Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 40 original podcasts with new episodes released every day.
News flash: Free trade is a good thing
President Trump, by his own declaration, loves tariffs. In fact, tariff is his “favorite word”. Tariffs purportedly produce funds, “billions and billions, more than anybody has ever seen before,” which can be used for essential spending or to reduce taxes and meanwhile will “bring back jobs”.
The president is all in on his enthusiasms. As matters now stand, he is imposing both universal baseline as well as country-specific tariffs, affecting more than $1 trillion of imports. This compares to the mere $380 billion in tariffs passed in 2018 and 2019 by the first Trump administration but will rise to $1.4 trillion when/if the temporary exemptions for Mexico and Canada expire in April.
There is a logic to tariffs that appeals to those with a protectionist bent. If foreign producers are selling in your country and taking profits — profits that could otherwise be earned by domestic enterprises — why not make the cost of doing business higher for them and keep the profits at home?
Yet the history of tariffs is, to put it kindly, dismal. The 1930 Smoot-Harley tariff is America’s best-known and most instructive experience with protectionism. In 1929, the League of Nations passed a resolution declaring that tariffs were destructive and should be ended by all. When Smoot-Hawley was introduced, Franklin Roosevelt campaigned against it. After the bill passed, 1,028 economists and even some business leaders like Henry Ford urged a veto.
President Hoover termed the measure “vicious, extortionate and obnoxious”. He signed it anyway at the urging of his advisors. Americans, especially the agricultural sector, were facing a perceived problem with overproduction, mainly due to electrification and other labor-saving innovations. Republicans generally agreed that prices were too low and it would help pull us out of our economic slump if American producers were shielded from foreign competition.
Big mistake. Trading partners had warned of retaliation, and indeed boycotts and reciprocal trading restrictions soon broke out. Canada, our most loyal trading partner, imposed tariffs on 30% of our products and formed closer economic ties with the British Empire. France, Britain and Germany all formed new trading alliances.
Yet initially, the medicine seemed to be working. Factory payrolls, construction contracts and industrial production all profited from the reduced market competition.
But the loss of the inherent advantages of trading soon became clear. From 1929 to 1933, US imports fell 66% and exports decreased 61%. World trade nearly ground to a halt, falling by two-thirds from 1929 to 1934.
Unemployment was about 8% when Smoot-Harley was enacted, but the promises to lower it further never panned out. The rate jumped to 16% in 1931 and 25% in 1932-33, falling back to pre-Depression levels only during World War II.
Tariffs didn’t cause the Great Depression, but they clearly deepened and prolonged it. Without Smoot-Hawley, it might have just been another temporary recession, not much worse than many other economic downturns in our history.
The take-home message is that free trade is a voluntary interaction that reliably promotes prosperity, both in theory and in practice. It is a classic win-win for participants, in contrast to protectionism which is based on the principle that the stronger party wins by defeating the weaker one.
The 2018-19 tariffs imposed by Trump and expanded by the Biden administration proved the point once again, reducing long-term GDP by 0.2% and resulting in the loss of 142,000 full-time equivalent jobs.
Nonetheless, Trump still favors strength and domination, with an emphasis on negotiations where he “holds the cards”. The lack of success last time has not dissuaded him from unleashing a barrage of tariffs with impositions, pauses, increases, suspensions and escalations that have left producers around the world desperately scrambling to protect their businesses by anticipating his next move.
Trump is playing with fire here. If he does ignite a trade war that results in another downturn, he may find that the American economy is not as resilient as it once was. Decades of uncontrolled deficit spending have left us deeply in debt and without the reserves necessary to withstand much more fiscal abuse.
The lessons of history and the laws of economics are clear. Tariffs don’t work. Proceed with caution.
Published in General
What does normal trade and automation produce? Deflation. What does the Federal Reserve constantly produce? Inflation.
The solution is to switch the deflation because that is the way God intended man to live. If they want to subsidize something, let them.
News flash: Free trade *is* a good thing, but only if it’s reciprocal. If American butter gets a 293% tariff slapped on it in Canada, how does that in any way look like “free” trade?
Tariffs are generally bad for trade, I don’t think anyone’s ever made a rational argument otherwise. The problem is, is free trade being reciprocated, and for state actors who play even well outside the norms (China and its rampant IP theft), you’re going to have to cough up another solution that accounts for fields of play that look, even casually, as wildly uneven.
