Saturday, 10 March 2018

All Heat And No Light

The Failed Promise of Tariffs

Protectionism and tariffs are in the news again--what with the signing of TPP and with President Trump about to impose US tariffs upon aluminium and steel.  As always there is a lot of silly uninformed posturing that rises up to insist that free trade is BAD and that protectionist trade policies are good "for our people".  Both assertions are twaddle and do not stand up to serious scrutiny. 

To put the cat amongst the pigeons, we are reproducing a debate on the issue.  It was reproduced in Patterico. The post was entitled, The Argument in Favor of Unilaterally Abolishing All Tariffs.  It was introduced as follows:
One argument I hear a lot from people who support Trump’s proposed tariffs goes like this: “I’m generally a free trader, but when other countries subsidize their products or impose tariffs on ours, why shouldn’t the U.S. retaliate?”  This post is designed to respond to exactly that argument.

One of my favorite economists, Don Boudreaux, had an Oxford-style debate last November in which he defended this proposition: “The U.S. government should unilaterally abolish all tariffs and duties on imports and all subsidies to exports, thereby making all reciprocal trade agreements with other countries unnecessary.”  To get the most out of Boudreaux’s arguments, you should watch the entire debate:

I’ll summarize some of his arguments from the first half of the debate here, both to whet your appetite, and to provide some arguments for those who don’t have 80 minutes to devote to the debate. (Boudreaux won the debate, meaning more people came to his side than to his opponent’s side.)

Boudreaux argues: How do we get richer by allowing government to artificially restrict our ability to buy goods we otherwise want to buy? Such government action creates scarcity — because there will be fewer goods and services available for peaceful people to consume.

Boudreaux invites the listener to imagine a situation where government sends in thugs to destroy your household possessions, like furniture. Yes, if government thugs were to destroy your furniture, that would certainly help furniture companies. But it would make you poorer, because now you must spend more money to buy new furniture. Tariffs operate in much the same way; the only difference is that tariffs make the furniture unavailable (or less available) before you can purchase it, instead of after you purchase it.
Tariffs essentially layer goods and services with costs.  That means the end consumer is made poorer at a stroke.  It is interesting how this plays out in the particular case of Trump's proposed tariffs upon imports of aluminium and steel.  All consumers of these products, in whatever form, will pay more for them than was the case before the application of the tariffs.  That means they are poorer. 

But the manufacturers of aluminium and steel benefit.  They are able to sell their products for a higher price.  Their pockets become lined courtesy of a governmental fiat.  This is what Trump means by "Making America Great Again".  It's as dumb as a sack of hammers. 
Opponents say goods are not being made unavailable. People are just being encouraged to buy domestic goods, which helps our economy. But Boudreaux notes that foreigners selling goods here helps our economy too. With the money foreigners earn from selling goods here, foreigners either buy our exports or they invest here. When foreigners spend or invest in the U.S., that creates jobs. If government prevents them from doing this, government prevents domestic jobs from being created. In other words, trade creates jobs — jobs that are destroyed by protectionism.
There are lots of examples we could use to illustrate the point.  One will do.  How many manufacturing plants exist in the United States which make "foreign" cars in that country?  How many United States citizens are employed manufacturing these vehicles?  Free trade in automobiles has created thousands upon thousands of jobs--many of them in the so-called rust belt states. 

Boudreaux notes that all economic change destroys some jobs and creates others. He provides statistics to back up what he says. The absolute top estimate of the number of jobs destroyed by trade with China is 4 million. But every month, 1.7 million jobs are destroyed by the changing nature of consumer demand. Of course, other jobs are created by the changing nature of consumer demand — more jobs than are destroyed, in fact, except in recessions.
But there is another emotive argument that must needs be consigned to the dustbin. 
In what is probably the central argument of the debate, Boudreaux responds to the argument: Why not retaliate against countries that subsidize their own companies? That’s not fair!

Boudreaux argues that, yes, what these foreign governments are doing is unfair — to the economies of those foreign countries. If a foreign government subsidizes a company or industry, that subsidy isn’t free. It draws resources away from non-subsidized sectors of that same foreign economy, into less efficient uses. That makes the country poorer as a whole. Meanwhile, those subsidies make us richer when we buy cheaper goods. Why should we complain if we get gifts from foreigners?

[Patterico's note: I have illustrated this point in the past by making the argument: what if, instead of cheaper goods, countries like China just gave us goods for free? Imagine that tomorrow, a brand-new 50-inch flatscreen TV appears on your front porch. Are you supposed to complain about this? Is that supposed to somehow make you poorer?? That seems to be the end point of the logic of the protectionists.]
Trump and his advisers are acting like classic protectionists.  They want freedom for themselves and lots of restrictions, rules, and impediments for everyone else. 
Boudreaux again turns to statistics and economic history to point out that, as a matter of cold hard historical fact, the freer a country’s trade policy, the higher the country’s per capita income and rate of growth. In all history, countries with freer trade have enjoyed greater wealth.  . . .

To the notion that we will get reciprocal lowering of tariffs by other countries only when we negotiate for them, Boudreaux uses this analogy: if we were throwing boulders into our harbors, should we stop doing so only when other countries stop throwing boulders into theirs? Again, this goes back to what I described as his central thesis: China’s tariffs against us hurt China more than they hurt the U.S. — and our tariffs against China don’t hurt China, they hurt us. Boudreaux says: “We don’t need other countries to stop hurting themselves for us to stop hurting ourselves.”

To the argument that we have too many regulatory burdens, Boudreaux agrees — but says that nothing is solved by putting yet another governmental burden on ourselves in the form of tariffs.
There is one final consideration.  What happens to all that steel and aluminium imported into the United States?  It just gets stacked up in holding yards somewhere, right?  Of course not.  It has to be "worked".  Downstream manufacturing is required to turn that aluminium and steel into useful products.  In other words, the US businesses manufacturing vehicle components or aluminium cans--along with their employees--benefit.
I’ll leave you with this interesting statistic cited by Boudreaux: two-thirds of the materials that we import are not consumer goods, but rather inputs into American production. To the extent that we restrict and tax those inputs, we raise the cost of American production — which makes us less productive, not more productive.
In summary:
Boudreaux sums up his position with this simple statement about what it means to oppose tariffs: “We will no longer interfere with our citizens’ decisions on how they spend their income.”

It’s hard to disagree, isn’t it?

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