China Tariff Battle Impacts Ottawa Kansas

by Levi A. Russell
This originally appeared as a column at the Ottawa Herald

When we read about the many aspects of the current trade war with China, it’s difficult to see how big international policy decisions affect us here in Ottawa. This week I’d like to discuss recent events in the trade war with China and how they might affect us. To do that, let’s take a big picture look at the trade war. Though there are many weapons in a trade war, tariffs are the primary weapon of choice for the Trump administration in its war with China. A tariff is a tax on an import, but as we will see, it’s a complicated tax.

Earlier this month, the U.S. Trade Representative imposed a 25% tariff on $200 billion worth of Chinese goods imported to the U.S. The 25% tariff is paid explicitly by importers of Chinese goods, but other parties are implicitly affected by the tax. In economics, we say that the incidence of the tax falls on the aforementioned importers, Chinese exporters, and U.S. consumers. The importer passes on some or all of the tariff in the form of higher prices for U.S. consumers. This higher price pushes down the quantity that consumers want to buy, resulting in lower revenue for Chinese exporters.

The tariffs will be applied to over 5,000 different products; some are consumer goods (i.e. goods we buy and consume directly) and others are intermediate goods, which are used by U.S. manufacturers to make other products. Some examples of goods that will be taxed under this tariff are grain, candies, pasta, beverages, minerals, ores, slag, ash, mineral oils, inorganic chemicals used in manufacturing, fertilizers, soaps, plastics, rubber, wood, fabric, stone, ceramics, flax, cotton, wool, aluminum, furniture, clocks, ships and boats, electronics, and many other goods. We can expect that the prices of many of the consumer goods listed here will increase here in the U.S. and the prices of other goods made from the intermediate goods will also rise to some extent (though not likely a full 25%).

A few days after the U.S. Trade Representative announced the 25% tariff, China retaliated with a promise to increase tariffs on $60 billion worth of goods exported to China. These tariffs will directly impact importers in China, but will also affect industries in the U.S. that export to China, as well as Chinese consumers. The broad categories of goods that will fall under these higher tariffs are food products, building materials, furniture, bedding, footwear, clocks, light fixtures, musical instruments, parts for locomotives, boats and yachts, electronics, and chemicals.

Here in Ottawa, the U.S. tariffs will likely have a bigger impact than the Chinese tariffs. Like the rest of the country, we will likely see a rise in the prices of many consumer goods. Some of the manufacturing and construction businesses in Ottawa will likely see an increase in their costs, especially if they buy raw materials or intermediate products directly from China. They will either have to pay higher prices for these inputs or find other sources either in the U.S. or another country.

Even though I am an economist, I will not try to tell you all of this is bad. The expected reductions in employment and GDP in the U.S. are mild, though they will likely be felt to a greater degree in specific areas of the country. These economic costs might be worth it if they result in policy changes that are favorable to U.S. interests. For all its improvements in the past few decades since it slaughtered tens of millions of its own people, China is still a Communist country. They still send Christians and Muslims to “re-education camps,” micromanage their citizens’ lives with an authoritarian social credit system, and support North Korea, which actively tortures its own people. China has repeatedly stolen our intellectual property and is increasing its spying efforts in the U.S.

The use of the term “trade war” is apt. The tariff battles may impact the economy in the short run, but winning the war is the goal. It’s up to us and our elected officials to determine whether the economic costs are worth the strategic and security-related benefits.

Dr. Levi A. Russell is the Gwartney Institute Professor of Economic Education and Research at Ottawa University

Market Solutions: Infrastructure Problems

Jacob C. Maichel 

It is hard to deny that healthy transportation infrastructure and support systems are paramount to economic growth and success. Unfortunately American roads and highways systems are crumbling more and more by the day and no matter how much the government spends the trend does not seem to shift. A study by the American Society of Civil Engineers determined that 32% of urban roads are in extremely poor condition, with Kansas having the 5th worst roads in the United States1! What can we do to fix our continually deteriorating roads? 

The right answer is not continuing to pour billions of federal dollars into infrastructure projects, atleast without private partnerships. The Trump administration in their 2018 budget proposal meetings began to increase federal spending on infrastructure by $200 billion which continued to undermine the power of American decentralization3. Federal spending and regulation will continue to hamper private responses to these problems if there is not a significant shift in federal policy.  

One of the first barriers is effect that the heavy red tape of regulation is having on development as a whole. Not too long ago in 1970 mandated reviews by the National Environmental Protection Act took an average of 2.2 years while today we are looking at around 6.6 years on the low end2! In the same timeframe we have seen environmental laws raise from only 26 to 70 in total when it comes to infrastructure development3. I am all for the environment but I am also for progress. Instead of the government pouring money into infrastructure perhaps they could spend it elsewhere to bolster environmental protections and cut back regulations allowing states or private industry take over. This way projects could be determined by supply and demand and the most pressing concerns can be addressed first by the people that use the systems, rather than bureaucracy! 

