Tariffs

Way back when then Presidential Candidate Donald Trump started talking about imposing tariffs I went into full facepalm mode.  Economically, tariffs are bad news.  They are a net drain on the economy.  “Protectionist” tariffs at best help a few at the expense of the many.

Let me expand on that a bit.  Take for instance iron.  A nation, call it Industria, can produce iron internally at, oh, 100 ID (Industria Dollars) per ton.  Another nation, call it Ferria, can produce iron, and ship it to Industria, at 80 ID per ton.  This makes the ironworkers (and the owners of iron producing businesses) very unhappy since either nobody buys their iron and they go out of business, or they have to find some way to match Ferria’s price.  This usually means making more with less which among other things means letting a lot of the former ironworkers go–much to their displeasure.

Enter the President of Industria.  He imposes a 20 ID per ton tariff on imported iron.  Now Ferria iron costs just as much as Industria iron.  And there was much rejoicing among iron workers and iron producing business owners.

All is good, right?

Not really.  This is what is seen.  There’s a flip side the “unseen” that Frederic Bastiat spent much time talking about.  By imposing that Tariff, the President of Industria has saved the iron making industry and lots of jobs.  But he’s done so by depriving every user of iron of the lower cost iron that Ferria would have made available.  That means everything that is made of iron and steel, everything that’s built with iron and steel machinery, everything that’s transported over iron rails, in iron and steel vehicles will cost more.  The iron workers were “saved” at the price of higher costs and lower standards of living for everyone else.  That part is “unseen” but it is nevertheless real.

Economically, there really isn’t any good justification for tariffs.

However, I have found reason to moderate my initial reaction to Trump’s talk of tariffs because while there’s no good economic justification, there can be other justifications. (Indeed, Bastiat makes that very argument–that there can be valid reasons for tariffs and other taxes, just not reasons based on economics.)

One of the reasons falls under national security.  If a nation allows itself to become entirely dependent on foreign supply of materials and industries critical to its defense, that nation is vulnerable to having that supply cut off.  In an ideal world every nation would recognize that it is in its own interest to trade freely on the open market in all these goods.  If they have a scarce resource that trade allows them to obtain the goods and services that make up the wealth of nations.  If one nation can produce goods more cheaply than another, it is in the other nations interest to trade for the cheaper goods in exchange for things the other nation cannot produce so cheaply.  In a free trade environment, everyone benefits.

The problem is, we don’t live in an ideal world.  Nations can make decisions based on things other than sound economic principles.  They may decide they are more interested in hurting you by depriving you of a resource they have than they are in reaping the benefit of that resource.  So, one needs to either have sufficient stockpiles of the critical goods to carry through a conflict, or to have the ability to produce those goods domestically, even if not as cheaply as a competitor.  An that may require a tariff on the competitor’s goods to support certain critical industries.

Another case where tariff’s might be of value is retaliatory.  If a nation has imposed tariffs on your nations goods, it might be valid to impose tariffs in rebuttal.  Ideally, the goal is to convince the other nation that tariffs to restrain trade are a bad idea and get them to the negotiating table so that you can eliminate tariffs entirely.  That may or may not work and you can end in a trade war that hurts everybody so extreme caution must be taken in when and where to use retaliatory tariffs.  But in the right circumstances, they can be valid.

And that is why I have had to moderate my position on President Trump’s proposed tariffs.  Other nations are starting to respond with suggestions of reducing or eliminating existing tariffs on American goods, which, if implemented, will have the benefit of encouraging trade generating more wealth and increasing the goods and services that make up the wealth of a nation available to people not just in the US, but in her trading partners.  A true win-win scenario.

As for the worries about a trade war?  We were already in one.  We just weren’t fighting back.

3 thoughts on “Tariffs”

  1. I think the Chinese have a good handle on what it is that Trump is doing, I wrote about it here:

    THE CHINESE UNDERSTAND WHAT TRUMP IS DOING, OUR MEDIA DOES NOT!

    http://www.maddogslair.com/blog/the-chinese-understand-what-trump-is-doing-our-media-does-not

    “I have just spent a week in Beijing talking to officials and intellectuals, many of whom are awed by his skill as a strategist and tactician…He [Yafei] worries that strategic competition has become the new normal and says that “trade wars are just the tip of the iceberg”.

    …In Chinese eyes, Mr Trump’s response is a form of “creative destruction”. He is systematically destroying the existing institutions — from the World Trade Organization and the North American Free Trade Agreement to Nato and the Iran nuclear deal — as a first step towards renegotiating the world order on terms more favourable to Washington. Once the order is destroyed, the Chinese elite believes, Mr Trump will move to stage two: renegotiating America’s relationship with other powers. Because the US is still the most powerful country in the world, it will be able to negotiate with other countries from a position of strength if it deals with them one at a time rather than through multilateral institutions that empower the weak at the expense of the strong…

    My interlocutors say that Mr Trump is the US first president for more than 40 years to bash China on three fronts simultaneously: trade, military and ideology. They describe him as a master tactician, focusing on one issue at a time, and extracting as many concessions as he can. They speak of the skillful way Mr Trump has treated President Xi Jinping. “Look at how he handled North Korea,” one says. “He got Xi Jinping to agree to UN sanctions [half a dozen] times, creating an economic stranglehold on the country. China almost turned North Korea into a sworn enemy of the country.” But they also see him as a strategist, willing to declare a truce in each area when there are no more concessions to be had, and then start again with a new front.”

