Trade duties are predictable, the results are less so

From an economics standpoint, one of the defining characteristics of commodity industries is that they are businesses nobody wants to stay in. They are the boot camps of economic development, appreciated by participants but an experience that few wish to prolong.

Commodities are the raw materials of economics, and most underdeveloped countries come to recognize that a commodity industry offer a good beginning, it often becomes a dead-end as a long-term source of economic growth. Commodities industries are plagued with boom-and-bust cycles, and partly because of this often find themselves substituting low-wage labor for scarce capital.

China did not get to be the second largest economy in the world by failing to understand economics and the role of commodities in economic growth. Policy makers there recognize that industry by industry they must introduce value-added products into the markets that their commodities exports have opened up.

China’s low-wage advantage in global trade has all but evaporated in the heat of their economic development. Its economy is clearly moving away from commodities and toward higher value-added products and market penetrations that substitute strategic focus for the brute force economics of the past.

It is in this economic setting that U.S. policy on global trade is continually tested. Recently, for example, Chinese producers of plywood were charged with “dumping” their product on U.S. markets. As in anything involving international trade things tend to get complicated in a hurry, but if we think of dumping as a country’s producers selling a product in a foreign market for less than it sells for in their own domestic markets we wouldn’t be wrong.

U.S. law on dumping calls for separate investigations of any dumping charges by the Commerce Department and the International Trade Commission. The Commerce Department, after its investigation, has initiated preliminary duties of almost 45 percent on imports of Chinese hardwood plywood. The trade commission was originally scheduled to publish its ruling regarding corrective measures on Oct. 24. The commission’s schedule has been affected by the partial shutdown of the federal government, though, and even with the end of the shutdown the decision may be delayed for several weeks.

It is not clear whether the plywood dumping was an accident, part of an economic policy strategy, or just an imperfectly formed market grab idea on the part of the producers and sellers. Whatever the cause was, though, the Chinese pricing action clashed with U.S. trade policy and the result will very likely be a punitive import duty on any of their hardwood plywood shipped here.

The economic effects of trade sanctions are usually a mix of predictable and unexpected actions, and the Chinese plywood situation is no exception. There is no doubt that the imposition of a nearly 45 percent increase in import duty will increase the cost to American users and will almost certainly result in a precipitous drop in sales to U.S. customers. What happens after that, though, is less certain, and the ultimate impact on U.S. jobs is unknown.

Chinese producers have been price leaders in U.S. markets. Their hardwood plywood products are used in the construction industry and by both large and small producers of wood cabinets in homes and remodels. Hardwood plywood produced in the U.S. has generally been more expensive than the Chinese imports but if the proposed duties are imposed that situation will be reversed.

In the best possible scenario, the Chinese essentially drop out of the U.S. hardwood plywood market and seek other global trade opportunities for their product. U.S. producers then step up production to fill the gap, creating new jobs for American workers, and the increased cost is absorbed painlessly by the housing market. There are no other secondary effects, and all’s right with the world; at least the U.S. portion of it.

Best possible outcomes aren’t all that common though, and pushing the Chinese out of this market is more likely to cause them to push back by transforming their bulk plywood into a higher-value product: finished cabinets. The information and production technology exists for China to produce, in their own domestic facilities, finished cabinetry for new and remodeled U.S. homes and ship directly to construction sites. The increased costs in the U.S. would also attract imported cabinets from Canada and Mexico. Large scale U.S. cabinet producers could probably still compete effectively in this new market but the smaller businesses in the cabinet industry would be devastated.

Today’s industries are complex organisms and are held together by DNA-like structures that do not respond in classic 19th- or even 20th-century ways to an economic jolt like a big import duty. From an economics standpoint it will be interesting to see how this anti-dumping situation plays out – even more so if your job depends on it.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.

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