No Matter What Any Other Country Does, The Correct Action Is To Reduce Tariffs

|
Posted: Jun 22, 2018 9:43 AM
No Matter What Any Other Country Does, The Correct Action Is To Reduce Tariffs

I seldom agree 100% with any articles of reasonable size. Today, I found another exception.

In a New York Times Op-Ed, Veronique de Rugy, a senior research fellow at George Mason University explains Why the U.S. Should Drop All Tariffs.

On trade, the president has been all over the place. One day he threatened to impose tariffs on our NATO allies on national-security grounds. Another day, he exempted these allies from the tariffs. A few weeks later, he changed his mind.

The United States should stop the scattershot, pointless nonsense on tariffs and go the other way, and hard: It should drop all tariffs, even if the rest of the world doesn’t follow.

Economists since Adam Smith have understood that free trade is the best policy. Studies show that countries with freer trade have both higher per-capita incomes and faster rates of productivity growth.

Yes, the world would be a better place if there were no trade barriers at all. But the United States should abolish its barriers even if China, Canada or others do not abolish theirs. As the economist and Times Op-Ed columnist Paul Krugman explained in an academic journal, “The economist’s case for free trade is essentially a unilateral case: A country serves its own interests by pursuing free trade regardless of what other countries may do.”

It defies logic for an American president to punish American consumers in order to prompt Justin Trudeau to be kinder to Canadians.

The case for low trade barriers is not simply theoretical. It’s currently on display in several places in the world, including Singapore, the Netherlands and New Zealand. Hong Kong is a case worth highlighting. Thanks to its history of free trade under British rule and current special status in China, it’s widely regarded as one of the least restrictive economies in the world. Among the policies that have fueled its growth is unilateral free trade.

Far from suffering from its free-trade stance, Hong Kong’s economy has experienced multiple periods of rapid growth. In 1950 its average per capita income was about one-third the average United States income, but by 2017 it was slightly higher. In 1960 life expectancy in Hong Kong was three years lower than in the United States, whereas by 2017 it was five years longer.

If Mr. Trump insists on acting unilaterally, he should cut rather than raise tariffs.

There is not a single thing in that article I disagree with. Of course, I have been saying the same things ever since I started blogging in 2003.

Has it really been that long? Yikes!

Krugman on Free Trade

The Krugman reference was was old but interesting. It dates to March of 1997. Here is the lead paragraph followed by a couple of other interesting paragraphs.

IF ECONOMISTS RULED the world, there would be no need for a World Trade Organization. The economist’s case for free trade is essentially a unilateral case: a country serves its own interests by pursuing free trade regardless of what other countries may do. Or, as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts.

Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports— no matter how expensive to produce in terms of other opportunities foregone—is a victory, and an increase in imports—no matter how many resources it releases for other uses—is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy.

When the United States recently imposed utterly indefensible restrictions on Mexican tomato exports, an Administration official remarked off the record that Florida has a lot of electoral votes while Mexico has none. The economically correct rebuttal to this sort of thing is to point out that the other 49 states contain a lot of pizza lovers.

Somewhere along the line Krugman's mind turned to mush, but in 1997 he was thinking clearly.

Trumpian Nonsense

Voluntary Agreement

Donald J. Boudreaux at Cafe Hayek wrote an Open Letter to Trump in response. Here are the key paragraphs.

Excuse me, sir, but your tweet is incurably incorrect. First, the 2017 U.S. trade deficit in goods to which you refer ignores American exports of services; you’d have been less inaccurate had you used $566 billion rather than $800 billion.

Second, the $566 billion that foreigners didn’t spend last year on American exports were dollars invested in America – dollars invested that increase America’s stock of productivity-enhancing capital goods and services, both directly and by reducing the amount of American capital drained away to wasteful uses by Uncle Sam’s profligate deficit spending.

Third and most importantly, each and every one of the transactions that gives rise to the U.S. trade deficit is a transaction to which an American voluntarily agreed. In each of these transactions, an American believed himself or herself to be made better off. How can America in the aggregate be “down” when in each of the hundreds of millions of transactions every American who was party to it found his or her economic welfare go up?

A friend of mine summed things up this way.

In response to Trade War Stupidity: US Chip Makers to Pay Tariffs On Their Own Chips the same friend commented:

"Yep, good point. That’s because our high tech guys can kick the shit out of the world competitively and don’t want stinking tariffs, so they’re not in there getting protection. In truth, trade protection is not about workers. It’s to protect the grandees of noncompetitive US firms that want to kill competition and enhance their firm’s stock value."

Bingo.

That's what it's all about. Politicians accept bribes from weak an inefficient companies. In return for campaign contributions,the inefficient companies get the trade legislation they need to survive.

The US sugar lobby is a classic example. Steel is another.

As I have pointed previously, there are about 6.5 million workers at manufacturers that use a lot of steel, but only 140,000 steelworkers, according to Moody’s.

I created this chart in Fred.

To save those jobs (more accurately to buy rust belt votes), we are on a crazy path as noted in Pandora's Box: Another Look at Steel Tariffs.

China Doesn’t Play Fair!

My inbox and comment box is filled with reader comments and emails telling me “China doesn’t play fair”.

So what?

More importantly, fair to whom?

If China really is flooding the US with steel below cost, that is to our benefit at the expense of China. There is no other logical conclusion. To subsidize exports, every person in China has to pay a cost, via taxation, pollution or both.

For further discussion, please see Reflections and Reader Comments on Free Trade: “China Doesn’t Play Fair!”

Trump is Clueless on Trade

Nearly every day someone tells me Trump "needs" to do this to bring other countries to the table. It's idiotic.

The correct thing to do on trade is to get rid of all tariffs and all subsides no matter what foolish actions other countries take.

Let's play a game.

What If the US Went to Free Trade Unilaterally?

  • Foreign investment in the US would soar. We would build more foreign cars here rather than their, creating more US jobs.
  • The US would get steel cheaper than the rest of the world. Our cars would be more competitive globally.
  • Every company that uses steel in the US would benefit, not so in the rest of the world.
  • The price of sugar would fall in half to the benefit of candy makers, bakers, and consumers.
  • We would get ethanol from Brazil rather than corn. Gasoline prices would drop.
  • We would get more lumber from Canada making US homes cheaper to build.
  • Standards of living would rise.

That item list came off the top of my head in 30 seconds. One could triple it easily with a bit more thinking. But the last point is the most important one: standards of living would rise.

Tariffs may be a smart political ploy temporarily (Trump's rust-belt stance helped get him elected), but tariffs are a piss poor economic policy, no matter what any other nation does.