A question on the President’s tariffs

From a reader:

What’s the best case you can make for Trump’s tariffs?

This is one of the harder questions that I have been asked.

First of all, the phrase “Trump’s tariffs” hits me the wrong way. It should be the job of Congress to set tariffs. They should never have passed whatever legislation it is that gives the President the authority to set tariffs.

But trying to be charitable:

1. Maybe he is really using them as economic sanctions. Think of them as a way to reward friends (by giving exemptions) and punish enemies (by not doing so). The problem with trying to justify the tariffs this way is that the victims of the sanctions are people in both the U.S. and other countries, not the leaders of other countries. If you are going to give the President any points for this, you have to believe that economic sanctions have great symbolic meaning and that this symbolism will affect other governments’ behavior. Not easy to buy that.

2. Maybe tariffs are an example of the “least-harm principle,” which is that if somebody is committed to doing something bad, you hope that they pick the tactic that does the least harm.

I first formulated the principle my senior year at Swarthmore Colleg, which was when the Lettuce Boycott became the cause du jour on campus. Some of my fellow econ majors wanted to raise objections to the left’s insistence that the dining hall only serve union-picked lettuce. I suggested that we should not bother, since there were so many bigger issues around. “It’s the least significant issue they could have chosen. We should be happy that this is what they are focused on. Call it the least-harm principle of knee-jerk liberalism.”

So, maybe the tariffs are the least-harm way for Mr. Trump to satisfy the trade-nationalists in his coalition.

17 thoughts on “A question on the President’s tariffs

  1. The best case is that the PRC has highly protectionistic policies that harm US companies doing business in the PRC and the tariffs are a means to push the PRC to reduce those policies.

  2. So, maybe the tariffs are the least-harm way for Mr. Trump to satisfy the trade-nationalists in his coalition.

    From a conservative this is absolutely the most true. They get a huge tax cut and conservative judges with the possibility to increase WWC votes in future years. Remember how much of the Trump campaign rallies centered on the Clinton globalist taking your jobs and community. Basically it is Pat Buchanan wing of the party that has great Electoral College demographics. (Despite getting less votes than Romney, Romney’s business of private equity made it impossible to win the right demographics.)

    Of course the biggest concern from conservative voters is it could backfire:
    1) As much as the Midwest loves the factories, they might lose agriculture sales. I still think if corn prices drop that risks a lot of Trump’s Midwest gains.
    2) Working in steel consuming industry every bad thing that happens to cars and trucks is being blamed on steel tariffs. (No matter how little the true impact is.) So every manufacturer can’t hire more workers or the prices increase $500 or moving a factory to Mexico will be directly blamed on Trump tariffs.

    • Note in terms of Trump’s politic beliefs, tariffs and protectionism is his most consistent policy view dating back to the Reagan years. That seems kinda weird as his business real estate and hotels mostly benefits from free trade. Note his recent complaints that the US have ~$18B goods trade deficit deficit with Canada which is offset by $20B in services. The highest portion of service surplus is tourism that includes Canadians at Trump hotels.

  3. Perhaps:

    * Resentment and anxiety build up in societies over time;
    * There are many possible outlets for this anxiety, but they probably all involve labeling an enemy and punishing them;
    * If a trade war lets off enough steam that we avoid a real war, we should be profoundly grateful for the tariffs;
    * There is at least some possibility, however slim, that the threat of American sanctions will lead to future trade with China showing greater respect for IP.

    (My personal objection to this theory is that I think a trade war is as likely to lead to a real war as anything else.)

  4. If I were to make the case for protectionism it would have nothing to do with unfair trade practices.

    I’d follow the logic of “War on Work” and claim that we actually need these inefficient jobs to give employment to those (esp men) who can’t/won’t do anything else. Work gives more benefits than a paycheck so working an inefficient job is better than none at all. Furthermore, labor force participation is somewhat of a public good, especially if the alternative to market work is watching TV, so we should all pay higher prices to increase the number of people working.

    I can almost convince myself of this line of logic. But not quite.

    • Trade is (under certain circumstances…) efficient but may require redistribution ex post to make all domestic agents better off. We live in a second-best world; various agency problems mean we haven’t figured out how to do this ex post redistribution in a fair and effective (not to mention politically feasible) manner.

      So, better not to trade internationally at all, since while the pie becomes larger its division becomes inequitable, with attendant political and social issues.

