China’s Import Taxes as Returns to Rent Seeking

This year a four-decades old quota limit on textile exports from China expired. In less than five months, U.S. imports of Chinese shirts and trousers have surged by some 1,500 percent.

To an economist, that’s good news—consumers are getting more of what they want for less, leaving us with more time and money for charity, savings, leisure, or however else we like to spend our lives.

But U.S. textile companies—and their Washington lobbyists—disagree. Now, in response to threats from the Bush administration to re-impose import quotas the Chinese have raised their own import taxes:

China, under fire from both the U.S. and the E.U. over surging trade deficits, has decided to fire back.

Beijing announced yesterday that it was raising export tariffs on textiles starting June 1. Textile exporters will now be taxed up to an extra 4 yuan (48 cents) on 74 types of clothing — a five-fold increase over existing tariff levels.

The decision comes on the heels of warnings issued earlier in the week from Washington that the Bush administration was considering limits on the imports of Chinese textiles.

Not surprisingly, domestic manufacturers in the U.S. cheered the news. But should we fear cheap imports from China? In Adam Smith’s Wealth of Nations he rails against high import taxes, as they simply reward the anticompetitive rent seeking of domestic companies:

BY restraining, either by high duties or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them…

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them…

But alas, even in Adam Smith’s day the problem of concentrated benefits and diffuse costs meant the special interest of domestic producers usually wins over the interest of consumers:

To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.

(See also: Humility as Trade Policy.)