What you’re seeing and hearing with the rhetoric is change, and there’s going to be some short-term pain for longer-term gains. And not in 10 years, it’ll be in a year or two that the gains made (not just tariff impacts, but everything from government spending, regulatory overhang, etc) will become wildly evident and Biden supporters will knock old people down in their rush to lay credit at a withering husk’s feet.
Good times. Special friends.
I wonder if that’s true. It sounds like it would be true in the one hypothetical you mentioned, but I wonder if the statement is true.
Though Trump and many others right here on Ricochet are trying to make a case that trade is a bad thing.
Unfortunately, I don’t see much to be done when a foreign country insists on tariffs. Those tariffs hurt the host country just as much as it hurts their target countries, but that’s what we get from politicians who either don’t know any better, are swayed by lobbying bizness interests, or don’t care about the welfare of their citizens.
In some cases, they hurt themselves far worse than they hurt the outsiders. To enrich the rice farmers of Japan (which of course make up a tiny percentage of that country’s population), Japan only allows 770,000 metric tons of rice to be imported each year without tariffs. Any imported rice after that quota has been met is assessed a tariff of ¥341 ($2.30) per kilogram. Source: The Japan Times. This hurts rice farmers in the U.S. (and any other rice-exporting country), but it is far more punishing to the rice consumers of Japan.
I find it reprehensible that Japan’s government is lowering the standard of living for all of its people to stuff money into the pockets of domestic rice producers. Should we reciprocate? If Japan is going to screw over its people, should we do the same and screw over ourselves? I certainly say no. If the voters of Japan put up with this and don’t demand an end to this costly protectionism, that’s on them. We should not emulate corruption out of “reciprocity.”
You described the situation perfectly, but many people simply don’t get how this works. They think that tariffs only hurt the country who has to pay the tariffs, not the consumers of the tariff levying country who must ultimately pay that cost.
Put the blame on loose language and the limits of reasoning by analogy. If you said, “No, DJT is right. Winning a trade war is easy. You just have to surrender!” Most of us (who haven’t thought about it a little) would advise you to adjust your medications. But you’d be absolutely correct. Because a trade war is not exactly like a real war. In a real war, the warring parties do not bomb their own cities or get pissed if their opponents bomb themselves in retaliation. If we’re worried that our surrender causes a flood of goods we want at a price we like … well, as Milton Friedman said, simply think of it as foreign aid. If we’re worried our suddenly victorious enemies are disadvantaging our exports, breath deeply: they just made us more competitive, both by encouraging us to work harder and smarter at the most profitable things we could be doing and by providing nicely priced inputs for our products. And they made us richer. Bastards.
Here’s the classic expression of the above. (Note: Henry George is called a socialist, another language short-circuit. Also note that this all depends on your attitude towards free markets. If you think they’re the way to go, putting a border between transactions changes nothing, as Don Boudreaux says.)
I didn’t realize Japanese people were suffering so horribly, perhaps dropping dead in the streets from starvation and impoverished from paying for rice.
Obviously, what they SHOULD be doing to honor the sacred texts of Economics, is buy all their rice cheaper from China, and then when all their local rice production is gone, China can tell them how much they can eat, and when.
A big problem with the materialist analysis of “free trade” is that it ignores social costs. You can’t put a dollar number on the social value of having plenty of meaningful jobs for blue collar workers. Every blue collar job shipped overseas has a social cost that can’t be expressed in the typical economic debates. The implicit claim that these costs are more than offset by cheaper consumer goods is unsupported. Indeed, I fail to see how it could be, since they’re not quantifiable. That does not mean they’re not there.
To be clear, I’m as skeptical of tariffs as I am all other forms of government economic meddling. However, I find the usual economic analysis of the issue to be overly simplistic and materialistic.
Indeed, Maximum Economics seems to end up with everyone somehow buying everything from other places that are cheaper, although without money since the people have no jobs since it would cost more to employ them than to pay foreign workers.
We need to switch to deflation. Trade and automation create deflation and for some reason we can’t have that. Except for trading with the Chinese mafia cheaper is always better. There are too many poor people and there’s too much fallow ground to act otherwise.
The second the Soviet Union fell we should have changed the whole system to deflation and we shouldn’t have traded with the Chinese mafia. It’s going to end badly. Nobody can afford anything right now. Inflationism only works out for the top 10%.