      I think it’s a coherent story. Maybe the grand bargain that’s just out of sight is something like: “trade’s winners have to wait until we’ve figured out how to compensate the losers”.*

      *Of course you could replace ‘trade’ with technological progress in that sentence. Maybe when the singularity finally gets here, and the median voter decides the problem needs to be solved in that context, we’ll be able to thread the trade needle too.

  5. I think it’s fair to say there are good or legitimate tariffs and bad or illegitimate tariffs, but that it’s not at all easy for any ordinary member of the public to tell which category any particular tariff moves falls in. It might also be fair to preume that a tariff is in the bad category absent evidence to the contrary, but one should remain open-minded about it.

    Some old libertarian writers liked to point out that tarrifs were a much less instrusive and invasive way than the income tax for the federal government to generate revenue, and one which didn’t run afoul of the 5th Amendment as any mandatory income reporting scheme does.

    Let’s say a sector has large, positive economies of scale. There might be several possible equilibria: one global dominant firm that no one could profitably take on, or perhaps two firms with half the market share where the strategy to take a temporary hit as an anticompetitive investment to try to drive the other firm out of business in order to achieve market dominance is just barely infeasible because it would just invite equal and opposite retaliatory moves. But with a little state support one can do it, especially if one correctly surmises that the other party doesn’t not have equal access to state support, and that there is a similar asymmetry regarding business formation, in that it is much easier to destroy a business than to build one up from scratch (and there may be national asymmetry with regards to ease of business setup too.)

    In that case of these companies being in different countries, then in such circumstances, it could make sense for a nation to act to preserve the competitive equilibrium, especially if it regards the domestic industry as having important positive externalities (such a networks of domestic know-how and expertise and incentives to invest and innovate in the sector if local human capital is available) and thus worthy of preservation in the long-term national interest.

    In a previous comment, I mentioned asymmetric and high SDCODB – “State-Dependent Costs Of Doing Business” as a factor which could make certain industries locally uncompetitive and non-viable compared to un-tariffed imports from places that imposed fewer costs on production. A particularly clear example would be a carbon tax with only local application, which has the effect of siting production out of the jurisdiction, maintaining the same level of consumption of carbon-intensive products, not reducing overall emissions, and perversely, creating more emissions via use of less efficient foreign facilities and transport.

    One response to such a situation could be, “so what, no problem.” Another response could be “compensating tariff to ensure a level-playing field of fair competition for domestic producers.”

    My legal argument would be that any regulation that raises the cost of doing business past the point of viability, without a compensating tariff, destroys the entire value of the business and the reasonable, and erases the investment-backed expectarions of the owners, and is unconstituional as an uncompensated taking for a public purpose, for which the public should bear the cost. And the question becomes what is the best way for the public to bear that cost.

    Either the public can buy out the businesses through condemnation procedings and then sell the parts for scrap, which seems expensive and wasteful. Or it can bear the cost indirectly by means of higher prices because of a tariff, which allows domestic business to continue as a going concern, preserving domestic organizational capital and know-how, keeping the business alive with incentive to continue investing and innovating, and with the money spent even substituting for other forms of taxation.

    That seems to be a preferable option that is both fair and constitutional.

    And the larger point with more implications regarding tariffs more generally is that SDCODB in the US are simply enormous and often obscene for almost everything these days.

    • I would add that one of the main reason to preserve local ability to produce (certain) goods has to do with economic resiliency.

      Even if it was most economically efficient to import all our steel from China, it would not be prudent. If some catastrophe hit Chinese steel manufacturers, the impact to our economy will be far greater if we did not produce some ourselves. (Now, by this same token it does me that we should not rely solely on domestic production. There is a balance to be struck.)

      The issue becomes more pronounced if:
      a) the good we are importing is part of the critical path for our defense infrastructure
      b) the country we are importing from is one that we could plausibly go to war with

      The issue then transforms from one of mere economic resiliency to one of national security.

      Of course, having open trade with another country can help reduce the chance of war, in that it creates ties of interdependence. However, that relies on both parties being more or less equally dependent upon one another. What does China depend upon us for? If they depend upon us merely for the capacity to consume the goods they produce, how long will that last? What happens if we lose the ability to consume at the rate they produce?

        • My point wasn’t really about China being our primary source of steel, that was just a simplified example to make a point. But I think your point is that, given that we have so many varied sources for steel, stimulating local production does not provide much additional hedge against risk.

