A national government imposing tariffs (or other customs barriers) uses its own country’s consumers and importers as hostages when it threatens foreign governments against harming its exporters. What a protectionist retaliation threat really means is, “If you harm your own consumers with your tariffs, I will hurt mine with my tariffs!” No wonder that protectionism was dismissed by Adam Smith and David Hume in the 18th century. Smith did concede that retaliatory tariffs could be good—if they prompted the targeted government to back off—but he didn’t hold out much hope for that happening.
Trade war casualties / Ask American steel and aluminum consumers if a trade war is good. Not unexpectedly, by the end of April, aluminum prices were up by about 10% in America according to data from InvestmentMine, a research consultant. American manufacturers of steel products are complaining about higher prices for their input. According to the Wall Street Journal, the steel and aluminum tariffs are the darkest cloud over the booming chemical industry in America. Ultimately, of course, American consumers will pay the price.
Even from the very imperfect metric of jobs, the steel tariff is very likely to be detrimental. Many more Americans are occupied in steel-using industries (around 2 million) than in steel-making (140,000). Economists at the Federal Reserve Bank of New York concluded that “the 25 percent steel tariff is likely to cost more jobs than it saves” (Liberty Street Economics, April 19, 2018).
More important, the tariffs will destroy value by making consumers pay more than the real cost for what they want.
At the time of this writing in early May, it is still too early for a quantitative assessment of the effect of tariffs that Trump imposed on washing machines in January. (See “Putting 97 Million Households through the Wringer,” Spring 2018.) However, according to preliminary data from the Bureau of Labor Statistics, the (domestic) producer price index of all major household appliances increased 1.3% between January and April, while household appliance prices had been stable for several years before. As these data cover all major household appliances, they suggest that the effect of the tariff on the price of washing machines is substantial—which is not surprising as that was precisely the aim of the protection requested by domestic producer Whirlpool.
Targeting China / Ask American farmers if trade wars are good. China is the second largest market for American agricultural exports (and was the largest as recently as 2016). U.S. pork and sorghum have already been hit by retaliatory tariffs or “deposits,” and threatened tariffs have reduced Chinese purchases of American soybeans and corn. The Chinese market accounts for half of American exported soybeans, the largest agricultural export. American farmers are starting to hurt, but Trump suggested that they could be compensated by special subsidies. So the U.S. government is going to tax Americans to offset some of the damage from taxing Americans. “Saturday-morning-cartoon central planning,” quipped Sen. Ben Sasse (R, NE).
On the one hand, the U.S. government helps farmers, making them more dependent on government. For example, the Foreign Agricultural Service of the U.S. Department of Agriculture markets American agricultural products abroad, notably through its many offices in China. On the other hand, the same government impedes farmers’ exports through its trade policy. Government planning has never been a model of rationality, except from the viewpoint of politicians and organized interests.
Much could happen by the time this article is released. The new 25% tariffs that were announced on $50 billion in Chinese imports could be imposed. A promised retaliation by the Chinese government would likely follow. More damage would be done if the trade war intensifies. The U.S. government has its sights set not only on China but also on Europe and on North American Free Trade Agreement countries (and some other countries). The risk that a trade war could precipitate a recession is significant. Alternatively, trade tensions could abate, perhaps because of stock market resistance and pressure exerted on Trump.
Isn’t it astonishing that so much depends on one single man in Washington, DC? In this respect, Trump may have as much power over the national economy as his Chinese counterpart.
A trade war hurts consumers, but it also disrupts production. As supply chains have become more integrated (and efficient) across borders, more businesses are taking the side of consumers over special interests. In early April, 107 trade groups, led by the National Retail Federation and the Information Technology Industry Council, warned the U.S. House of Representatives against launching a trade war. It is becoming clear that the current protectionism only benefits a small number of large producers and their few employees.
The Trump administration’s invocation of national security as justification for some of the tariffs is mainly a protectionist excuse. So are, in large part, its allegations of Chinese intellectual property (IP) theft. “IP theft” covers many different things: (1) counterfeit or pirated products, (2) actual theft (often cyber theft) of trade secrets, and (3) the Chinese government’s requirement that foreign firms that establish a presence in China enter into joint ventures with local firms, which often involve technology transfers to the latter. The second form of “IP theft” certainly looks like real theft, but the first one is debatable, especially under the absolutist, criminalizing view of the U.S. government. (Interestingly, as Stanford law professor Paul Goldstein notes, the U.S. government did not protect foreign copyrights until 1890 and waited another century before joining the major international copyright treaty.)
