Chas Craig, BridgeTower Media Newswires
“Mercantilism benefits favoured companies but not economies and consumers.”
“Industrial Policy – Big Mistake” appearing in the Dec. 22 edition of The Economist
The quote is a nod to Adam Smith, the father of modern economics best known for his use of the concept of an “invisible hand” to argue for free market policies. Most economic textbooks are merely a condensed version of his “The Wealth of Nations” (1776).
Various tariffs were put in place at the direction of President Donald Trump throughout 2018, with the most contentious trade negotiations occurring between the U.S. and the world’s second-largest economy, China. The two sides have agreed to a pause in the trade war, but if an agreement is not reached by March, Trump has said he will boost the tariff rate to 25 percent from 10 percent on $200 billion of Chinese imports. The Chinese would, no doubt, impose additional countermeasures of their own.
Let us take a step back from the gory details to ask a bigger question. When are tariffs warranted, if ever? It seems reasonable for nations to, at least in part, insulate domestic industries from foreign competition in areas concerning national security. Indeed, the early-2018 tariffs on steel and aluminum were ostensibly rolled out under the banner of national security. While many economic and military experts view these tariffs as unnecessary, it makes sense for the U.S. to make sure it can procure enough war-making materials from domestic sources. Simply relying on allies is not good enough because sometimes friends turn into foes, and supply chains can be disrupted during times of war.
The second instance in which tariffs might be warranted is when they can reasonably be expected to force others to cease anti-free trade practices of their own. Acknowledging the obvious, the trade war between the U.S. and China is not just about trade flows, but about economic, military and technological supremacy. China’s industrial and trade policies are mercantilist and predatory to its counterparts, and to the extent the U.S. administration negotiates better terms with China and others, we would welcome it. However, trade wars are not “easy to win” as our president has suggested in the past.
Although tariffs may at times be justified, protectionist policies make it harder for countries to exploit comparative advantage, the theorem that countries should produce the goods and services they are the best at and import the rest. The sort of trade barriers that are put in place with the sole aim of monopolizing the domestic market for local companies are long-term destructive to the wealth of nations, even if trade deficit countries such as the U.S. may receive a short-term growth impetus from the re-shoring of making things we’re not so good or cost-effective at doing. We would all do well to keep front of mind that tariffs are essentially an excise tax on commerce. Like other things subject to excise tax (cigarettes, gasoline), all else equal, the more you tax something, the less of it you will get.
To close, free traders must realize that it is not invisible hands, but people that possess voter registration cards. Warren Buffett recently commented that the “benefits of trade are basically not visible,” while “the negatives ... are very apparent and very painful.”
If we want to wrestle back control from those with populist impulses, we need to do a better job of explaining the benefits of free trade for all and putting forth policies that ensure basic economic security for trade-driven victims of job loss while incentivizing work and re-training.
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Chas Craig is president of Meliora Capital in Tulsa (www.melcapital.com).
