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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
The only reason technology is shared across the world is because of trade. Same for transportation which relies on technology.
That may be true in a lot of cases, but most of the world cannot manufacture at all a lot of the things we make here, like airplanes and pharmaceiticals, let alone manufacture them cheaper.
Because it wasn’t made here.
Are you aware of, for example, how many pharmaceuticals are imported?
Yes, and I knew you would bring it up! Only a few countries produce pharmaceuticals and we import some from them because they do it cheaper than our own companies. But nearly the entire cutting-edge pharmaceutical industry that makes the medical breakthroughs is located in just a few scant countries, the U.S. being far and away number one. A few others are Israel, and I think South Korea(?). Maybe France(?)
I find $176 Billion imported, vs $100 Billion exported. And given the difference in technology that you mention, that would mean that the QUANTITY of imports would greatly exceed the QUANTITY exported.
Quantity is sort of irrelevant here when the question was one of things that the U.S. can export that nobody else can make. The U.S. is the only place where certain drugs can be developed, tested, and in some cases, manufactured. For instance, all the Covid vaccines that the entire world used were created in the United States (with the exception of some inferior ones in Russia and China). Eventually, we licensed the vaccines to other countries like India in a humanitarian effort so that they could make it for their own citizens.
Yes, I know, Randy. Believe me, I’ve been reading some version of this for decades. There’s a lot of truth to it, as far as it goes. I’m just not convinced that “Free trade benefits the working class” is actually true, overall. It’s repeated like a mantra, but to the extent that it’s true, it’s a purely materialistic judgement. I’m also certain that it’s not true for everyone in the working class, and swapping a decent job for an entitlement check paying those people just for existing is arguably worse for society even if the individuals are getting by, materially.
These concerns are never addressed by the those praising free trade as if it’s all upside, based on materialist economic theories. If they’re even mentioned, they’re handwaved away with, “Free trade benefits the working class.” This is an unsatisfying, simplistic response to an extremely complex socio-economic issue.
People aren’t widgets and money isn’t everything.
Apple gives money to China and then another country gives money to Apple. I don’t see how else you can do the accounting.
All of this is solved by switching to deflation, which would require the banking system to switch from fractional reserve to full reserve.
For sure, it doesn’t benefit every last person. When the automobile displaced the horse and carriage, many people lost jobs raising and training horses, installing horseshoes, etc. Tractors and other mechanized agricultural devices have reduced the number of agricultural jobs by gigantic numbers. The only way to ensure that no one ever loses a job due to changes beyond their control is to have an absolutely stagnant society. Some might think I’m stretching, talking about technological changes, when the topic is tariffs. But even if we had almost no imports, there would be far fewer factory jobs than in 1950, because of technology. Most of the loss of factory jobs is due to mechanization, not because of imports.
Can you point out any comments on Ricochet where anyone has said it’s fine if people are unemployed, because we can just put them on welfare?
One of the things that drives the idea that the U.S. is losing in the trade deals (trade wars?!) is the pervasive myth that the U.S. is losing its manufacturing base and/or manufacturing jobs. The truth is that U.S. manufacturing output has more than doubled in the last few decades, leaving all of the other manufacturing powerhouses in the dust. The only exception is China, who recently caught-up to us in total output, but only because they have five-times more people than us. This means that we are still out-manufacturing them by a ratio of five-to-one.
Trade and automation create deflation. The Federal Reserve forces inflation because the banking system is based on fractional reserve banking instead of reserve banking. It’s stupid and it’s going to end the hard way. There is no reason everybody shouldn’t benefit from a deflationary economy. The government can’t spend to oblivion either.
The average man on the street will tell you, “We don’t make anything, anymore.” They’re just mistaken. The United States is a manufacturing powerhouse. Yes, it would be great if we made even more. Donald Trump has been on the right track when it comes to cutting regulations, to make the USA a more desirable country to operate from. But this whole tariff mess is not the right way forward.
I find it curious how often free-traders etc like to refer to things in terms of “per capita” but when it comes to something like manufacturing output, it’s just the total number. Maybe because manufacturing output “per capita” hasn’t doubled, so that’s not quite as impressive?
Also, if exports have increased, then domestic production for domestic consumption may have actually decreased. In a world where today’s ally could be tomorrow’s enemy, that doesn’t seem smart.
Why would you use more labor when you could use less?
Whose fault would that be? We should be deflating the money all the time.
Except for China, this isn’t a big deal.
I don’t claim that anyone on Ricochet said such a thing. This is just an example of one of the unmeasurable and unmentioned social costs that free trade may incur.
Also note that these concerns also apply to increased and/or unrestricted immigration of lower-wage workers, keeping wages down for native workers. In my experience, this practice is also favored by many of the same people who hate tariffs, also justified by economic theory (“If we close the border, get ready for higher-priced avocados!”). The more conservative ones may grudgingly accept making some effort to enforce immigration laws while increasing legal immigration, but many libertarians seem to resist even that (I’m not pointing any fingers here, just making a general observation). My thought is that maybe more expensive avocados would be worth the other social benefits. Maybe not.
