Some people are concerned or even panicked about President Trump imposing tariffs on the products of other countries. Progressive economists and world government proponents have loudly opined that tariffs are the destructive option that will harm us more than “them.” In reality there is little cause for concern.
Free trade is almost magical. Imagine there are two primitive tribes. On tribe specializes in making baskets. These baskets are durable and so tightly woven they will hold water. The other tribe is expert in making bows and arrows. Their arrows fly far and true and can kill game at great distances. Now imagine these two tribes meet and trade bows and arrows for baskets. When they part, both tribes are richer than they were before they traded because now both tribes have excellent baskets and superior weapons.
But over time the Bow and Arrow tribe realize they can use their weapons to capture and enslave members of other tribes and force them to make cheap, knock-off baskets. The availability of low quality baskets drives the value of all baskets down which impoverishes the Basket tribe. Free trade implies a level playing field.
Free trade is good when it is fair but free trade can be weaponized and used to the detriment of the trading partner. Some will argue that all trade is free trade and that having an advantage in labor prices or material costs or skill is simply one of the components that combine to bring the lowest possible price to the consumer. This would be true if the consumer was not also part of the supply chain. The consumer may have a job that depends on sales of a product that can be made cheaper somewhere else. Driving the cost to the consumer down may result in the consumer not being able to afford the product even at the cheaper price because the consumer no longer has an income.
Most “experts” analyze the economy only at the top level. The reality is that every transaction effects every other transaction to some degree, even if only infinitesimally small. Milton Friedman famously stated that “Nobody in the world knows how to make a pencil” to illustrate the fact that there is a complex web of trade and transactions to goes into making the materials to make a pencil. Miners, lumberjacks, chemists, metallurgists, machinists, truckers, and all those needed to support those trades are essential to produce a single pencil and any perturbation to that web has an impact on every other element. No one person has all the skills, knowledge and resources needed to make a pencil completely from scratch. It is only through the magic of free trade that the components can be brought together in the glory of a Ticonderoga #2.
This interconnection means any change has a cascading effect. If our politicians agree to a “free trade” deal with country that exports flowers then those flowers will compete in our domestic market. Prices will fall which is good for consumers but bad for domestic flower producers. In a few years the domestic suppliers go out of business, reducing the supply and driving up the price. Eventually consumer prices are back to where they were originally but the profits are being sent offshore, decreasing the overall wealth of our economy to the benefit of the flower producing country.
Foreign governments can subsidize their producers and then export those products as a form of economic warfare. Entire domestic industries can be decimated and replaced with a reliance on imported products. One the manufacturing web is broken it takes years to rebuild it. Our steel, automotive, semiconductor industries among others are victims of an ongoing economic war.
To win these wars offensively we must innovate, improve and streamline our manufacturing to stay ahead of the competition. We have the advantage that domestic production does not involve the time and cost of transoceanic shipment. But sometimes that is not enough and we must resort to defensive strategies.
A tariff is a tax placed on an imported product to bring its price point within a competitive margin of domestic products. The importer (consumer) pays the immediate tax but over time the exporter pays the cost. The cost comes from not having access to our market at uncompetitive low levels. This ripples into the exporter’s economy and stops the transfer of wealth. Over time a tariff prevents the transfer of wealth away from the domestic economy. The consumer isn’t advantaged by a lower cost product but is advantaged, or at least not injured in the long term.
Some pundits caution against tariffs as they can lead to reciprocal tariffs and a “trade war”. In a trade war, both sides apply escalating tariffs on imports from the other side. Both sides are trying to injure the other’s economy. It is like a game of chicken where two cars are driving head on to see which one swerves first. This would be a good analogy only if the two sides were roughly equal.
Mexico’s exports to the United States account for 36% of Mexico’s Gross Domestic Product. We are their biggest customer. Our exports to Mexico account for only 1.6% of our Gross Domestic Product. Their market is the scale of a rounding error.
In the game of tariff economic chicken, our vehicle is an 18-wheeler while Mexico is driving a moped. They cannot win a war of tariff escalation. We know it, they know it, Trump knows it, which is why they caved within hours of Trump’s 25% tariff announcement.
Will you pay 25% more for an imported beer or some guacamole dip? Perhaps, but in time the upside of the thriving economy will be worth it. We need our economy to grow if we are to survive the existential threat of our ballooning national debt.
It’s just common sense.
3 replies on “Tariff-ic Solution”
This is a very well-written, easy-to-understand article. Good job! Long before the income tax existed, the government mostly funded itself with tariffs, and the country did very well.
Makes sense to me. We need to once again start producing rather than buying cheaply made, poor quality products from overseas.
Brent
One of your best articles.