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Paper Tariff Bad for Printers, Bad for Their Customers, Bad for the Economy

News of the cave-

By Dr. Joe Webb
Published: March 31, 2007

News of the cave-in to protectionism was quite disappointing the other day as the Bush Administration, fearing that pending legislation in Congress might actually be worse than this specific decision, agreed to put tariffs on coated papers originating from China. Printers, who have not been able to pass along their cost increases to a market depressed by new media competition, will have yet another burden to deal with. Tariff wars never work, and consumers of goods end up paying the price in terms of more expensive goods and lower employment. Tariffs also are a blow against economic freedom, the ability of buyers to select from a wider range of suppliers and prices, and affect the employment of consuming industries. Notably, higher costs of paper will tilt the media playing field further against print. Note these cost changes over the past year: Computers & peripherals, down -5.3% Internet service providers and web search portals, down -22.7% These are the real competitors to print, and this decision is a step backward in the re-alignment of the print business. Paper is a fixed cost of print; new media has no such cost barrier. Tariffs also remove the pressure on inefficient industries and companies to restructure themselves and to innovate. It is no accident that the expiriation of steel tariffs in 2003 corresponds with the current economic expansion and declining unemployment in that time. Changes in tax rates did not do it alone. Some will say that the tariffs helped the industry "buy time" to re-align itself; instead it was a major contributor to many months of slow economic conditions. How do consumers of print adjust? By changing to less expensive grades, reducing run lengths, reducing page counts, or by not printing at all. These are already happening, but these trends have seemed to stabilize recently. Rising paper costs may re-start the shift. Paradoxically, one of the ways to avoid the tariff is to print goods in China and deliver finished goods to the U.S. While printing imports from China have stabilized and affected imports from Canada more than U.S. production, this tariff provides new incentives to outsource printing to China. The paper industry is likely to suffer reduced demand from the changes in print run characteristics and this new incentive to print offshore. Reduced demand for paper means that there will be less paper produced, which means that the paper industry will have further problems with its attempts to manage capacity and profitability because there will be less revenue to cover its fixed costs. These downside effects do not occur immediately, but they corrode over time. Print alternatives will only continue to become cheaper, and more compelling. Right now, protectionist acts are limited, but there are many industies lining up with Congress and the Commerce Department to make their case for their own protectionist desires, and the Bush administration seems ready to act in their direction. Recent productivity data have been disappointing, and these acts will do nothing to improve U.S. productivity. Only competition does that. The Cato Institute has an interesting paper on the tariffs and trade. The last big flirtation with tariffs was with steel and another Cato paper has a good discussion about the effects on supply and demand. In fairness, I must note that there was a time in history where tariffs were the principal form of taxation in the U.S. until the advent of the income tax. "Mild" tariffs can be a legitimate form of taxation in the case where other forms of taxation are absent. That is definitely not the situation here. Part of my personal concern in this matter is that I have worked in a company that was convinced its competitors were "dumping" when all along their competitor's costs were significantly lower, and there was no "dumping" involved. The company's financial structure was seriously flawed because of high long-term debt. The company went through years of painful downsizing, in a death by a thousand cuts, until it was finally sold. Also, I saw what the same line of reasoning did to Kodak when it staunchly refused to compete with Fuji in the 1980s rather than restructuring and revitalizing itself then, at a time when it had significant resources to do so, a price for which Kodak stockholders paid for significantly, in an attempted restructuring that continues today.

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.



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