Taming Deflation

This week, in what I believe was the United States’ boldest move yet to curb the influx of deflation from China, the U.S. commerce department slapped tariffs as high as 198% on bedroom furniture imported from China. This decision could cut bedroom furniture imports from China by about $1 billion a year, while raising prices for U.S. consumers.

The case of “cheap” bedroom furniture imported from China is the largest trade issue dispute of its kind between the U.S. and China. Some U.S. manufacturers called it “illegal dumping.” Those same bedroom furniture makers are now applauding the U.S. commerce department action.

While most of the news in the media has been about saving U.S. jobs, I believe another motive could have underlined the tariffs: taming deflation. Yes, there is no doubt that U.S. jobs have been lost. In fact, over the past three years, 35,000 U.S. wood furniture workers have lost their jobs-that’s 28% of that industry’s workforce.

U.S. consumers are very cost conscious. And they should be since they work so hard for their money. As news of cheaper bedroom furniture from China spread, U.S. consumers started buying “made in China.” U.S. Bedroom furniture imports from China rose 121% from 2000 to 2002 and another 54% in the first six months of 2003 alone. This threatened to put old American bedroom manufacturers out of business.

It’s a fine line. In order to save U.S. jobs, tariffs were introduced. The cost: higher prices for American consumers. It’s ironic in a sense because the U.S. stands for democracy, freedom, and (I like to think) capitalism. Are tariffs not really curbing these principles and taking away the freedom of choice for U.S. consumers?

While I don’t want to tread into a debate on the pros and cons of tariffs on imported goods to the U.S., the angle I am looking at is the deflation we are importing by bringing into the U.S. cheap “made in China” goods. I see it in the inflation numbers-if we take away energy and home prices and volatile food prices, the cost of living is actually coming down.

Greenspan talks a big shtick about deflation no longer being in the picture, but the threat is still very much here. Maybe the Fed Chairman sees deflation no longer as a threat because he knows about more incoming tariffs on Chinese-made goods. Could this be a possibility?

I can’t see how we’ll place tariffs on all the goods Wal-Mart sells. And considering interest rates are about to begin rising, I’ve never seen interest rates rise at the same time that consumer prices are falling. That’s a recipe for disaster if I’ve ever seen one! The next 12 months should be very interesting economic times in North America. Stay tuned.