Second thoughts about tariffs
… and sanctions, subsidies and other distortions
Most libertarians will tell you that they are free-traders and believe in open borders.
In theory I may agree with them; in practice, not necessarily.
Donald Trump loves tariffs. He even called it "the most beautiful word in the dictionary."
I understand the sentiment, but I am not as enthusiastic about it as Trump and his followers appear to be.
In my post about free trade (The triple-U of free trade) I tried to make the point that economic policies are so closely connected, that it is not possible to make significant changes to any part of it without affecting the whole.
All the talk about it these days made me think, and even change my position slightly, but to explain why, we need to talk about the BIG PICTURE. Let me start with looking at the parts of the puzzle starting with some economic principles.
A little aside
The expressions macro- and micro-economics stink of Keynesianism, the idea that the meddling of some smart people is necessary for the proper functioning of any economy.
I strongly dislike the arrogance of it, but we live in a world that functions within this framework, so I will use it to make my point.
There are two kinds of incentives, the carrot and the stick.
The income tax is a tax on work, the message it sends is: work less!
A sales tax is a tax on spending, the message it sends is: spend less, save more!
Tariffs are a form of sales tax that the importer have to pay at the border; which does not make it any less of a tax on consumption. The message is the same as with any other kind of sales and excise taxes: spend less! Tariffs are a handicap on cheaper, possibly even better, imported products.
Subsidies are carrots. They decrease the cost of production and therefore incentivize more of it. More production depresses prices, which in turn incentivize more consumption. Such distortion of the market is NOT good. The ‘real’ cost of subsidized production is the actual cost of the production plus the subsidies.
Sales subsidies, such as electric car buying incentives are carrots for the producers of electric cars, but a handicap on ICE cars.
Subsidizing research of one technology comes at the expense of the one it aims to replace.
Patent laws are both helping and hindering competitiveness.
Regulations are sticks, making production more expensive. Regulations can take many forms, but they are all costly. Professional licensing, labor unions, environmental regulations all increase the cost of production.
The macro-economic factors.
Monetary policy, fiscal policy, overall productivity, debt level, inflation level, labour force demographics, banking policies, per capita GDP, GDP to debt ratio, fiscal responsibility, banking laws and regulation are all playing a role in the cost of production and purchasing power.
The state and quality of the infrastructure, education, social services, the environment, the legal system, basic human rights and the predictable and just application of the laws are all contributors to the health of the economy.
It is not possible to take any one particular product and determine every single factor that influenced its price and the cost of its production.
The above, seemingly disjointed, list of stating the obvious is only leading to the most obvious of statements: Nothing is as simple as it appears at first glance.
Let me give you some examples:
Agricultural subsidies
The USA spends 15-20 billion dollars a year on agricultural subsidies, representing 20% of the farmers income. The top subsidised crops are corn, soybeans, wheat, cotton and rice. What this means is that animal feed is subsidized. The eggs and the meat that are produced with the subsidized feed are, therefore, also subsidized.
It would seem reasonable for the Canadians to put a tariff on the subsidized American products, except and of course, the Canadians are spending over 4 billion on their own subsidies on more or less the same. On a proportional base, it is even more than the American subsidies.
Most of the subsidized crop end up in the third world causing MAJOR economic disruption. Since it is very difficult to compete with free, they destroy local agriculture perpetuating the need for the ‘help’ and the political influence and dependency that comes with it. African countries are already started to rebel against this sort of help.
Agricultural subsidies and the resulting overproduction have a detrimental effect on public health as well.
High fructose corn syrup is a major contributor of the American obesity and diabetes epidemic.
The American civil war
Contrary to popular beliefs, the main cause of the civil war was not slavery, but tariffs. Abraham Lincoln was voted into office on the promise that he will protect American industry (in the North) from British industrial products that were of higher quality at a lower price.
The only problem was that this ‘protection’ came at the expense of the South which ended up with the double whammy of higher prices for the equipment needed for their production, while also killing the European market for their products.
We could continue with examples, digging far deeper into the exploration of costs and benefits, influences and confounders, sticks and carrots but they would not change the basic assumptions I started with: nothing is so simple that it can be remedied with yet another political intervention.
I don’t think tariffs is the most beautiful word in the dictionary, but I am perfectly fine with reciprocity.
If you are subsidizing any kind of production, then you have no moral standing when protesting tariffs on your subsidized products.
The title of this post is second thoughts, yet, up to this point I was talking primarily about the problems of political intervention into the economy. It is my firm belief that they are more likely to do harm than good, but we should also understand that there is a hierarchy on both ends. Some interventions are more damaging than others. The economy also has directions.
I mentioned the American civil war. The stated goal, albeit at a very high cost, was achieved. America did become an industrial superpower.
The sales tax and tariffs are doing less harm to the economy than the income tax and the capital gains tax. Yes, we could argue about the details, but not about the fact that not all taxes are created equal.
Donal Trump is using tariffs as a political weapon. Maybe he is right doing that.
He also said that if it works out, he may eliminate the income tax.
Yes, we could argue about the details, but not about the fact that doing that would be an enormous boost to the American economy.
“Tax Complexity Now Costs the US Economy Over $546 Billion Annually”
(Source)
These two considerations, using tariffs as a political weapon and a possible replacement for the income tax softened my libertarian opposition to the idea. MAYBE, just maybe, it is not the worst thing America can do today.
Just to be clear: I would love to live in a world without political distortions of the economy, but in the imperfect world we are living in, we have to make choices. Only with this knowledge can we start fixing the problems.
Western civilization is living on the fumes of its former glory and cannot possibly recover it without asking fundamental questions about every aspect of the factors that led to this loss.
The causes are just as complex as the economic distortions.
Let me pick just one: the concept of the free lunch.
What would be your pick? We can discuss it in a future post.
More from this Substack
these two posts about the economy are addressing related problems
References
IRS Tax Compliance Costs the US Economy $546B Annually
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Great article (and I learned something about the Civil War)!
Trump's tariff plan is interesting. He stated first that it was to balance trade (since other nations had high tariffs for USA products), and secondly the tariffs would make America rich (like it was before income taxes were instituted.) Not much explanation on how that would work, and, of course, the Left kept INSISTING that US citizens would pay for the tariffs.
Then there were the negative responses from Canada and Mexico, which eventually resolved with Trump getting the policy changes from those nations we needed. THIS was a tariff angle that had not been explained, perhaps to keep other nations off their stride until policy changes were made.
THEN Trump promoted the 'reciprocal tariff' plan, which finally made sense-totally fair!
I'm a retired engineer, not a financial/trade expert. But once I understood the foreign policy and reciprocal tariff uses (that were needed since foreign policy negotiations had failed) it all made sense.