of the tire tariff (-a + -b + -c + -d) are greater than the benefits of the tire tariff (+a + +c), for a net welfare loss of (-b + -d), which will be the “deadweight loss” of the tire tariff (costs to the economy that are not offset by benefits).

One can only conclude therefore that America will be worse off with the tire tariff, not better, and we (collectively) will suffer from higher tire prices, a net loss of jobs, lower economic growth, and a reduction in our country’s standard of living.

That is why economists almost universally support free trade and oppose tariffs and trade protection – economic analysis and empirical evidence clearly show that there are always net welfare losses from tariffs. Therefore, politics aside, it will be Americans in the end who will be punished with the punitive tire tariffs.

Protectionism doesn't work folks

by

Here is a recap of the headlines regarding the recent tariff on imported tires:

Obama to impose tariffs on Chinese tires: Obama imposes tariffs on China tires for 3 years, a decision that could anger Asian powerhouse

China Strikes Back on Trade: Beijing Threatens U.S. Chicken, Car Parts After Washington Slaps Stiff Tariffs on Tires

Stocks head lower on US-China trade concerns: Major indexes fall in early dealings amid concerns about US-China trade dispute

Tire Tariffs Are Cheered by Labor: Mr. Obama ordered the tire tariffs after the United States International Trade Commission, an independent government agency, determined that a more than tripling of Chinese tire imports had disrupted the $1.7 billion tire market….President George W. Bush had rejected four similar recommendations from the trade commission, angering organized labor.

“One of the most amazing and overlooked details about the “punitive tire tariffs” is that they were actually opposed by the domestic tire industry (Goodyear and Cooper). It was the United Steelworkers who filed the complaint, not domestic tire workers or the domestic tire industry.” (Mark Perry)

From the NY Times:

Mr. Obama, responding to a complaint by the United Steelworkers, imposed a 35% tariff on Chinese tires for cars and light trucks. China has deplored the administration’s decision, suggesting it caved to domestic support for protectionism. The Tire Industry Association, which represents American tire retailers, said the decision was ill-advised and would lead to higher prices for consumers.

Dollar is rebounding

by

The U.S. Dollar index for major currencies reached its highest level this year, and is at the highest level since December 21, 2007 (see chart below). Oil fell yesterday by almost $5 per barrel in the spot market to $112.43 (brent spot) and $115.20 (WTI) and below $115 in the futures market. The stock market rose by +300 points.

Middle class expanding — globally, that is.

by

While much attention has been placed on the shrinking middle class here in the U.S., Jim O’Neill, chief economist at Goldman Sachs, offers an interesting commentary of the expanding middle class globally in this weeks Financial Times:

In the midst of the current widespread gloom and doom in the west, it is important not to lose sight of the true structural themes shaping our era.

Linked to the current mood, commentators often depict an embattled and shrinking middle class, with sharply rising financial inequality. However, globally, this is simply not true. One of the most startlingly positive phenomena for many generations continues to unfold around the world. We are in the middle of an explosion of the world’s middle class – about 70m people a year globally are entering this wealth group.

The phenomenon may continue for the next 20 years, with this global middle accelerating to 90m a year by 2030. If this happens, an astonishing 2bn people will have joined the ranks of the middle class. This demonstrates that, contrary to widespread opinion, global inequality is declining significantly, not increasing.

It is important for everyone in the so-called developed world to be constantly aware that these powerful shifts in global wealth are good not only for the developing world, but for them too. If you take a look at a chart of recent US export growth, you may well think you are looking at the wrong data series. But you are not. US exports are indeed growing at close to 20 per cent and it is this that is stopping the housing and credit crunch from driving the US into a deep recession. Aspects of the same phenomenon can be seen in Japan, Germany and even the UK.

The new middle-class explosion is going to remain the market opportunity for us all, or certainly for those of us who are prepared to respond to the new realities.

This, of course, makes trade and regulatory policies all the more important for green industry-related imports and exports. The current APHIS Q37 and other free-trade negotiations (e.g. Columbia) have perhaps even more far-reaching implications than we otherwise surmised. I’ll be speaking at a colloquium at the annual meeting of the American Society for Horticultural Sciences this week discussing this issue in more detail.

Click here for the full FT article.
.