The Chopstick case, tariff, and currency

Trade balance has been a hot topic in the US, especially among the protectionists. Some blamed the RMB currency peg, others blame WTO and call for tariff. In one extreme we have the now obsolete Schumer-Graham Act, asking for a 27.5% tariff to 'equate' the effect of an allegedly mis-pegged Yuan.

The interventionists believe they are the gods, who are more powerful than the market. Perhaps they want to make themselves more powerful than the market, like Stalin and Mao once were able to do so. What they have missed is that every merchandise has its own cost structure and every factory in each country has its own competitive advantage. Imposing indiscriminate tariff or 'manipulating' currency does disservice to the consumers and discourages efficiency in the suppliers.

With fair and transparent macro-environment, each product will find its own price based on supply and demand, just like raindrops find their way to the puddles on the ground. To tilt the ground is a task not only difficult, but also impossible to accomplish.

Here is a good example of how the price of chopsticks (waribashi) find its own 'equilibrium point'.
  • "In a move that has cheered environmentalists but worried restaurant owners, China has slapped a 5 percent tax on the chopsticks over concerns of deforestation. (The tax could be think of a better reflection in of the cost, i.e. environmental cost, see elaboration in the comments)
  • Chinese chopstick exporters have responded to the tax increase and a rise in other costs by slapping a 30 percent hike on chopstick prices with a planned additional 20 percent increase pending.
  • A pair of waribashi that used to cost a little over 1 yen less than 1 cent now goes for 1.5 to 1.7 yen. The rising costs of raw wood and transportation because of higher oil prices have also contributed to the rise, industry officials said.
  • To minimize the impact, Japanese importers now buy more bamboo chopsticks and are considering new suppliers, including Vietnam, Indonesia and Russia, said Fukuoka.
  • An Osaka-based restaurant chain operator, Marche Corp., switched to reusable plastic chopsticks in February at its 760 outlets after testing various materials over six months, said company spokesman Michihiro Ajioka.
  • A pair of plastic chopsticks costs about $1.17 and can be reused some 130 times a cost-per-use that matches a pair of waribashi, Ajioka said.
This is a lesson for both the trade bureaucrats and the environmentalists. It shows how one can achieve the objectives without getting all the bureacratic inefficiency, while benefiting human beings overall in the long run.

Prices will adjust by themselves, as no factory can sell at a lost in the long run. What you need to do is to deal with the price levers, instead of relying on the lazy solution of tariff or currency. If Senator Schumer is a little less lazy, he could try not to manipulate currency in his own way. Instead, he could work on much more effective measures to achieve his objectives, such as pulling the environmental or labor policy lever in the factories. He will win support from everybody, including workers and people inside China.


Anonymous said...

What's the difference here? Isn't it both the 5% tax in the chopstick case and the 27% tariff proposed by US are policy rather than natural market forces?

Sun Bin said...

ohh yes, you raised a good point. i forgot to elaborate on this. thanks very much.

one of the differences is that it is not across the board. this allows for more say from market force.
second is that it is imposed voluntarily by the exporter, supposedly that reflects the rising environment cost rather than punitative tariff. (my perfect example would be if the tariff would be put into a conservation fund, so that the 5% reflects the environmental cost and it should matches what its competitor countries are doing.
(this example is not perfect but close enough, as the 5% cost hike does reflect that rationale. if i use the textile tariff as an example your question is totally valid)

third, which is what kicked off my post, the point here is that goods such as disposable chopstick would adjust its price by itself (becaue cost will change). only a level playground is to teh best interests of both parties according to "free market principles". there are many ways to level the playground (i.e. cost structure) for China and its competitors. tariff is an especially bad measure because the playing field is not level and it harms the domestic industry of the importer because they are competing under an artificial umbrella.
exchange rate is also just a short-term fix because, given time, changes in, eg, changes in the cost component (eg commodity/raw material in our case) will lead to re-negotiation in price. imported copper wire in an electric motor is analogous to the wood in the chopstick,