Obama and the Next Depression

On Friday, just in time for a soft news cycle, Pres. Obama announced a 35% punitive tariff on Chinese tires. Not only is this another example of Obama shifting policy and giving in to his left wing masters, this is the blue print for a second great depression.

Obama campaigned to restore protectionism to the Democratic Party, so his Chinese tire decision is not out of character for a redistributionist leftie. Wisely, however, Obama has more recently changed his tune to say that protectionism is the wrong move during an economic decline. Still, with Card Check in the doldrums, Obama had to throw the unions a bone, and China bashing it is.

Why Obama chose low end Chinese tires is a mystery. The US has not been a player in this market segment for over a decade. No US jobs will be ‘saved’ by Obama’s actions, not even union ones. Furthermore, Obama did not find that China is dumping its products, only that it is selling more tires than last year. This trend is easily explained by lower car sales; people are keeping their older cars longer, and they need inexpensive tires. One can only assume that Obama is playing some sort of insider politics with the unions that demanded this tariff.

Since no US tire manufacturer will be affected, the only direct effect of Obama’s weekend tariff is to make life harder for people who drive modest cars that ride on low cost tires. Obama will hardly earn his stripes as a man of the people with this one. The indirect effects could be dramatic.

China has already signaled its intent to retaliate. China imports over $71bln from the US, including manufactured goods. This figure has been growing at double digit rates for a decade. Obama has no training or experience in business or economics, but even he should realize that the US can ill afford to risk such a valuable customer for its products. Furthermore, whatever China buys from the US offsets China’s immense Dollar reserves and helps shore up the Dollar’s price. Obama had nothing to gain and everything to lose, and yet he still managed to make the wrong decision.

To be sure, China needs the US too. China sold $338bln in goods to the US last year, but China is diversifying. China has a growing middle class that consumes domestic goods designed for Asian markets. Also, China is expanding into higher value added goods, like autos, which create greater wealth than do commodities. China can indeed survive without the US by marketing to its Asian neighbors. Furthermore, China’s communist dictators are comparatively immune to the effects of a disgruntled populace. In short, China is well equipped to fight a trade war.

The Great Depression is the textbook example of how trade protectionism can lengthen a recession. If Obama’s Chinese tire tariff expands into serial retaliations, the US will have the pleasure of repeating that experiment in misery. Let’s hope that Obama steps back from this precipice before it is too late by repealing this pointless tariff.