Concerning the third form of IP “theft,” the “forced” technology transfer, of course it’s not nice for the Chinese government to directly or indirectly require technology transfers or provide “incentives” for them, as the U.S. trade representative often complains. But nobody is forcing American firms to establish business in China. One can export to the Chinese market from the United States or else simply ignore the Chinese market altogether. Technology transfer is only one of the conditions that profit-maximizing corporations accept voluntarily in order to access markets in liberty-challenged places. None of this would happen in an ideal world, but the U.S. government should be content to make America ideal for liberty.
Moreover, ordinary courts, even Chinese courts, are often available to enforce IP claims. International treaties could address remaining problems. Using trade sanctions to solve problems of IP protection, says Goldstein, “is like performing microsurgery with a sledge hammer.”
Free to consume and compete / One official justification for the trade war with China is that Chinese exporters are subsidized or otherwise assisted by their government and thus have unfair advantages when competing against American companies. The fact that Chinese producers and Chinese taxpayers are forced to subsidize their exporters does not justify the U.S. government’s further reducing the freedom of Americans—their freedom to import, in this case. If other people’s oppression were a good justification for undermining liberty, trade and everything else would be a race to the bottom: the least-free in the world would dictate everybody else’s level of freedom. It would be better to let Americans be free to import and let American businesses compete, even if they are not on a level playing field.
The notion of a level playing field is highly suspicious anyway. Where in the world or even inside America is there a level playing field? And how do you measure the tilt of this metaphorical field? Is it a tilt that average wages are 40% lower in Mississippi than in California? Directly or indirectly, governments intervene in the economy, including the federal and state governments in America. Public expenditure on education, for example, is higher in America (4.2% of gross domestic product) than in Germany (3.7%). Would this justify German firms complaining that they face an unequal playing field?
Moreover, if entrepreneurial private companies need protection in order to compete with Chinese state companies or subsidized “private” ones, where is the advantage of private enterprise? We might as well install a Chinese sort of economy in America. In reality, the more Chinese firms are dependent on—and run by—their government, the less efficient they will become. The more state-controlled Chinese society becomes, the more likely Chinese taxpayers won’t be able to continue subsidizing their government’s cronies.
Some may respond that there already is only a relatively small difference of degree between Chinese and American state capitalism. If that is the case, indeed, America might not be able to maintain its historical economic advantage. But that would be caused by too little free enterprise here, not too much.
The U.S. government should not worry about poor Chinese taxpayers and straight-jacketed businesses in China. We may hope that they will improve their dire situation with time. But there is little we can do about what’s happening in China except to give an example of economic freedom and efficiency, which will not be done with protectionism. But the U.S. government can do a lot about freedom at home by not impeding American consumers and businesses that want to import from, or invest in, foreign countries.
Losing the war / Even if retaliation against foreign protectionism were to succeed in opening trade, it would strengthen the false idea that what we give up in trade (exports) is more important that what we obtain (imports). As James Mill wrote in his 1824 Elements of Political Economy:
When one country exchanges …, the whole of its advantage consists in the commodities imported. … This seems to be so very nearly a self-evident proposition, as to be hardly capable of being rendered more clear by illustration; and yet it is so little in harmony with current and vulgar opinions that it may not be easy, by any illustration, to gain it admission into certain minds.
Thus, a strategy of retaliation, even if successful in the short run, may actually compromise free trade in the longer run.
A related question is whether America could lose the trade war by being sidelined because American protectionism pushes toward the East the center of gravity of world trade. This is not impossible as far as formal trade agreements are concerned. From this point of view, pulling out from the Trans-Pacific Partnership might have been America’s first trade war defeat. Trump may now be realizing this, as he voiced a wish to reenter the agreement. But it must not be forgotten that trade agreements are not the essence of free trade, and that the Trans-Pacific Partnership was as much about regulating trade as about freeing it.
What’s important is whether Americans remain free to import and whether American businesses can freely pursue opportunities wherever they see them. Alas, the same protectionism that leads the U.S. government to disengage from the formal world trade system is likely to undermine the freedom of American consumers and businesses to make their own individual decisions on where to buy or invest in the wide world.
