The Road To Tariff-Free Trade

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Posted: Aug 02, 2018 11:43 AM
The Road To Tariff-Free Trade

The basic economic laws, as with the basic laws of physics, have been known for a very long time. They still are valid today, and they do not change to conform to good intentions.  If you artificially fix the price of a good or service above the market level, you will have a surplus. If you fix the price below the market, you will suffer a shortage.  If the supply decreases for a given level of demand, the price goes up, and so on.   These things are not negotiable.

In an effort to be compassionate, or at least sound compassionate, some people, even those who should know better, fall for unsound principles. Others promote bad policies out of selfishness, ill will, or ignorance. It doesn’t matter. The end result will be more pain for someone, and irresponsible policies will cause disruption in the economy.

Fallacies and errors are often relatively easily to correct in the physical sciences because molecules don’t complain or hire an army of consultants.   People are the subjects of economics, however, and people aren’t like molecules. They have selfish interests.   Some use government coercion and force to get what they want or what they think everyone else should want.   They ignore the predictable negative consequences to other groups.  They forget the long term harm that is sure to arrive for someone else to deal with, either now or some time in the future..

Tariffs are in the news lately, with all parties maneuvering for advantage. Tariffs, too, are subject to economic law. When companies in two different nations trade, both sides of the transaction are better off than they would have been. If that were not the case, they wouldn’t have engaged in the trade. The more trades, the more the accumulated benefits on both sides. That has been demonstrated over several centuries.

Tariffs are justified with good intentions, assuming that, by protecting specific industries, you are protecting and helping everyone. Reduced foreign competition empowers domestic firms to maintain higher prices and profits, allowing them to keep or even increase employees. That is the part that is seen.

What is not seen is that everyone else in the economy must pay the higher prices. Employers who now have higher costs for inputs may have to lay people off or eliminate expansion plans. In the case of steel and aluminum, one or both of them are inputs into almost every product or the processes that make them. An increase in either or both of them is bound to have significant effects on the rest of the economy.

On a positive note, President Trump said that he is ultimately looking for all trading partners to eliminate all of their tariffs. That would be a good result for all countries involved. As it is now, many firms throughout the world have the advantage, with higher tariffs on many U.S. goods. In Europe, it is a remnant of post-WWII rebuilding, when countries devastated by the war were given favorable trade terms to help them overcome the difficulties. It has been many decades since the war ended, and those advantages are no longer needed, whether or not they actually helped then.

Time will tell whether or not the President’s apparent no-tariff wish comes to pass, but what we do know is that there are giant hurdles on the road to tariff-free trade. There are lots of individuals and businesses who stand to lose if they actually have to compete for their profits, and lots of bad economics and politics to overcome. On the other side, everyone else stands to gain by getting lower input prices, lower consumer prices, and more innovation, the almost universal results of increased competition.