Category Archives: Protectionism

Trump’s New Corporatist Plunder Will Cost U.S.

05 Friday Sep 2025

Posted by in Central Planning, Protectionism, Socialism

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Since his inauguration, Donald Trump has been busy finding ways for the government to extort payments and ownership shares from private companies. This has taken a variety of forms. Tad DeHaven summarizes the major pieces of booty extracted thus far in the following bullet points (skipping the quote marks here):

  • June 13: Trump issues an executive order allowing the Nippon Steel-US Steel deal contingent on giving the government a “golden share” that enables the president to exert extensive control over US Steel’s operations.
  • July 10: The Department of Defense (DoD) unveils a multi-part package with convertible preferred stock, warrants, and loan guarantees, making it the top shareholder of rare earth metals producer MP Materials.
  • July 23: The White House claims an agreement with Japan to reduce the president’s so-called reciprocal tariff rate on Japanese imports comes with a $550 billion Japanese “investment fund” that Trump will control.
  • July 31: Trump claims an agreement with South Korea to reduce the so-called reciprocal tariff on South Korean imports comes with a $350 billion South Korean-financed investment in projects “owned and controlled by the United States” that he will select.
  • August 11: The White House confirms an “unprecedented” deal with Nvidia and AMD that allows them to sell particular chips to China in exchange for 15 percent of the sales.
  • August 12: In a Fox Business interview, Bessent points to the alleged investments from Japan, South Korea, and the EU “to some extent” and says, “Other countries, in essence, are providing us with a sovereign wealth fund.”
  • August 22: Fifteen days after calling for Intel CEO Lip-Bu Tan to resign, Trump announces that the US will take a 10 percent equity stake in Intel using the CHIPS Act and DoD funds, becoming Intel’s largest single shareholder.

Each of these “deals” has a slightly different back story, but national security is a common theme. And Trump says they’ll all make America great again. They are touted as a way for American taxpayers to benefit from the investment he claims his policies are attracting to the U.S. However, all of these are ill-advised for several reasons, some of which are common to all. That includes the extortionary nature of each and every one of them.

Short Background On “Deals”

The June 13 deal (Nippon/US Steel), the July 10 deal (MP Materials), and the August 22 deal (Intel) all involve U.S. government equity stakes in private companies. The August 11 deal (NVIDIA/AMD) diverts a stream of private revenue to the government. The July 23 and July 31 deals (Japan and South Korea) both involve “investment funds” that Trump will control to one extent or another.

The August 12 entry adds “expected” EU investments with some qualification, but that bullet quotes Treasury Secretary Bessent referring to these investments as part of a sovereign wealth fund (SWF). Secretary of Commerce Lutnick now denies that an SWF will exist. My objections might be tempered slightly (but only slightly) by an SWF because it would probably need to place constraints on an Administation’s control. That might give you a hint as to why Lutnick is now downplaying the creation of an SWF.

I object to the Nippon/US Steel “deal” in part (and only in part) because it was extortion on its face. There is no valid anti-trust argument against the deal (US Steel is the nation’s third largest steelmaker and is broke), and the national security concerns that were voiced (Japan! for one thing) were completely bogus. Even worse, the “Golden Share” would give the federal government authority, if it chose to exercise it, over a variety of the company’s decisions.

The Intel “deal” is another highly questionable transaction. Intel was to receive $11 billion under the CHIPS Act, a fine example of corporate welfare, as Veronique de Rugy once described the law. However, Intel was to receive its grants only if it stood up four fabrication facilities. But it did not. Now, instead of demanding reimbursement of amounts already paid, the government offered to pay the remainder in exchange for a 9.9% stake in the company. And there is no apparent requirement that Intel meet the original committment! This could turn out a bust!

The MP Materials transaction with the Department of Defense has also been rationalized on national security grounds. This excuse comes a little closer to passing the smell test, but the equity stake is objectionable for other reasons (to follow).