          That’s an excellent point, but you’ve also got to consider whether it is likely that events take one source out of commission might also take other sources out. For instance, if we go to war with China, then you can bet Taiwan, Japan, and likely South Korea would cease to be sources (India as well, if they ship it via the Pacific). That’s up to a quarter of our steel imports denied to us. At that point, Russia’s leverage on us increases (as they still provide a reasonable share) and they may feel inclined to exploit our need and squeeze us tighter for every ounce we buy.

          That being said, I’m fairly confident that in that scenario, imports from Canada, Brazil, and Mexico would be unaffected. So, by importing from many different countries, maybe there isn’t much risk reduction in local production. That’s something that has to be weighed in the balance.

          Something else that has to be weighed, that I don’t have the time to research, is where do we source more specialized types of steel? Because we may not source them proportionally from all of those countries. What are the risk profiles for those alloys? How affected are they in (for example) the war with China scenario? How critical would they be to the war effort?

          At this point I don’t have answers to those questions, and those answers may come out against the Trump tariffs. My point is that maybe those kinds of questions were asked by those who proposed the tariffs in the first place.

  6. He is lowering taxes on corporate income which should affect investment positively and exchanging this for a limited consumption tax which is a less onerous tax. Best I got.

  7. Maybe international trade is an iterated prisoner’s dilemma. The best long-term strategy is cooperate/cooperate. But if one side is defecting, then a good strategy is tit for tat.

    If Trump sees China, etc, as defecting (and really, in things like Intellectual Property, they definitely are), then defecting as well is a legitimate strategy for long-term game. China makes concessions, the tariffs are dropped/reduced, and everyone is happier than the current situation.

  8. Third would be as a negotiating tactic, but that requires a lot more judgement and realism about what is possible than anything we have seen.

    There is a case for low uniform tariffs to insulate against trade swings, and many small countries have tariffs simply because it is the easiest method of raising revenues for them, neither of which apply to these.

  9. From as near as I can tell, Trump is essentially only targetting China, exempting essentially all other trade partners. Thus, I view this as a national security issue: trade war instead of actual war. If this is the correct understanding, then the fact that American consumers are hurt is unremarkable.

  10. Trump is pretty clear about having three goals with the tariffs: (1) maintaining the industry in the US as a defense base precaution; (2) undoing some of the self-inflicted competitive disadvantage that we have done to ourselves with our over-regulated and over-taxed economy subject to judicial anarchy that pushed manufacturing out of the US with skids greased by trade agreements; (3) to create more long-term economic opportunity for US citizens. Economics is useless in considering the scope of Trump’s ambitions: economics is cosmopolitan and indifferent to such considerations. Of course he could also say it was to raise tax revenue and that would be a good and sufficient reason in itself.

    Tyler linked to an interview that explained a lot of this: http://thechinaroad.co.uk/2018/03/25/an-interview-with-bruno-macaes/

    Trump, more than anyone, understands “Now, if we were to legislate for the world as a whole, that might be a better system. We know the advantages, we have read our Hayek and Milton Friedman, and so on, but if we are competing against a rising power like China, which has dominated the secrets of modern technology, and if the idea is that China is going to marshal the resources of the state and then our private sector is supposed to compete – not against the corresponding private sector in China, but against the Chinese state – then there’s something here that doesn’t work, right?”

    Being able to see the forest for the trees is what makes Trump the smartest person in DC. The fact that he is genuinely committed to improving the welfare of US citizens and is not a shameless poseur is why he will turn out to be our greatest president.

    • Well said — tho instead of “smartest” I would opine that he has the best instincts for choosing policies that have the best mid-term results. “Deal Smarts” is not the same as street smarts, nor IQ smarts.

      I didn’t like tariffs when Bush used them either. But he was re-elected despite the Bush Derangement Syndrome of the Dem media.

  11. As these tariffs are clearly being used against China, and China has also been copying IP, I’d say the well known Tit-for-Tat strategy is far more likely than any other strategy to lead to an agreement with China to reduce their defecting/ cheating.

    There is also the timing issue with North Korea. I see the most likely non-war solution with Kim being that China offers him a deal (that he can’t refuse) that includes him staying in power, but without nukes. Or else. (China supports a coup against him? More trade war?)

    Tariffs / trade war with China as a way to pressure NK is better than war-war, tho Trump seems to be preparing for that, too — wisely.

    China has more need for the US as a huge customer, than the US has need for them to be lowest cost supplier. Maybe. Would the new middle class Chinese accept another Great Leap Forward, or Cultural Revolution? Accept, support, join? None know now.

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