    Tyler thinks this is speculative. I do not understand what he is looking at to come to that conclusion. This is so obvious it should be blinding, but for the progressive left, the media, and the NeverTrumpers (and many of the otherwise rational economists) it is not. I think the problem with the economists is they live in a linear world where linear analysis is what propels their understanding and way of thinking. We, including Trump, however, live in a nonlinear world where real change happens after sudden tectonic shifts in political opinion or policy.

    Trump understands that we can either continue down the road with the now threadbare old “New World Order” of the middle 20th century or we can look forward and find a world order which is actually new.

    The economists believe in incremental change, Trump believes in tectonic change. The economists are right for the majority of the time when the socio-economic model works, and all we are doing is fine-tuning it. But once we enter the model change years, the socio-economic model fails, and as the failures become increasingly apparent, we need to find a way to change to a new model. Here incremental change cannot move the model forward. Instead, gradual change only causes the model to spin into a death spiral slowly. The cure is sudden change like when an electron fires off a photon and instantly changes its orbital state.

    We are not in a fine-tuning stage. We are in the sudden orbital shift stage.

    As I have said before, during times of chaotic shift whether in business, national economy, or personal venture the people who were expert during the last economic model are the last people one should seek advice from during the interregnum. I learned this when in the 1980s I watched the collapse of AT&T after the 1982 breakup of the Bell System which was a government-created monopoly.

    “The breakup of the Bell System was mandated on January 8, 1982, by an agreed consent decree providing that AT&T Corporation would, as had been initially proposed by AT&T, relinquish control of the Bell Operating Companies that had provided local telephone service in the United States and Canada up until that point.[1] This effectively took the monopoly that was the Bell System and split it into entirely separate companies that would continue to provide telephone service. AT&T would continue to be a provider of long distance service, while the now-independent Regional Bell Operating Companies (RBOCs) would provide local service, and would no longer be directly supplied with equipment from AT&T subsidiary Western Electric.” Breakup of the Bell System

    This was all pretty vanilla except for the following facts: 1. The breakup stood the former Bell System at the edge of an interregnum, 2. The experts of the old system could not understand what the interregnum was likely to lead to, 3. The outcome destroyed AT&T because it chose the cash cow of the pre-interregnum but those cash cows turned to fools gold in and beyond the interregnum.

    The point is the experts of the prior model become the goats of the interregnum and beyond. The reason is they have vast experience and expertise in the earlier model but the new model will be completely different and any previous experience and expertise will not only be wrong but will be damaging and destructive.

    AT&T paid the price for failing to understand Maddog’s Iron Law of Model Change: Experts of the earlier model must be discarded, or they will destroy all relying on them in the new model.

    We are now firmly in the interregnum for the new model, and the experts of the old like the various professors of economics are more dangerous than helpful. I expect many of them to figure out the fact that they are on the wrong track. This will allow the better among them to begin recalibrating and hopefully, those will be able to change. Regardless many will not, so you will need to be wary of expert advice for the foreseeable future.

    The Chinese see clearly what Trump is doing. They like the rest of the world prefer the old model which the US created to allow Europe and Japan to build up their economies after WWII. It is time for a more equitable world order. Trump will force that to happen over the next few years.

    Our media is comprised of the least capable individual from university. They nearly to a man have never worked or had responsibilities which would allow them to build knowledge and experience outside of the sinecured halls of effete big journalism in the big cities of America. The result is a media run by fops and know-nothing dandies.

    The least likely people to understand what is going on are the journalists, followed closely by the experts of the former model.

    I hope this was valuable.

    Mark Sherman

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  2. Very very right at the end: “worries about a trade war? We were already in one. We just weren’t fighting back.”

    Trump’s tariffs are a negotiation chip, as well as a willingness to fight.

    Trump has called for ending all tariffs, all subsidies, all non-tariff barriers. This is every “Free Trader’s” goal. Only Trump is calling for this, among elected decision making politicians.

    He’s fighting for Free & Fair Trade — in a post WW II where America was rich enough to allow others to have tariffs but have none for the US. With large trade deficits. Should probably call it “Trade Inequality”, and Trump wants to redistribute Trade.

    American workers will get more, and ARE getting more. Using tariffs is the real way to put tariffs into the negotiation calculations — and all countries now with export surpluses with the US are in far more danger of a small lose- Big Lose (for them) with tariff reduced trade.

    I like win-win. Trump is showing that being willing to do lose-LOSE is more likely to lead to fairer, freer, trade.

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