See #12.
inFLation iS mAgiCK moNEy THat mAkEs mY houSE gO up.
The inflation rate is double what they say it is. We can’t keep doing this.
They force interest rates lower, which makes it easier to replace people with automation and overseas trade. If you make capital expensive or even normally priced, this all will happen slower.
Japan had a twenty-year span that they call the “lost decades.” Remember when Japanese products flooded our markets because their businesses were being subsidized by their government while at the same time preventing our products from entering their markets due to import quotas and high tariffs? Well, it cost them 20 years of economic stagnation. It is a textbook case of what protectionism does to a country.
https://en.wikipedia.org/wiki/Lost_Decades
But they still have some high tariffs, don’t they? Just because they may have overdone it at some points in the past – and so did we, of course – doesn’t prove that ALL tariffs are ALWAYS bad.
Here’s another social factor to consider. We pay people in this country not to work. The welfare rolls and numbers of people on disability are enormous. If you brought back all these low-skilled jobs to America, they would not find enough workers to fill them. They can’t find enough workers as it is right now. The U.S. has had a huge labor shortage for well over a decade (maybe even the worst we’ve seen?) because so many people find getting welfare easier than working. The only way bringing these low-skilled jobs back to America is going to work, is to cut-off all young healthy people from welfare.
Another reason welfare payments demand that we have to hire people in foreign countries to do a lot of our work.
There does seem to be a problem with people being paid more to not work, than to work.
cEntRal pLAnNing MakEs oUr liVEs beTTEr
Problem solved.
I don’t know their current state of tariffs, but if they are high, it just proves that tariffs are a bad thing. The U.S. GDP per capita has left Japan stumbling in the starting gate many years ago:
https://countryeconomy.com/countries/compare/usa/japan?sc=XE34
People in Japan seem to be doing pretty well, in material terms. Better than a lot of people even in the US. Japan’s big problem is demographic, not from tariffs.
I just looked up home ownership between our two countries. 65% in the U.S. own homes compared to 55% in Japan. Even more stark is that the average square footage of a home in the U.S. is more than double that of Japan 2,164 sq. ft. vs. only 1,023 sq. ft.
https://worldpopulationreview.com/country-rankings/house-size-by-country
The problem is that when you protect one segment of the economy, you may very well be killing more jobs than you are saving or creating. We put up steel and aluminum tariffs and it allows domestic steel mills to raise their prices, expand their operations, and hire more workers. Great, right? But there are many more American workers in steel-consuming industries than in steel production. So every American factory that buys steel at inflated prices now has to raise the cost of its finished products, making them less competitive. Well, we can fix that by putting tariffs on things made out of steel, too, I suppose. But if you are making John Deere tractors in the U.S. and exporting them, your tractors are now less cost-competitive than tractors made in other countries where they were able to buy steel at world-market prices.
Meanwhile, the American family that has had their cost of living driven up by tariffs is going to cut back somewhere. There are things that are necessities and things that are luxuries. So maybe you drive the car for another couple of years before replacing it, which diminishes the prosperity of the local dealership. Maybe you don’t go out to eat anymore, which diminishes the prosperity of the local restaurants. You give up vacationing, which diminishes the prosperity of hotels, gas stations, restaurants, etc., where you would have spent money. It’s not like everyone just has a suitcase full of cash sitting around that was going otherwise unused and can be used to pay for the price increases brought on by tariffs.
This isn’t about being anti-worker. Free trade benefits the working class. The level of worldwide poverty has greatly decreased in the last 50 years, and economists attribute that largely to freer trade.
I would attribute it more to technology and transportation.
One problem that “free trade” seems to ignore is that some other place in the world can produce EVERYTHING cheaper than we can here, simply because we have standards for labor and environment etc that other places don’t.
Apparently, you are unaware that the United States is the second largest exporter in the world. I guess there must be a bunch of dumb foreigners all around the world who don’t realize they are paying for overpriced American goods.
We could outlaw technology and transportation.
Yes, they can but that is not the only reason.
We are too stupid and corrupt to manage so much inflation all of the time.
Is a computer imported from China by Apple, for example, and then sold to another country, counted as a “US export?” Probably. But it really isn’t.
It’s an import and an export. Why would it be anything else?