Tariff might hurt rather than help economy

By DAVID MOON, Moon Capital Management, LLC
September 20, 2009

Neodymium is a chemical element known as a “rare earth element.” For those of you who keep a periodic table of elements handy, its symbol is Nd.

It is a vital component in the production of the magnets used in wind turbines and the batteries used in hybrid vehicles such as the Toyota Prius.

Over 99 percent of it is produced in China.

If you think that our nation’s dependence on oil creates a national security threat, consider this: Neodymium is also used in the guidance systems on many of our military’s weaponized missiles.

That’s not fair. Why would the Creator put all that good stuff in a socialist country?

Life isn’t fair.

The Middle East enjoys being home to the largest oil deposits in the world. Some geographical areas enjoy favorable climates for growing vegetables or certain expensive fruits. Bananas would be a lot cheaper at the Kroger on Asheville Highway if they came from Grainger County.

The risk of the Chinese dumping their U.S. Treasury bonds may be frightening, but consider the possibility of losing access to a critical component of a military guidance system.

This is one reason I was dumbfounded by the U.S. imposing a 35 percent trade tariff on Chinese tire imports.

The relationship between the U.S. and China is both dangerous and interdependent. We are like two mountain climbers roped together, crossing a 300 foot deep crevasse. China depends on the U.S. as a market for its exports in order to support its own economic growth. The exploding U.S. national debt requires significant foreign funding – a large source of which is China.

And then there are those rare earth elements.

In imposing the tire tariff, the U.S. government never alleged that the Chinese government was engaged in illegal dumping. U.S. Trade representative Ron Kirk explained that the action was simply in response to a surge in market share by Chinese manufacturers.

This tariff will effectively eliminate a source of 17 percent of the tires sold in America. Suppliers will have to find new products – almost certainly higher cost sources.

In his campaign for the presidency, Herbert Hoover pledged to enact tariffs on imported agriculture products in an effort to help farmers – a voting block that constituted 27 percent of Americans at the time.

Tariffs always appeal to some political constituency.

As Hoover’s legislation worked its way through the legislative process, other industries were included in the protectionist measures. By the time the Smoot-Hawley Tariff Act of 1930 was passed, it included record import taxes on more than 20,000 products.

More than 1,000 economists signed a letter urging President Hoover to veto the bill. On the eve of its passage, Henry Ford, CEO of one of the companies the Act was ostensibly designed to help, called the massive tariff “economic stupidity.

Historians disagree on the role of Smoot-Hawley in extending the length or depth of the Great Depression. They do not disagree on its futility in helping the American economy.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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