Around the world women wash clothes and most wash by hand since they lack access to electricity, or access to enough electricity to power a washing machine.
Access to modern washing machines, like access to cars, matters for teenagers and adults in wealthy countries as well as poor. Protectionist policies that tax foreign goods can shield some jobs and companies, but taxes on imports raise prices that especially hurt low-income families and limit consumer choice. Protectionism shelters domestic firms, which may protect jobs in the short run also leads to less competitive domestic firms over time by reducing incentives for innovation in domestic companies.
Tariffs on foreign cars and washing machines reduce the competitiveness, profits, and, over time, employment of U.S. firms. So Whirlpool’s dumping charges against Korean/Chinese washing machines will hurt Whirlpool employees and stockholders in the years to come as well as hurting U.S. consumers now. (See “U.S. to Charge Duties on Some Samsung, LG Washing Machines Built in China,” (WSJ, July 20, 2016) and “Whirlpool Wants Tariffs for Chinese Washers,” December 30, 2015, and more on Asian washing machine protectionism below.)
The U.S. Commerce Department is:
upholding a complaint by competitor Whirlpool Corp. alleging that the companies [LG and Samsung] sold their washers in the U.S. for less than they cost to produce.
The concern is “predatory pricing,” where large firms care said to sell goods below cost for a time to drive competitors out of business, then later raise prices to recover early losses. So have LG and Samsung, both South Korean companies with Chinese factories, been manufacturing washing machines and selling in the US below their cost of production?
In “The Mounting Costs of Antidumping Laws: Time for Action?” (Truth on the Market blog, May 23, 2016), Alden Abbott argues for reforming US Antidumping laws:
Although the original justification for American AD law was to prevent anticompetitive predation by foreign producers, I explained that the law as currently designed and applied instead diminishes competition in American industries affected by AD tariffs and reduces economic welfare.
Abbott cites and quotes from an October 2015 World Bank study, “Antidumping and Market Competition: Implications for Emerging Economies,” he says “confirms that the global proliferation of AD laws in recent decades raises serious competitive concerns.”
Over a century, antidumping has gradually evolved from an obscure and rarely used policy tool to one that now constitutes an important form of protection not subject to the same WTO [World Trade Organization] controls as members’ bound tariff rates. Rather, antidumping is one of several instruments that allow members to exceed their bound tariffs, albeit subject to very detailed WTO procedural disciplines. Moreover, while the application of antidumping was until the WTO era mainly the province of a few traditional users, emerging markets have become some of the most active users of antidumping and related policies as well as important targets of their application. And though these policies are known collectively as temporary trade barriers, WTO rules governing the duration of antidumping measures are much weaker than for safeguards.
Antidumping policies have, under pressure of special interests at home and abroad, developed into a complex network of trade barriers used both by and against US manufacturers.
Virginia Postrel’s New York Times column, “Economic Scene: Wealth Depends on How Open Nations Are to Trade,” (2001) quotes from economists Stephen L. Parente and Edward C. Prescott’s book Barriers to Riches on the cost of protectionism in India:
In other words, says Professor Parente, “poor countries are poor because some groups are benefiting by the status quo,” and those groups use the law to block change. India has a long history of this. In the early 20th century, strikes kept Indian textile mills from increasing the number of looms each worker operated, and the government protected the old ways through steep tariffs on foreign textiles. As a result, from 1920 to 1938 textile productivity rose by only a third as much in India as it did in Japan, which was beginning its climb to prosperity.
Indian government policies blocked imports of Japanese and other foreign cars and blocked foreign direct investment. Special interests limited competition within India (blocking new firms). Established companies working with labor unions and government blocked imports of foreign manufactured goods. So India protected existing firms and jobs and stayed poor through the 1960s, 70s, and 80s, and only started prospering after barriers to international trade and foreign direct investment were lifted in the early 1990s.
Here is a three-minute video from The Commanding Heights documentary (and episode 2 on India’s Permit Raj, and the stagnation of India’s protected Ambassador car company vs. Japan’s Toyota:
This is a lesson for the U.S. as well. Domestic regulations coupled with protectionist policies can slow and even stop advances across whole industries. Plus protectionism is often advanced under the guise of various policies claimed to be pro-consumer, antitrust, environmental, and pro-labor.
