Evan Soltas
Jan 26, 2012


Disturbing and insincere undertones in Pres. Obama's 2012 SOTU

Watched the president's speech Tuesday night and found myself in agreement with him on a number of fronts, especially on immigration, but also on education to a certain degree and on state investment for public goods like pure scientific research...but I was really bothered, frankly, by his stated position on trade and industrial policy. Let's go to the transcript:
We can't bring back every job that's left our shores. But right now, it's getting more expensive to do business in places like China...So we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed...It's time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America...And I will not stand by when our competitors don't play by the rules. We've brought trade cases against China at nearly twice the rate as the last administration— and it's made a difference. Over a thousand Americans are working today because we stopped a surge in Chinese tires. But we need to do more...It's not fair when foreign manufacturers have a leg up on ours only because they're heavily subsidized. Tonight, I'm announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China. There will be more inspections to prevent counterfeit or unsafe goods from crossing our borders. And this Congress should make sure that no foreign company has an advantage over American manufacturing...
I find it hard to believe that President Obama actually thinks this, and I bet that his economic team tried to get this populist, protectionist crud out of the address. (Romer? Goolsbee? Geither? Lew? Where are you?) Greg Mankiw thinks that it was an economic mess too.

These tax credits amount to relative tariffs on multinational corporations. And for what? Sure, China's subsidizing their industries and undervaluing their currency, but they do so at their expense to our benefit. They're selling us a dollar for fifty cents--of course America can't do that, but here's the key thing: nor should we. On net, basic social welfare analysis shows that tariffs create domestic losses in welfare--as does, for the record, China's policies in China.

But from a game-theoretic perspective, we should take as given China's decision, and not try to fool ourselves into thinking we have any meaningful degree of leverage over them. This is a deliberate development strategy on their part, albeit misguided. Our optimal response is to take the free fifty cents in goods, despite the resultant trade deficit and corresponding capital inflow.

Now that doesn't mean we hang Ohio, Indiana, and Detroit out to dry. We can provide retraining, unemployment insurance, etc., to ease the adjustment process. But let's not indulge an uneducated protectionist impulse. It sets a poor precedent, and the President and his team should know better.