Trump’s tariffs: free, fair or foul trade?

Many Democrats and Republicans were in uproar in early March after the imposition of American import tariffs on steel and aluminium by President Donald Trump. He has long complained, as president, candidate and citizen, that the US has so many bi-lateral “trade deficits” and is “losing on trade”, particularly with the countries like Mexico and China. It is very important to note that these two tariffs are only the latest in a very long line (of literally dozens of rounds) of such taxes from President Washington through to Bush 43 and Barack Obama.[1] Commerce Secretary Wilbur Ross has been at the forefront of the Trump Administration in defending such a policy. He said, in part, that:

Unfair trading practices from countries like China have distorted the global steel and aluminum markets. Since 1998, countless steel mills and aluminum smelters have closed. More than 75,000 steel jobs alone have disappeared. More than 75,000 steel jobs alone have disappeared. Today the US has only one steel mill that can produce the advanced alloys used in armored-vehicle plating; [and] one aluminum smelter that makes the high-grade aluminum needed for defense aerospace applications.[2]

Like most who formally study economics, international trade was a key topic in my bachelor degree at the Australian National University (ANU) in the early-to-mid 1990s. ANU in those days was not only the top ranked economics degree in the country, but wasn’t anti-capitalist as most are today. I learned then (and since) that international free trade, like domestic free markets, is both in theory and practice a key driver of greater competition, innovation and wealth for all. The person that I first truly learned this crucial lesson from had actually been dead for well over 200 years – the British Classical School economist and ethicist Adam Smith. I read one of his two most famous books, The Wealth of Nations, and then wrote an essay that said the following about trade:

The parliament of his day was an instrument of the powerful and the privileged. The result of this was the establishment of positions of monopoly in the economy through the regulations of government. The mercentilist system is the main manifestation of this monopoly situation. Smith summarised this by stating that: ‘In the mercentile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.’[3]

Another influential book I read regarding trade whilst I was at ANU was Australia’s Foreign Debt, Myths and Realities by John Pitchford. Professor Pitchford was also one of my economics lecturers from that period of my life. The key lesson from him and his book is that trade deficits are not a problem in themselves (of a macro-economic nature), although they could be an indicator of problems elsewhere (of a micro-economic nature). Chief amongst the latter being bad government policies, usually taking the form of free market interventions at home or free trade interventions abroad. Early in my post-uni career as a policy economist, I wrote a paper summarising Pitchford’s thesis and presented it to my then colleagues at New South Wales Treasury in which I said:

There are two main approaches to analysing the balance of payments (BOP): the trade approach and the absorption approach. Under the trade approach, the BOP consists of the current account balance (CAB) plus the capital account balance (KAB) which is (ex post) equal to zero. The CAB is equal to exports less imports plus net income. The KAB is equal to the change in foreign borrowing plus official reserves. The absorption approach, however, liberated thinking from the restrictive view that the CAB involved purely trade questions. Thus it is just as correct to view a current account deficit as implying that an economy is spending more than its income, as it is to see it as arising from a combination of a government fiscal deficit and a private excess of investment over saving (ie the twin deficits). The situation of an individual in society spending more than their income for long periods would be regarded by most as unsustainable. For an economy, however, spending more than its income means either that private investment exceeds private saving and/or there is a fiscal deficit.[4]

In general, the latter is a policy problem but the former is not. Thus, as Adam Smith also said in The Wealth of Nations:

Nothing can be more absurd than this whole doctrine of the balance of trade. It is a concept originally devised and promulgated by merchants in order to promote their special interests under the pretence of protecting the national interest. A government that tries to watch over the balance of trade has embarked upon a task that is intricate, embarrassing and fruitless.

To make the case even more simply, international trade restrictions like tariffs are in a ‘nut shell’ taxes. All government taxation reduces the supply and competition of whatever is taxed and thus raises costs and prices in not just one industry but throughout the economy. This is almost always not just a one off impost on wealth and jobs, but an ongoing process (over years or decades) of decay like compound interest. Economics Online puts it this way:

Tariffs, or customs duties, are taxes on imported products, usually in an ad valorem form, levied as a percentage increase on the price of the imported product. Tariffs are one of the oldest and most pervasive forms of protection and barrier to trade. The imposition of a tariff leads to a higher price and an economic welfare loss as per the following diagram:[5]

Like every other government intervention in the market, tariffs have their ‘Baptists and Bootleggers’ (an expression coined by Professor Bruce Yandle). The ‘bootleggers’ most benefiting from tariffs are certain Big Business, Big Union and Big Government types, especially in steel and aluminium itself. Trump, however, appears to be a ‘baptist’ or true believer in the need for tariffs sometimes, at least as a key component of a strategy to improve America’s defence as well as to help force other countries to reduce or remove their unfair trading practices (tariffs, quotas, subsidies, regulations, currency manipulations). He can even point to Adam Smith for some support.[6] This is what I said on this in my Smith essay:

Smith had a few important exceptions to the general proposition of non-interference with trade. The first is protection of an industry which is necessary for the defence of the country. ‘The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country. Defence is of much more importance than opulence.’ The second exception is when there is a tax on a domestic commodity a tax should then be put on the foreign commodity of the same kind. In that way capital would go in its natural direction ‘and would leave the competition between foreign and domestick industry, after the tax, as nearly as possible upon the same footing as before it’. Lastly there is retaliation for restrictions to trade in foreign countries. This exception though is more complicated than the previous two. There is first of all the problem of where to limit the restrictions on their commodities. Should restrictions be placed only on similar commodities or to all related commodities or to all of a country’s commodities. Despite this if the retaliation can ‘procure the repeal of the high duties or prohibitions complained of’ then this is a good policy to follow. ‘The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods.’ On the other hand if ‘there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them.

Secretary Ross addressed the main non-defence reason by POTUS for the steel and aluminium tariffs when he stated: “Further escalating this issue is counterproductive. Rather, countries should take responsibility for their unfair practices and work together to address the underlying problems facing these industries. The US is ready and willing to engage in such efforts.[7] My friend and colleague Dr Dan Mitchell recently addressed this in his brilliant daily blog of International Liberty. Dr Mitchell is based in the Washington DC area but has been to Australia many times, including late last year for the inaugural Cost-of-Living Summit and LibertyFest in Brisbane QLD. He even wrote his PhD thesis on a very Aussie topic –  Australia’s Superannuation System: Model for US Social Security Reform? What he said in his blog entry Using Protectionism to Reduce Protectionism was that:

Some people are arguing that President Trump may have a clever plan to use tariffs as a tool to force other nations to reduce their trade barriers. Mr Trump’s practice of staking out extreme positions on trade as a negotiating tactic is a sign of his brilliance. Or so we’re told. But that theory took on water last week, when he had to backtrack on a promise to hit Mexico and Canada with tariffs, without any concessions from either Mexico City or Ottawa.[8]

The economic schools that I have drawn upon so far in this piece have been Classical (Adam Smith), Monetarist (John Pitchford), Neoclassical (Economics Online), and Public Choice (Bruce Yandle) as well as Austrian, Chicago and Supply Side (Dan Mitchell). My favourite, and I believe the best, is Austrian. And my favourite Austrian is economist, historian and philosopher Murray Rothbard.[9] In his economics treatise of Man, Economy and State (with Power and Market), he made clear that:

Economists have devoted a great deal of attention to the ‘theory of international trade’—attention far beyond its analytic importance. For, on the free market, there would be no separate theory of ‘international trade’ at all. ‘Nations’ may be important politically and culturally, but economically they appear only as a consequence of government intervention, either in the form of tariffs or other barriers to geographic trade. The arguments for tariffs have one thing in common: they all attempt to prove that the consumers of the protected area are not exploited by the tariff. These attempts are all in vain. The absurdity of the pro-tariff arguments can be seen when we carry the idea of a tariff to its logical conclusion—let us say, the case of two individuals, Jones and Smith. This is a valid use of the ‘reductio ad absurdum’ because the same qualitative effects take place when a tariff is levied on a whole nation as when it is levied on one or two people; the difference is merely one of degree. To make sure that their aim is accomplished, Jones levies a 1,000% tariff on the imports of all goods and services from Smith and vice versa. As a result, Jones and Smith see their problems of unemployment disappear as they work from dawn to dusk trying to eke out the production of all the goods and services they desire. A mild tariff over a wider area is perhaps only a push in that direction, but it is a push, and the arguments used to justify the tariff apply equally well to a return to the ‘self-sufficiency of the jungle’.[10]

Professor Rothbard even wrote specifically about steel tariffs in 1993, not long before his death in 1995. He pointed out then that:

The arguments of the steel industry differed from one century to the next. In the nineteenth century, their favorite was the ‘infant industry argument’. Of course, ‘infancy’ for protectionists never ends, and the ‘temporary’ period of support stretched on forever. By the post World War II era, in fact, the steel propagandists, switching their phony biological metaphors, were using what amounted to a ‘senescent industry argument’ that the American steel industry was old and creaky, stuck with old equipment, and that they needed a ‘breathing space’. One argument is as fallacious as the other. In reality, protection is a subsidy for the inefficient and tends to perpetuate and aggravate the inefficiency, be the industry young or old. As for ‘unfairly’ low pricing or dumping, this is trumped-up non-sense by American firms who are being out-competed. But if a foreign country should be silly enough to engage in this practice, we should rush to take advantage of it rather than penalizing it. [Ultimately] dumping can harm only the dumper; it always benefits the dumpee.[11]