China is both a developed and an undeveloped country, much like Europe after the fall of communism. When Deng Xiaoping’s reforms began in 1978, parts of “China” were already market-based (Taiwan and Hong Kong). Agricultural reforms allowed mainland China families to essentially own farmland, which immediately and dramatically increased food production.
Reforms also opened a handful of southern and coastal regions, Special Economic Zones, to foreign investment and the most important early investors were returning Chinese investors who had earlier fled China and prospered in other countries.
By the 1990s firms and workers in these free-enterprise zones had surged ahead, with 40% annual growth rates in Shenzhen, for example. By 2016, hundreds of millions in China have enjoyed decades of sustained economic development. Western and rural regions, though, have been slower to enjoy the gains from market reforms and international trade and investment.
Access to electricity and washing machines plays a larger role in reducing poverty and gender inequality around the world. Swedish statistician Hans Rosling explains the magic of washing machines in his famous TED talk (now with over 2 million views).
Washing machines, or the lack of them, impact every family on the planet. Rosling is passionate in advocating access to electricity and washing machines for Earth’s five billion people still living below the “wash line.” Rosling says one billion live above the “airline,” with access to all sorts of machines and gadgets and even flying machines! Another billion can’t afford all that, but do have electricity and washing machines. But below the wash line, five billion live in families where women take dirty clothes to the river each week, bring water from wells, or, for those lucky enough to have running water, wash clothes by hand at home.
(My mother had a washboard in the utility room before we had any machines for cleaning. We later bought a washing machine and mom hung clothes out to dry in the patio or front yard (depending on rain). Later we bought a dryer and still later a dishwasher. These magic appliances made daily chores much, much easier for my mother and my sister.)
There are important ways this washing machine progress story connects to the U.S./China debate topic. Central to Hans Rosling’s TED presentation: Some environmentalists believe Earth’s ecosystems unable to cope with the economic expansion and surge in electricity use needed to power washing machines for the billions still washing clothes by hand. Rosling mentions his environmentally-conscious Swedish students who ride bicycles each day to reduce their “carbon footprint.” He asks for a show of hands on bicycles first, then on clothes washing. None of his students wash their clothes by hand.
U.S. trade policy with China is impacted by environmental concerns (especially CO2 emission) with policies involving energy use and global climate change (as well as separate labor, antitrust, and other policies).
Environmentalists want more renewable energy used in China, and find common cause for protectionist policies that would also protect relatively more energy-efficient U.S. manufacturers from Chinese competition. Chinese manufacturers are shifting to more efficient and less polluting natural gas power, especially in China’s more-developed southern and coastal provinces.
The Chinese government though, is spending billions to heavily-subsidize solar and wind power installations, and also running heavily-polluting coal-power for electricity in the north, and coal-powered state-owned steel production. These costly policies are driven by politics. Fears of jobs losses, plus local corruption sustain coal and steel subsidies.
Concern about foreign environmentalists and protectionism energize solar and wind power subsidies. Unless the Chinese government makes a big show of spending billions for solar and wind power, and being a leader in renewable energy, they risk U.S. and E.U. environmentalists joining with manufacturing and labor interests to build new protectionist barriers. This 2011 article, “Prospects for Green Protectionism under China-US Energy Cooperation” discusses this dynamic:
A typical example was that the US threatened to impose unilateral trade sanctions, especially the so-called “carbon tariffs”, on energy-intensive products imported from those developing countries that would not adopt CO2 mitigation policies “comparable” to that of the US. The Waxman-Markley bill, passed in June 2009 by the US House of Representatives, and most other proposed [laws/legislation] in recent years all contained such provisions, [with/regarding] China as the major target.
The Chinese government understands the threat of “carbon taxes” so continues to subsidize solar and wind power generation.
Separate from green energy policies are more traditional protectionist policies claiming foreign firms are hurting the U.S. by selling manufactured goods below cost. Cited above are efforts by Whirlpool to slap tariffs on Korean washing machines made in China. Courthouse New Service December 30, 2015 story, “Whirlpool Wants Tariffs for Chinese Washers.”
