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.
The flip side of free trade is free migration, and for much the same reason, overall economic efficiency, lowest cost production.
The net result of free trade and the required free migration is that income levels in all countries evolve toward the world mean, which is a small fraction of the US mean income. When US wages fall to $5/hr, we will make steel again, although what an immiserated US population would do with the steel I cannot imagine. Certainly, they won’t be buying cars.
I would set the tariff rate for all countries except China to 0%. I would impose a tariff on China at 25% due to their constant government sponsored IP theft.
We don’t really know how they reached their main numbers on the tariffs, but at least listening to Lutnick, Navarro, Trump et all its clear that they included the issues you bring up but also VATs. We dont know how much of the calculations, assuming there really were any, were based upon those various components.
But more on topic, this seems to assume that countries that have a surplus with us must have lower costs in regulations and laws, but I haven’t really seen comparisons between countries. I have a son-in-law who is just back from managing a factory in China he complains about Chinese rules and regulations so they certainly also have them. As you point out the EU in general has more regs but many of those countries have a surplus with us. So it would be nice to see actual numbers.
Still, each country controls what regs and laws it sets. I would favor letting each country set its own rules and then compete. If we think another country is engaging in unfair trade practices then rather than give tax breaks to US companies that take business overseas tax them more heavily. Especially tax executive compensation that is related to moving business overseas. That will stop it.
Steve
The U.S. was at or near autarky with the Embargo Act of 1807, which banned imports from all foreign nations. The purpose was to avoid getting sucked into the Napoleonic Wars and Congress revoked them after 14 months. It has been estimated that the Act reduced GNP by five percent, though even it’s opponents at the time (Jefferson’s Sec. of the Treasury, Albert Gallatin) marveled at the transformation in the economy as the shipbuilding industries was supplanted by manufacturing, particularly textiles. The economic transformation caused a political transformation with Daniel Webster, previously a staunch advocate of free trade, becoming a staunch advocate of protection. John C. Calhoun went the other direction, supporting protective tariffs, including the Tariff of Abominations, until he didn’t and decided that protective tariffs (i.e. those not for revenue) were not only unconstitutional, but justified state nullification.
The “free trade” position of the 19th century ascended with the election of Polk and until Lincoln’s election tariffs averaged btw/ 15% and 25%. Some portion of the Democrats at this time weren’t really galvanized by trade issues, but by ensuring limited national government by limiting revenues. They ran into the quandary that at times lowering the tariff actually increased revenue.
People generally date the Industrial Revolution in the UK from 1760-1860, but the fastest growth was in the 19th century, especially 183-1860. During that time the UK had massive growth in factories, just like the US. It generally had lower tariffs during that period. Decreasing them especially after 1846 and after 1820 for manufacturing. Note that GDP growth is considered faster overall in the 19th century than that of the US.
I think there is a difference between tariffs for revenue when it was what other countries are also doing so it kind of balances out vs doing it for protectionism. It’s also different when gold is the currency.
Steve
Its hard to have classical comparative advantage once you mix financing (goods based on credit), and the monetary system facilitating trade is not founded on hard assets but fiat.
That’s not to say a more complex form of comparative advantage doesn’t exists.
I forgot to ad that we should have the kind of trade that does not cause Bond yields to rise while the dollar crashes.
Steve
Dave Schuler: There are, basically, three styles of trade:
Free trade
Managed trade
Autarky
It may seem a minor point, but it’s best to think of trade “styles” as a continuum, not as three distinct categories. While there are those that adhere to one extreme or the other, most economists find themselves somewhere in the middle, perhaps towards one end or the other of the spectrum.
Dave Schuler: To the best of my knowledge no country on the planet has truly free trade.
Similarly, no country is a perfect democracy, or perfectly libertarian, or strictly egalitarian. These all exist on continua.
With that in mind, trade will almost always have some barriers. Industries in small countries can rarely survive contact with much larger economic powers, so often use tariffs to protect local industries, especially agriculture. Nearly all countries have some sort of industrial or agricultural policy to subsidize certain industries. Large countries often invest in emerging technologies in order maintain their lead. Subsidies can mean overproduction, so other countries may impose trade barriers to prevent dumping. And security concerns may mean protecting supply lines that could be subject to interruption in the event of conflict.
Stability of political conditions is a paramount concern for markets, so negotiation and gradual easing of trade barriers is preferred to economic warfare.
No argument. Being at the extreme end of the spectrum I think it’s useful to think of autarky as a different category.
Again, no argument. Switzerland is just about as close to a perfect democracy as can be imagined. In trade IMO the choices are about picking winners and losers and we have made some very foolish choices over the last 40 years.
As to building American industry, Intel has cancelled its billion dollar chip project northeast of Columbus, Ohio. The site will go back to farmland.
Apparently, the TSMC project in Arizona is on hold, too.
My speculation is that the very fast rises in the prices of equities makes Americans risk-averse.