Another great Austrian writer from times past, Henry Hazlitt, importantly adds, in his legendary book Economics in One Lesson, that:

It is wrong to think of the tariff issue as if it represented a conflict between the interests of producers as a unit against those of consumers as a unit. It is true that the tariff hurts all consumers as such. It is not true that it benefits all producers as such. On the contrary, it helps the protected producers at the expense of all other American producers, and particularly of those who have a comparatively large potential export market. The effect of a tariff is to change the structure of American production. It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller. Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.[12][13]

In conclusion, Trump’s tariffs are: not in keeping with free trade; not fair for most Americans; but will hopefully be only temporary foul trade by the USA that helps reduce the foul trade of others like China, India, Russia and the European Union. I will give ‘props’ to the President though: in his recent hiring of a free trade friendly Chief Economist in Larry Kudlow; as well as raising awareness that multilateral trade agreements like the TPP are not “free trade agreements” despite most people calling them that. As I pointed out last year in a largely pro-POTUS speech on Trump-enomics: the TPP’s 8,000+ pages are not needed for genuine free trade; and the world hasn’t seen much genuine free trade since prior to World War I. Modern Austrian economist Dr Bob Murphy, in his textbook Lessons for the Young Economist, provides some final ‘food for thought’:

Perhaps the simplest argument to demonstrate the absurdity of tariff barriers was devised by Henry George, who observed that in peacetime nations impose tariffs on themselves in order to keep out foreign goods, while in wartime nations impose naval blockades [or trade sanctions] on other countries in order to prevent them from receiving foreign goods. If the protectionist arguments were correct, wouldn’t naval blockades [or trade sanctions] make the enemy country prosper?[14]


Footnotes

[1] http://www.u-s-history.com/pages/h963.html + https://en.wikipedia.org/wiki/2002_United_States_steel_tariff + https://www.washingtonexaminer.com/trump-can-learn-from-obamas-tariff-debacle/article/2650582

[2] https://www.whitehouse.gov/briefings-statements/commerce-secretary-wilbur-ross-imposed-metal-tariffs/

[3] https://www.amazon.com/Adam-Smith/e/B000APTFBA/

[4] https://catalogue.nla.gov.au/Record/354264

[5] http://www.economicsonline.co.uk/Global_economics/Tariffs_and_quotas.html

[6] https://static1.squarespace.com/static/56eddde762cd9413e151ac92/t/56fbaba840261dc6fac3ceb6/1459334065124/Condensed_Wealth_of_Nations_ASI.pdf

[7] https://www.whitehouse.gov/briefings-statements/commerce-secretary-wilbur-ross-imposed-metal-tariffs/

[8] https://danieljmitchell.wordpress.com/2018/03/19/using-protectionism-to-reduce-protectionism/

[9] https://www.mises.org/library/austrian-perspective-history-economic-thought

[10] https://mises.org/library/man-economy-and-state-power-and-market

[11] https://mises.org/library/making-economic-sense

[12] https://www.mises.org/library/economics-one-lesson

[13] Henry Hazlitt also said in Economics in One Lesson re tariffs: “For the erection of tariff walls has the same effect as the erection of real walls. It is significant that the protectionists habitually use the language of warfare. They talk of ‘repelling an invasion’ of foreign products. And the means they suggest in the fiscal field are like those of the battlefield. The tariff barriers that are put up to repel this invasion are like the tank traps, trenches, and barbed-wire entanglements created to repel or slow down attempted invasion by a foreign army. And just as the foreign army is compelled to employ more expensive means to surmount those obstacles—bigger tanks, mine detectors, engineer corps to cut wires, ford streams, and build bridges—so more expensive and efficient transportation means must be developed to surmount tariff obstacles. On the one hand, we try to reduce the cost of transportation between England and America, or Canada and the United States, by developing faster and more efficient ships, better roads and bridges, better locomotives and motor trucks. On the other hand, we offset this investment in efficient transportation by a tariff that makes it commercially even more difficult to transport goods than it was before.

[14] https://mises.org/library/lessons-young-economist

Darren Brady Nelson

Darren Brady Nelson

Mr Darren Brady Nelson is the Chief Economist at, and on the Advisory Board of, LibertyWorks. He is also a Heartland Institute expert who recently worked for an Australian Senator and on a Presidential Campaign.
Darren Brady Nelson

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