Obama's Friday Night Doc Drop

This was announced by the Obama administration last evening.

President Barack Obama on Friday slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

Obama had until Sept. 17 -- next week -- to accept, reject or modify a U.S. International Trade Commission ruling that a rising tide of Chinese tires into the U.S. hurts American producers. A powerful union, United Steelworkers, blames the increase for the loss of thousands of American jobs.

I immediately had two thoughts. First, I thought about history. In the early 1930's, we had an act called Smoot/Hawley. This was a sweeping bill that provided tariffs and other protectionist policies on all sorts of goods and services. Smoot/Hawley sparked a trade way and it contributed greatly toward turning a recession into a depression.

President Obama's tariffs are much more limited. They are limited strictly to tires. Still, the Chinese are not happy. Trade wars don't have to start with a sweeping piece of legislation. You can expect protectionist retaliation from China. Our companies, in some industry, will see the price of their goods get whacked with tariffs on their product from China. From there, who knows what can happen.

During periods of economic contraction, and frankly always, the last thing you want to do is stunt trade. All companies need access to all markets now more than ever. Now, Chinese tire companies don't have as much access to our markets. That makes the price of tires more expensive. China will now protect those companies with a retaliatory tariff and our companies will have less access to China. That will stunt growth all over the world and create upward inflationary pressure.

This move makes no economic sense. It's strictly political. Unions control the tire makers and they've been complaining that cheap tires from China are causing them jobs. This is yet another nod to the unions from the Obama administration.

More than that, we count on China to finance our massive deficits and debts. Is ticking off our biggest creditor really the wisest geopolitical move? China is already weary of buying up our bonds. Now, the Obama administration has just given them another reason not to buy our bonds. At the same time, Secretary Geithner is assuring the Chinese that our debt is safe, we are telling them our markets are not welcome to them. How exactly does that work?