The Nvidia/AMD deal has been justified as compensation for allowing the companies to sell chips to China, which is competing with the U.S. to lead the world in AI development. This is another form of selective treatment, here applied to an export license. The chips in question do not have the same advanced specifications as those sold by the companies in the U.S., but let’s not let that get in the way of a revenue opportunity.

While nothing about TikTok appears on the list above, I fear that a resolution of its operational status in the U.S. presents another opportunity for extortion by the Trump Administration. I’m sure there will be many other cases.

Root Cause: Protectionism

The so-called investment funds described in the timeline above are nearly all the result of trade terms negotiated by a dominant and belligerent trading partner: the U.S. My objections to tariffs are one thing, but here we are extorting investment pledges for reductions in the taxes we’ll impose on our own citizens! Additionally, the belief that these investments will somehow prevent a general withdrawal of foreign investment in the U.S. is misguided. In fact, a smaller trade deficit dictates less foreign investment. The difference here is that the government will wrest ownership control over a greater share of less foreign investment.

Trump the Socialist?

Needless to say, I don’t favor government ownership of the means of production. That’s socialism, but do matters of national security offer a rationale for public ownership? For example, rare earth minerals are important to national defense. Therefore, it’s said that we must ensure a domestic supply of those minerals. I’m not convinced that’s true, but in any case, fat defense contracts should create fat profit opportunities in mining rare earths (enter MP Materials). None of that means public ownership is necessary or a good idea.

All of these federal investments are construed, to one extent or another, as matters of national security, but that argument for market intervention is much too malleable. Must we ensure a domestic supply of semiconductors for national security reasons? And public ownership? Is the same true of steel? Is the same true of our “manufacturing security”? It can go on and on. The next thing you know, someone will argue that grocery stores should be owned by the government in the name of “food security”! Oh, wait…

Trump the Central Planner

Government ownership takes the notion of industrial planning a huge step beyond the usual conception of that term. Ordinarily, when government takes the role of encouraging or discouraging activity in particular industries or technologies, it attempts to select winners and losers. The very idea presumes that the market is not allocating resources in an optimal way, as if the government is in any position to gainsay the decisions of private market participants who have skin in the game. This is a foolhardy position with predictably negative consequences. (For some examples, see the first, second, and fourth articles linked here by Don Boudreaux.) The fundamental flaw in central planning always comes down to the inability of planners to collect, process, and act on the information that the market handles with marvelous efficiency.

When government invests taxpayer funds in exchange for ownership positions in private concerns, the potential levers of control are multiplied. One danger is that political guidance will replace normal market incentives. And as de Rugy points out, the government’s potential role as a regulator creates a clear conflict of interest. In a strong sense, a government ownership stake is worse for private owners than a mere dilution of their interests. It looms as a possible taking, as private owners and managers surrender to creeping government extortion.

Financial Malfeasance

In addition to the objections above, I maintain that these investments represent poor stewardship of public funds. The U.S. public debt currently stands at $37 trillion with an entitlement disaster still to come. In fact, according to one estimate, the federal government’s total unfunded obligations amount to additional $121 trillion! Putting aside the extortion we’re witnessing, any spare dollar should be put toward retiring debt, rather than allowing its upward progression.

As I’ve noted before, paying off a dollar of debt entails a risk-free “return” in the form of interest cost avoidance, let’s say 3.5% for the sake of argument. If instead the dollar is “invested” in risk assets by the government, the interest cost is still incurred. To earn a net return as high as the that foregone from interest avoidance, the government must consistently earn at least 7% on its invested dollar. But of course that return is not risk-free!

A continuing failure to pay down the public debt will ultimately poison the debt market’s assessment of the government’s will to stay within its long-run budget constraint. That would ultimately manifest in an inflation, shrinking the real value of the public debt even as it undermines the living standards of many Americans.

One final thought: Though few MAGA enthusiasts would admit it even if they understood, we’re witnessing a bridging of two ends of the idealogical “horseshoe”. Right-wing populism and protectionism meet the left-wing ideal of central planning and public ownership. There is a name for this particular form of corporatist state, and it is fascism.

