Tariff and Counter-Tariff

At Forbes Kenneth Rapoza provides a good, two sentence summary of the several rounds of tariffs and counter-tariffs the media are calling a “trade war”:

If the editorial board over at the WSJ and the FT and The Economist are right, then all this ends badly for both sides. If they are wrong, a better trade arrangement is worked out before it all goes to hell in a handbasket.

Before you can make a judgment about what effect the tariffs will have on the status quo ante, you should understand what it was. The old system encouraged consumption and the taking on of debt while increasing income inequality.

I believe in free trade with all my heart but what we’ve had isn’t free trade. Our average tariff rate is 5%; China’s is 25%. And that was before the first round of tariff increases between the two countries began. We subsidize some export goods, mostly agricultural, but we’re pikers by comparison with the Chinese. China has been dumping steel and aluminum made in government-owned plants for over a generation. I don’t believe there is any viable substitute in the U. S. for a diverse economy which includes robust heavy industry, light manufacturing, and agriculture along with service industries and finance. We should put policies in place which effectuate that even if it does raise prices and lowers GDP by a couple of points.

7 comments… add one
  • Guarneri

    When you agree almost completely with something it’s hard to comment by not simply playing it back. So I will observe that for all his faults, and we know what they are, Trump has been the only guy in ages with the philosophy and the guts to take on the issue, demand a better deal (to coin a phrase) and put up with the interim flak.

  • Andy

    I think a lot depends on if one thinks the tariffs are a means or an end. Trump’s critics mostly assume they are ends. I think it’s more likely they are intended as a means to achieve some other end. But Trump hasn’t exactly been clear.

    The other thing is one of strategy. If one believes that mercantilist policies by our trading partners are bad, then the question becomes about how to change those policies – and this is a question that is largely absent from the debate.

    It’s a similar problem with NATO. Europe’s lack of military capability is a problem that’s been recognized for two decades yet nothing has been done about it – or at least everything that’s been tried (various forms of pleading mostly) have failed. Trump’s approach much more hardball with many characterizing it as “destroying” or “damaging” the alliance. But those who make that criticism offer no alternatives.

  • But those who make that criticism offer no alternatives.

    That is a problem not just with our balance of trade and NATO but many of the rest of today’s most pressing issues. We know what the administration’s opponents are against (the administration) but not what they’re for. Immigration is a good example. I think there’s a reason they don’t offer alternatives. They like the status quo.

    And that brings up a question we’ve faced for 17 years without coming up with a good answer. What do you do when the status quo is untenable? Or you can’t go back to it?

    I think, for example, that mass immigration to the United States by the unskilled whether legally or illegally is no longer tenable. The wage effects on individuals with low levels of skills who are already in the country are just too cruel. My political party doesn’t agree but offers no solution to either side of that equation.

  • CuriousOnlooker

    An application of one of Dave’s comments on trade – given Chinese trade practices, the question is not how the US can get China to change its ways, but what’s the right policy assuming China will not trade.

    Now let’s flip this to EU/Germany and China. Assuming Trump’s refusal for the US to be the “demand of last resort” will be around for a while; what’s the right policy for them. For Germany and EU, they have a huge internal market, large enough to offset the US but hobbled by the sovereign debt crisis – Germany could fix that by ramping up spending or reforming the EU via debt mutualization. China has a huge domestic market as well; and it could boost it via reforms like a true commercial law system; the biggest benefit of that would not be foreign firms; but Chinese firms who finally won’t have to cater to the whims of the local cadres.

    They would gore golden cows; Germany’s power over the EU and the CCP’s power; and hence the hue and cry.

    In every crisis there is opportunity.

  • CuriousOnlooker

    Correction, it’s assuming China will not change; not China will not trade.

  • In response to CuriousOnlooker’s observations, I think there’s something that’s being missed. If the tariffs change China’s behavior, fine. That may or may not happen. But what will happen is that the tariffs will change our behavior.

    WRT Germany, until relatively recently Germany was running a trade surplus with China. Deficits with China are pretty new to them and I’m not sure how they fit in with Germany’s export-based growth.

    What we know from experience is that Germany is not going to get greater access to China’s internal market and, if anything, the Chinese authorities will try to curtail Germany’s present market share within that internal market.

  • Gray Shambler

    And Uncle Sam can use the money tariffs will generate.

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