I have been thinking about writing a post on the discourse surrounding President Trump’s tariffs for some time. After considering it I have decided that would be simplified by defining some terms, particularly regarding things like “free trade”, “comparative advantage”, etc. This post is an attempt at those definitions.
I’m going to use the word “trade” in the sense of imports and exports to/from other countries.
There are, basically, three styles of trade:
- Free trade
- Managed trade
- Autarky
The term “free trade” is used pretty loosely. To the best of my knowledge no country on the planet has truly free trade. Genuinely free trade means
- It applies both to trade in goods and trade in services.
- No tariffs or quotas
- No occupational licensing, intellectual property law, or the like
I don’t advocate truly free trade but that’s what it means possibly because that’s what it means.
“Autarky” means self-sufficiency, i.e. no foreign trade. There are only a few countries that might succeed at being autarkies, e.g. the U. S., Russia, China, and India. However, autarky practically by definition makes the country that is an autarky poorer than it otherwise might be and, indeed, that has been the experience of countries that practiced it.
That’s why I advocate managed trade but our present managed trade is perverse. We protect some goods and services while subsidizing imports. We subsidize imports by imposing regulations (health, labor, safety, environmental, etc.) on the goods we produce (which increases their costs) but not limiting our imports to countries that have regulations on goods production as strict (or stricter) than our own. I should point out that that’s why it makes sense (from their point of view) for EU countries to impose tariffs on goods imported from the U. S. since their regulations are stricter than ours.
The net effect of that is to benefit protected service-providers. That many of those protected service-providers, e.g. physicians, lawyers, etc., are in the top 10% of income earners while many of those in the goods-producing sectors of the economy that compete with imports are in the bottom 10% of income earners is why I see our system of managed trade as perverse.
The short version of “comparative advantage” is the countries should produce the goods and service they are able to produce better and cheaper than other countries are. The longer version of comparative advantage enunciated by David Ricardo more than 200 years ago is that trade between Country A and Country B makes sense even when everything produced by Country A is more expense than the same good or service produced by Country B so long as there is a relative difference between the prices of the competitive products or services. The additional complication is that although I doubt that 1% of Americans understand that argument I suspect that nearly 100% of Americans understand buying what’s cheaper.
It should be noted that comparative advantage only applies when the means of production are not portable from one country to another. The portability of the most significant factors of production, i.e. capital and labor, today makes comparative advantage a lot less important than it was 200 years ago. And, of course, our system of managed trade subverts comparative advantage.