Letting Protectionist Nations Tax Themselves

22 Tuesday Apr 2025

Posted by in Comparative advantage, Protectionism, Tariffs

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First, a few more comments re: my speculative musings that Donald Trump’s tariff rampage could ultimately result in a regime with lower trade barriers, at least with a subset of trading partners. Arthur Laffer and Stephen Moore suggested last week that the White House should propose reciprocal free trade with zero barriers and zero subsidies for exports to any country that wishes to negotiate. A more cynical Ben Zycher scoffed at the very possibility, noting that Trump and his lieutenants view any trade deficit as evidence of cheating in one form or another. Zycher is convinced that Trump lacks a basic understanding of the (mostly) benign forces that drive trade imbalances.

I’ve said much the same. Trump’s crazy notions about trade could scuttle negotiations, or he might later accuse a trading partner of cheating on the pretext of a bilateral trade deficit (he’s done so already). And all this is to say nothing of the serious constitutional questions surrounding Trump’s tariff actions.

The mistaken focus on bilateral trade deficits also manifests in certain proposals made during trade negotiations: “Okay, but you’re gonna have to purchase vast quantities of our soybeans every year.” This sort of export promotion is a further drift into industrial planning, and it’s just too much for Trump’s trade negotiators to resist.

This might well turn out as an exercise in self-harm for Trump. However, I’ve also wondered whether his trade hokum is pure posturing, especially because he expressed support for a free trade regime in 2018. Let’s hope he meant it and that he’ll pursue that objective in trade talks. Please, just negotiate lower trade barriers on both sides without the mercantilist baggage.

Which brings me to the theme of this post: it would probably be simpler and more effective for the U.S. to simply drop all of its trade barriers unilaterally. There should be limited exceptions related to national security, but in general we should “turn the other cheek” and let recalcitrant trade partners engage in economic self-harm, if they must.

Okay, Wise Guy, What’s Your Plan?

I have a few friends who bemoan the lack of “fair play” against the U.S. in foreign trade. They have a point, but they also hold an unshakable belief that the U.S. can be just as efficient at producing anything as any other country. They are pretty much in denial that comparative advantages exist in the real world. They are seemingly oblivious to the critical role of specialization in unlocking gains from trade and lifting much of the world’s population out of penury over the past few centuries.

Furthermore, these friends believe that Trump is justified in “retaliating” against countries with whom the U.S. runs trade deficits. If tariffs are so bad, they ask, what would I do instead? Again, here’s my answer:

Eliminate (almost) all barriers to trade imposed by the U.S. Let protectionist nations choke themselves with tariffs/trade barriers.

Before getting into that, I’ll address one fact that is often denied by protectionists.

Yes, a Tariff Is a Tax!

Protectionists often claim that tariffs are not really taxes on U.S. buyers. However, tariffs are charged to buyers of imported goods (often businesses who sell imported goods to consumers or other businesses). In principle, tariffs operate just like a sales tax charged to retail buyers. Both raise government revenue, and they are both excise taxes.

In both cases, the buyer pays but generally bears less than the full burden of the tax. That’s because demand curves slope downward, so sellers (foreign exporters) try to avoid losing sales by moderating their prices in response to the tariff. In both cases, sellers end up shouldering part of the tax burden. How much depends on how buyers react to price: a steep (inelastic) demand curve implies that buyers bear the greater part of the burden of a tariff or sales tax.

People sometimes buy imports due to a lack of substitutes, which implies a steep demand curve. Consumer imports are often luxury items, and well-heeled buyers may be somewhat insensitive to price. Most imports, however, are inputs purchased by businesses, either capital goods or intermediate goods. In the face of higher tariffs, those businesses find it difficult and costly to arrange new suppliers, let alone domestic suppliers, who can deliver quickly and meet their specifications.

These considerations imply that the demand for imports is fairly inelastic (steeper), especially in the short run (when alternatives can’t easily be arranged). Thus, import buyers bear a large portion of the burden in the immediate aftermath of an increased tariff. By imposing tariffs we tax our own citizens and businesses, forcing them to incur higher costs. Correspondingly, if demand is inelastic, an importing country tends to gain more than its trading partners by unilaterally eliminating its own tariffs.