As others have pointed out, we’d probably also need to get a bunch of people currently on welfare to go back to work for any positive social benefits to outweigh the inflationary downsides, and likely there are other complications that haven’t occurred to me. I’m unsure we can untie this Gordian Knot.
To clarify, I’m not claiming that the standard libertarian-ish argument against tariffs is wrong. I’m saying it doesn’t take into account all the non-economic concerns. It’s quite possible that the overall effect is positive, but how can we rationally decide if all that’s discussed are debits and credits? As I said before, people aren’t widgets and money isn’t everything.
Laken Riley could not be reached for comment.
(the old one about Ted Kennedy and Mary Jo Kopechne)
If we were in constant deflation, as God intended, we wouldn’t care about this.
I don’t see the point of being a libertarian if you aren’t against inflationism and the fractional reserve banking system. And if you don’t believe in that, good luck. Nobody knows how to make this work anymore.
cEntRal pLAnNing MakEs oUr liVEs beTTEr
gOVeRnmENt forCE maKEs OUr LivEs bETteR
foRCInG uS tO uSE goVErNmENt moNEy mAKes ouR lIvEs betTEr
In regards to things like manufacturing output and wealth, per capita is the only thing that counts. India’s GDP is 500 times larger than the country of Monaco. Yet the GDP per capita of India is only $2,500.00 per year. The GDP per capita of Monaco is over a quarter-of-a-million dollars per year. Pop quiz: In which country would you choose to make a living?
Why would that necessarily be so? Domestic production is not limited by anything other than people’s ingenuity and capacity to work. As far as I can tell, domestic consumption has skyrocketed in the U.S. When I was growing up, not every household had a car, air conditioning, TV, and certainly no cell phones, computers, or microwave ovens, and few people traveled on airplanes or traveled long distances at all. The average American lives better than John D. Rockefeller did at the beginning of the 20th century.
As Rufus noted, about the only one we have to worry about is China. Almost all the other countries we trade with on any large scale are friendly to the United States.
I just watched a video where Paul of Combat Veteran Reacts reports on how Trump’s trade tariffs are starting to push Japan and South Korea into the arms of China. Maybe this is what J.D. Vance means by the United States moving its emphasis from Europe to the Pacific. It’s just a start, but Japan and South Korea need to do something to protect their export markets, so if the U.S. pushes them out of the U.S. market, it is in their interest to join in a free (or freer) trade zone with China.
This also puts the status of the U.S. dollar as the world’s reserve currency on a shakier footing.
Paul also points out that the example of Trump going to Ukraine and trying to extort payment for past military services, and in trying to extort payment from other countries for services rendered against the Houthis (as was discussed in the Signal scandal transcripts) can’t help but get South Korea and Japan thinking about how to handle the situation when Trump comes demanding payment for the cost of the military personnel based in South Korea and Japan over the past several decades.
For the last few days, I have had this thought. If I were a member of the Canadian parliament, I would try to sell my colleagues on the following plan. We should come up with a free trade agreement with the European Union, Great Britain, and Mexico. Maybe South Korea and japan, too. Enough of these trade deals with exceptions for this and that. No tariffs on anything from a participating trading partner. There’s no point in inviting the US to participate. Donald Trump has already demonstrated that even when he gets the very trade deal he demanded (USMCA), he will violate it on the flimsiest pretext, anyway. Call it the FT Agreement. When people ask what the FT stands for, we can tell them it stands for Free Trade, if we wish to give a non-profane answer.
You don’t see it?
Everything that’s exported must first be produced. If most of what’s produced is exported, then domestic consumption of domestic production is necessarily low.
What people are consuming now is far more imported than in the past. Cell phones, computers, etc, weren’t being produced in the US in the 1950s, and they aren’t now. The increased CONSUMPTION of those has zero to do with US manufacturing/production.
Not sure this is a smart movie for them, considering China also has tariffs that may be higher than ours.
Maybe I’m not quite following your point(?) Why don’t you just look up figures on how much we consume of U.S. produced goods vs. how much we export? That would answer your question.
I don’t think they could be higher than the 25% or 50% that Trump is proposing.
Here’s a start:
So, with import duties and VAT, could be at least 38%. And that’s just so far.
I don’t know the calculations of all the tariffs and taxes combined, but I know that Japan and South Korea already trade with China, so it must be profitable. So with the U.S. raising it’s tariffs to a minimum of 25% across the board, it cannot be a better deal than those countries are already getting with China.
Or, it could be empty threats. Who knows?
Supposedly, both Japan and South Korea have been increasing their defense capacities due to concerns about China. Why would they then turn to increasing trade, which would likely serve to increase China’s military the same way our trade with them has?
For the same reasons that the U.S. has been increasing its defense capacities against China while at the same time increasing our trade with them.