Tariffs (again)

I have said before that I am a real unfan of tariffs.  But, bear with me here for a minute.

Tariffs are bad. There really is nothing good, economically, about tariffs. A modest tariff might, under the right circumstances, be less bad than other forms of taxation as a revenue generation measure, but economically, from the aspect of national prosperity, they are bad. They hurt the nation against which the tariff is imposed by reducing their trade and, thus, reducing their means to obtain more goods and services. They hurt the nation that imposes the tariffs by increasing the cost of goods and services and thus making less available to its people.

Arguments may be made about tariffs to “preserve jobs”, yet those jobs are had at the expense of making the product of said jobs more expensive for everyone else–after all; if they could have produced the involved product or service as cheaply as the tariffed foreign source, then they wouldn’t need the tariff.  It helps a few at the expense of many.

And a “retaliatory” tariff against a nation that has imposed tariffs on ones own nation? That does not “counter” the effects of that tariff–it doubles down on it. Both nations are now making both of their economic situations worse.

Let’s break that down a little bit.  If a country, A, makes widgets, and widget manufacturers come to the government and complains about “unfair competition” from Country B’s widgets and paint pictures of dire consequences such as widget makers losing their jobs, Country A might be influenced to tariff on Country B’s widgets.  Country A’s widget manufacturing jobs preserved.  Yay!  Only it doesn’t stop there.  Who were Country A selling their widgets to?  In the domestic market (the tariff doesn’t help in the international market) those people are now finding they have to pay more for their widgets.  After all, if Country A could make widgets as cheaply as Country B, there would be no need for the tariff.  That means that everyone who uses Widgets has to pay more.  And less of something is demanded when the price is higher (Economics 101).  So there will be fewer widgets in Country A.  But that’s not the only effect.  People spending more on widgets means that they have less available for other things.  The increased scarce resources that have alternative uses (labor, material, time, whatever) required to obtain widgets is not available to produce other things.  The problem is, most people don’t notice that because it’s spread over the entire economy.  A little here.  A little there.  Individual transactions aren’t very much, but spread over the entire economy they add up.

What about Country B?  They’re unhappy about the loss of markets for their Widget manufacturers.  So what do they do?  They find something that country A produces more cheaply, call it Goofers, and impose their own tariff on that.  There are a couple of problems with that, though.  First off, it does nothing to improve his own Widget sales.  It doesn’t restore the market in Country A.  And, while it might make Country A’s Goofer manufacturers unhappy (the same way Country A’s tariff on widgets makes Country B’s widget manufacturers unhappy).  But like Country A’s tariff on widgets, it makes Goofers more expensive for Country B, reducing their availability (people who would have bought them at the lower price won’t at the higher) and increases the resources spent to acquire Goofers, meaning those resources are not available for other things.

Both countries end up worse off economically from the tariffs.  Country B’s “retaliatory” tariff doesn’t improve its situation.  It makes it worse.  If either country drops its tariffs and goes “free trade” it’s economic situation improves.  It’s wealth–which is the sum total of goods and services available to the population–increases.  This remains so even if the other country does not.

However, Trump appears to be using tariffs not as tools of economic policy, but as weapons in diplomatic policy. Basically, raising in a high stakes poker game.  He’s shoving chips out on the table and daring the other guy to call.

And so long as the other nations keep folding, I can’t really say that he’s wrong, whatever the actual economics of tariffs are.

Advertisements

4 thoughts on “Tariffs (again)”

  1. When Trump announced his plan to lay tariffs on Mexico, I bought a few “call” options for Diamond — the ETF that follows the Dow Industrial average. I’ve more than doubled my money.

    The market always recovers from Trump tweets.

    Liked by 1 person

  2. From an economic perspective, we should tariff exports, not imports!

    https://www.maddogslair.com/blog/from-an-economic-perspective-we-should-tariff-exports-not-imports

    “I have said before that I am a real unfan of tariffs. But, bear with me here for a minute.

    Tariffs are bad. There really is nothing good, economically, about tariffs. A modest tariff might, under the right circumstances, be less bad than other forms of taxation as a revenue generation measure, but economically, from the aspect of national prosperity, they are bad. They hurt the nation against which the tariff is imposed by reducing their trade and, thus, reducing their means to obtain more goods and services. They hurt the nation that imposes the tariffs by increasing the cost of goods and services and thus making less available to its people.”

    It is sane to tax those who wish to export the value of the nation, but not those who want to increase the value of the nation through imports.

    Taxing imports in an idiot trap which traps many.

    Mark Sherman

    Like

    1. I take it, then, that you cheer when other nations place import tariffs on American goods and services? Because that’s functionally identical to what you’re proposing.

      The problem with taxing the exports is that, too, is worse for your economy. First, by reducing the markets available for goods and services made in your country, they reduce the incentive to produce them in the first place, nor is there the incentive for the improvements that tend to bring real prices down over time. Second, when folk sell a good or service it doesn’t stop there. They’re doing to do something with the returns from such sales–either buying goods and services in turn or investing which furthers further economic growth.

      The whole “preventing the export of wealth” (meaning goods and services) is to fall into the zero-sum fallacy. You don’t have less wealth because goods and services were sold to someone else. And if there are some goods and services one can’t afford because others bid up the price? Well, I’d love to have a GT40, but there we are. Fortunately, as I discussed elsewhere on this blog, the cheapest beater I’ve ever own would have smoked cars winning the Indy 500 a hundred years ago. And you don’t have to go back much farther for them to be faster than the fastest cars that ever existed Economic growth (and the technological growth that comes with it) tends to do that.

      Another thing to remember when it comes to government action is that anything government can do for you, it can do to you. If the government can harm someone else economically for your benefit it can also harm you for someone else’s benefit. Better to keep government as far away from most things as possible.

      Like

  3. Tariffs are not the only thing a government can do to harm the economy. The Trump administration has made it a goal to cut regulations in a large number of areas, helping to fuel the good economic growth we’re going through right now. This has made it possible for Trump to use tariffs as a weapon, as implementing some tariffs will only slow things down a little – i.e., the noise from the tariffs is minor compared to the signal of the regulation rollback (if I’m not mangling metaphors too much there).

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s