A major factor that prevents someone else from taking the reins from the federal government is the distortion caused by subsidies which reduces other projects return on investment. American investment banks and large pension funds seek to invest in infrastructure projects but often turn to foreign development particularly in Canada, Asia, and Latin America2. Instead of a top down approach the power should be given to states and allow private public partnerships. This is currently difficult to do as any project that receives any federal funds must return all the grant money if it decides to go private. States have also learned to become willingly helpless as they just hold out until roads become so bad the federal government has to pay for the repairs themselves. 

The fact of the matter is that private or local governments are able to do projects exceedingly more efficient. Federal projects have a long track record of having pork barrel spending tied to projects, usually a product of political favors completely removed from the people the project is meant to serve3. Not only have private projects both in and outside of the US been completed cheaper and faster they also remove all the risk from the taxpayer and shift it to the investors backing the project. These projects also create new revenue for the federal government instead of sucking out an ever growing amount of money.  

Something that should very seriously be considered is allowing all 50 states to collect toll revenue from interstate systems and use it to maintain the roads. This has worked incredibly well for India’s toll road which is one of the busiest systems in the world2. Allowing states to tap into this capital to modernize and maintain roads would be a very welcomed shift by anyone who uses these roads on their daily commutes. If the states also had the ability to team up with local innovators they could completely transform the way infrastructure is managed. Economies of scale can help private investors to offset large investments while trying to earn a return, incentivizing efficient allocation of resources.  

The fact remains that the more power is given to the private sector and smaller localized governments the better the results are. If the federal government was able to produce cheaper high quality infrastructure it would make sense for them to control all the means of production… which has failed in every socialist country in the history of humankind. State and local governments should be encouraged to collaborate with the same people they served rather than penalized for taking part in building up their communities. Page Break 

1. https://www.businessinsider.com/worst-highways-roads-us-ranked-2018-10  

2. https://reason.org/wp-content/uploads/files/federal_barriers_to_private_capital_investment.pdf 

3. Chris Edwards, “Privatization,” https://www.downsizinggovernment.org, Cato Institute, July 12, 2016.
   
   

    Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Market Solutions: Transport Safety

By Jacob C. Maichel

Anyone who has flown within the last two decades understands how frustrating the process can be. Arriving hours earlier than takeoff to combat the setbacks that could prevent you from making your flight is frustrating. It seems the security model provided by the government has no alternative, but what if private industry had more freedom to do screenings? Surely companies with an incentive to outperform their rivals would be a more efficient solution than the Transportation Security Administration (TSA).

Previous to one of the most devastating acts of terrorism, 9/11, the majority of airport security was handled by private companies. The issue with the previous model was that the Federal Aviation Administration (FAA) oversaw the private companies. Before 9/11 the majority of the rules set in place by the FAA were to protect against plane malfunctions or natural disasters, as they had little desire to be a law enforcement agency1. After the attacks congress unanimously approved a fully federal screening system which created the TSA in 2001. By 2002 the TSA was based in the Department of Homeland Security and boasted the 4th largest budget in the building. A fully federal system was actually opposed by then president George W. Bush and the House of Representatives, who both pushed for private security with strict federal oversight.

There is a small program called the Screening Partnership Program (SPP) that meets much resistance from the TSA. The SPP program allows for airports to opt in for private screeners rather than the traditional TSA approach and currently 22 airports take advantage of this. One of the largest adopters of this is the San Francisco airport. A study by the House Transportation and Infrastructure Committee revealed in 2011 that screening inside of San Francisco International was 65% more efficient than federal screening at Los Angeles. Some of the factors that are attributed to this dominance is less employee turnover which leads to better workers, and more flexible staffing measures such as scheduling.

San Francisco really exhibited the benefits of being private during the recent government shutdown. During the shutdown TSA employees calling in sick increased 272%, while none of the 22 privatized airports had any delays. Being private also allows for more focus to be on the security of the consumer. In 2015 there was a test by the inspector general where 67/70 weapons made it past TSA screening points. If this happened to a private service provider the airline could simply switch to new security. For private screeners being effective is the only way to stay in the airports, as where TSA is guaranteed.

One of the most glaring flaws in this structure to me is that the TSA is self regulating. TSA has the task to give themselves their own rules which creates a conflict of interest. The TSA gets to choose what is and is not allowed on airplanes, what technology and screening procedures are used, all while being the same organization who implement the searches! With private screeners we could hold each company accountable, decrease operating costs, and most importantly increase security! While federal oversight is unquestionably important in aviation the security itself could be handled much better by the private sector.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University