I recently critiqued Bernie Sanders’ welfare ideas in the article, “Bernie Sanders’ Welfare Trap”. In the spirit of being fair, this article will address the crazy notion that populist Republican Donald Trump came up with. Namely, a 25% tariff on Chinese produced goods. In this day and age, it’s remarkable how many people still do not understand the negative effects of tariffs, regulations, and other trade barriers.
The media has had a heyday with Trump these last months. His popularity, especially among the blue collar class, has skyrocketed. To many he’s an amusing departure from the typical dull and boring establishment candidate. He talks off-the-cuff and spouts his opinions without a second thought of any political fallout. His stance on issues from immigration and foreign policy to international trade has made him the populist candidate, not unlike Theodore Roosevelt some 100 years ago. But are his fans even listening to what he promotes? Do they understand the consequences of electing an individual who’s intention is to amass even more power in the executive branch, ala Roosevelt?
Trade and Tariffs
To get a handle on what the fallout may be on a 25% tariff on Chinese goods is to look back to those glorious years of The Great Depression. Shortly after the stock market crash in 1929, the Hoover administration signed the Smoot-Hawley Tariff Act of 1930 into law. Economic historians, the world over, can tell you how departmental that was for the US economy and world economy as a whole. It kicked off a series of trade wars that left the industrialized nations weakened. They became economic islands of autarky. An autarky is a self-sufficient economy. The problem is, no nation can sustain its economy under the severe conditions of an autarky. The Great Depression deepened and spread around the world. Post WWI Germany, in particular, was harshly affected by these trade barriers. Without the ability to export what manufactured goods they produced, they fell into a series of hyperinflationary bouts that destroyed their currency. A decade of isolation and alienation from world markets gave rise to the sentiment that elected The National Socialist Workers’ Party of Adolf Hitler. A key plank in Hitler’s economic plan was an autarkic fatherland that would conquer her neighbors in order to provide for her citizenry. To hell with trade, free or otherwise.
After Adam Smith became famous with his book, “An Inquiry Into The Nature and Causes of the Wealth of Nations”, other classical economists continued where he left off. One of these economists was David Ricardo. Ricardo famously postulated that through the specialization of trade, even when a nation has an absolute advantage, both trading partners became better off and the standards of living for their respective citizens increased. To illustrate, imagine Costa Ricans wanting to have maple syrup for their pancakes. They could attempt to grow maple trees in a tropical climate and harvest the maple syrup. They might even pull it off with enough capital investment, but at what cost? Simultaneously, imagine Canadians having a craving for bananas. They too could attempt to grow their own banana trees in giant greenhouses. What would the immense cost be to undertake a project of that scale? The answer is for each country to specialize in what it can produce at the lowest opportunity cost. In our example, Canada specializes in maple syrup production and Costa Rica trades in bananas. Both nations can then allocate their scarce resources in other more beneficial projects. The price for each good would also be cheaper for consumers as there would be a net increase of the traded goods in each country.
Although free trade became fashionable after Adam Smith among British intellectuals, it didn’t catch on with the US government. The government continued to impose protectionist tariffs on other nation’s goods as a chief source of revenue. This is a part of what is known as mercantilism, where the government controls trade between nations and businesses as it was in the colonial days. In the mid 19th century, the newly formed Republican Party under Abraham Lincoln proposed high protectionist tariffs to protect the fledgling industry of the northeast, in particular, the railroads. After his election, Lincoln signed the Morrill Tariff which increased the import tariff from 21% to 31% overall on goods imported from Europe. Before the Morrill Tariff, the US had enacted a 55% tariff that almost led to the secession of South Carolina under the Andrew Jackson administration. A compromise was struck and the tariff was eventually lowered to 21%.
Protectionist tariffs had hit the agrarian southern states the hardest, as they depended on good trade relations with their European partners. Cotton was the nation’s key export and garnered great wealth for southern growers. The Republican Party incorporated a plank into their platform that would funnel some of that wealth to their friends in the northeast by way of a higher tariff and subsidies. In his 1st Inaugural Address, Lincoln stated that he would enforce the collection of “… all duties and imposts…” much to the southern states’ chagrin. It’s no surprise the first shot fired was at Ft. Sumter, an import duties post that controlled shipping into Charleston Harbor.
Our above example of maple syrup and bananas pertained to specialization in foreign trade where each trading partner had an absolute advantage. But what happens when both nations have comparatively the same opportunity cost and resources to produce comparable goods? Let’s take automobiles as an example. After WWII, the US had dominated the world market in automobile manufacturing. It wasn’t until Europe and Japan had rebuilt their economies that they became competitors in the global automobile market. How does the advent of new competition affect world trade? The same way competition affects trade on the local level. Each producer must compete with the lowest prices and at the best quality in order to please consumers. Similarly, this is the same with consumer electronics, textiles, agricultural products and a myriad of other goods. Some developing nations compete with other more advanced nations through lower labor costs. Others through natural resources such as lumber, oil or rare earth metals for lithium batteries. The end effect is higher standards of living for the globe through better allocating scarce resources into their most productive uses.
When left alone, this laissez-faire globalization of trade benefits everyone. It helps to stave off conflicts which lead to wars and supplies less affluent countries with goods that may otherwise be unattainable. But laissez-faire capitalism is in short supply these days. Just as large protected crony corporations intervene in local exchanges, they also intervene in global trade. Trade agreements such as NAFTA, GATT, SAFTA and the recent TPP are anything but examples of free trade or capitalism. These managed trade agreements hamper competitors by incorporating the use of political force. They cause trade imbalances, shortages and lowered standards of living for everyone involved. They give the crony corporations an absolute advantage by hampering smaller competitors on both the national and international level. Those who scrutinize the concept of free trade are mistaken if they think a multi-thousand-page trade agreement represents free trade.
Donald Trump’s idea of slapping a 25% tariff on Chinese goods wouldn’t protect anybody. The idea behind a tariff is to protect a certain national industry. A tariff on steel is an attempt to protect less competitive steel producers in the US. But the goods that are imported into the US from China aren’t even manufactured here. A tariff will only cause Walmart and other retailers to raise prices. How is that going to help the American worker?
Trump seems to believe by enforcing the tariff he will compel manufacturing to return to the US. Those goods that China exports are produced with low-cost unskilled labor, by and large. As I had written in my article, “Creative Destruction, Technological Unemployment and Choice”, what manufacturing that does return to our shores is largely being manufactured by advanced robotics and automation. This is little help for the mass of displaced unskilled US workers.
Starting a trade war with a country that manufactures most of your stuff and holds most of your debt is extremely foolish. Trump claims that he’s not all that smart, but the key to his success is surrounding himself with smart people. Maybe he ought to consider finding some smarter people. After all, even if a hole is surrounded by a doughnut, it’s still just a hole.
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