Appliances maker Whirlpool wants the federal government to impose tariffs on imported Samsung and LG washing machines made in China, claiming they are priced too low. Whirlpool Corp. filed an anti-dumping petition with the U.S. Department of Commerce and the U.S. International Trade Commission, accusing its Korean rivals of circumventing federal orders. Dumping refers to selling a product in the United States at a price that is lower than “the price for which it is sold in the home market,” or the fair value, according to a government handbook.
Does it seem reasonable that Samsung and LG would invest hundreds of millions in design, factories, tooling, production, and shipping to sell their new washing machines in the U.S. for less that it costs to produce them?
The popular theory is that firms engage in “predatory pricing,” with big firms selling below cost in order to drive their smaller competitors out of business. Once competitors are bankrupt or leave the business, these “predatory” firms plan to recoup their losses as monopolists by raising prices much higher.
It is an interesting theory, but according to economists, doesn’t work in practice. “Antitrust,” an article in The Concise Encyclopedia of Economics, notes:
Likewise, belief in the efficacy of predatory pricing—cutting price below cost—as a monopolization device has diminished. Work begun by John McGee in the late 1950s (also an outgrowth of the Chicago Antitrust Project) showed that firms are highly unlikely to use predatory pricing to create monopoly. That work is reflected in several recent Supreme Court opinions, such as that in Matsushita Electric Industrial Co. v. Zenith Radio Corp., where the Court wrote, “There is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”
Those researching US/China trade policy should ask: who benefits from current and proposed trade policies? Past posts have noted that trade restrictions are often proposed and promoted by concentrated interest groups expecting to benefit from anti-dumping policies and other trade barriers.
Trade policy is not so different from other regulations. Regulations restricting Uber and Lyft ride-sharing, for example, are passed in the name of protecting the public but serve to protect established taxi and limousine companies from competition.
Everyday people benefit from wider transportation options, but not enough to lobby, protest, or vote because of this single issue. Taxi companies and drivers are concentrated and motivated, and they will lobby and protest to defend their government-protected privileges, just as Whirlpool and worker unions do to try to raise costs for Korean/Chinese companies.
Relatively open trade with China was originally easy because in the 1980s China was so poor and rural that manufacturing there was little threat to U.S. firms. As China under Deng Xiaoping opened up parts of the economy to foreign direct investment, manufacturing boomed. The Chinese economy integrated with the U.S., South Korean, Japanese, and Taiwanese economies. Now hundreds of millions of jobs across these five economies are woven together through tens of thousands of interconnected companies, supplier contracts, and distribution agreements.
The results of this relatively open trade and investment policy over three plus decades has been lower costs for goods for world consumers and astonishingly good news for hundreds of millions across China. A Huffington Post article, “Global Poverty Will Hit New Low This Year, World Bank Says,” reports the amazing story that as world population grew by billions since 1990, extreme world fell:
…a stunning decline from the numbers reported over the last 25 years. According to the World Bank, 37.1 percent of the world’s population lived in extreme poverty in 1990. In 2015, that number is estimated to drop to 9.6 percent.
In an October 7, 2015 Cato at Liberty post, “The Dramatic Decline in World Poverty,” Ian Vasquez connects this poverty reduction with the expansion in economic freedom, especially in China:
The drop in poverty also coincides with a significant increase in global economic freedom, beginning with China’s reforms some 35 years ago and the globalization that followed the collapse of central planning in the late 1980s and early 1990s. As we celebrate this achievement and strive for further progress, we should not lose sight of the central role that voluntary exchange, freedom of choice, competition and protection of property play in ending privation.
Relatively open U.S./China trade and investment policies have been the major factor reducing world poverty, along with India’s economic reforms in the early 1990s. Tyler Cowen in “Trump’s Disastrous Pledge to Keep Jobs in the U.S.” (Bloomberg, November 29, 2016) argues that policies designed to protect US manufacturing jobs will backfire:
If regulations prevented, say, Ford Motor Company from transferring its own capital funds to Mexico, what would keep it from using affiliates, subsidiaries, commercial alliances, or a complex web of foreign transfers to achieve more or less the same ends?…
Furthermore, if we limit the export of American capital to Mexico, the biggest winner would be China, as one of its most significant low-wage competitors — Mexico — suddenly would be hobbled.