Tariffs on imports also trigger price hikes by import-competing producers. Sometimes this is opportunistic, but even these producers incur higher costs in attempting to meet new demand from buyers who formerly purchased imports. (See this post for an explanation of the costly transition, including a nice exposition of the waste of resources it entails.)

Other Forms of Blood Letting

Beyond tariffs, certain barriers to trade make it more difficult or impossible to purchase goods produced abroad. This includes import quotas and domestic content restrictions. These barriers are often as bad or worse than tariffs because they increase costs and encumber freedom of choice and consumer sovereignty.

Another kind of trade intervention, export subsidies, must be funded by taxpayers. Subsidies are too easily used to protect special interests who otherwise can’t compete. Currency manipulation can both subsidize exports and discourage imports, but it is often unsustainable. The common theme of these interventions is to undermine economic efficiency by shielding the domestic economy from real price signals.

Let Them Tax Themselves

Suppose the U.S. simply turns the other cheek, eliminating all of our own trade interventions with respect to country X despite X’s tariffs and other interventions.

To start with, the existence of barriers means that both countries are unable to exploit all of the benefits of specialization and mutually beneficial trade. Both countries must produce an excess of goods in which they lack a comparative advantage, and both countries produce too few goods in which they have a comparative advantage. Both incur extra costs and produce less output than they could in the absence of trade barriers.

Unilateral elimination of U.S. tariffs and other barriers would reduce high-cost domestic production of certain goods in favor of better substitutes from country X. But Country X gains as well, because it is now able to produce more goods and services for export in which it possesses a comparative advantage. Therefore, the unilateral move by the U.S. is beneficial to both countries.

On the other hand, U.S. export industries are still constrained by country X’s import tax or other restraints. These would-be exporters are no worse off than before, but they are worse off relative to a state in which buyers in country X could freely express their preferences in the marketplace.

What exactly does country X gain from tariffs and other trade burdens on its citizens? It denies them full access to what they deem to be superior goods and services at an acceptable price. It means that resources are misallocated, forcing abstention or the use of inferior or costlier domestic alternatives. Resources must be diverted to relatively inefficient firms. In short, the tariff makes country X less prosperous.

Empirical evidence shows that more open economies (with fewer trade barriers) enjoy greater income and productivity growth. This study found that “trade’s impact on real income [is] consistently positive and significant over time.” See this paper as well. Trade barriers tend to increase the income gap between rich and poor countries. The chart below (from this link) compares real GDP per capita from the top third and bottom third of the distribution of countries on a measure of trade “openness”. Converting logs to levels, the top third has more than twice the average real GDP per capita of the bottom third. And of course, the averaging process mutes differences between very open and very closed trade policies.

The chart also shows that countries more “open” to trade have more equal distributions of income, as measured by their Gini coefficients.

An important qualification is that domestic production of certain goods and services might be critical to national security. We must be willing to tolerate some inefficiencies in that case. It would be foolish to depend on a hostile nation for those supplies, despite any comparative advantage they might possess. It’s reasonable to expect such a list of critical goods and services to evolve with technological developments and changing security threats. However, merely acknowledging this justification leaves the door open for excessively broad interpretations of “critical goods”, especially in times of crisis.

Setting a Good Policy and Example

Here’s an attempt to summarize:

  • Tariffs are taxes, and non-tariff barriers inflict costs by distorting prices or diminishing choice
  • Trade barriers reduce economic efficiency and produce welfare losses
  • Trade barriers deny the citizens of a country the benefits of specialization
  • Both countries gain when one trading partner eliminates tariffs on imports from the other
  • The demand for imports is fairly inelastic, at least in the short run. Thus, the gain from eliminating a tariff will be skewed toward the domestic importers
  • Both countries gain when they agree to eliminate any and all trade barriers
  • Across countries, trade barriers are associated with lower incomes, lower income growth, and more unequal distributions of income

The U.S. has a large number of trading partners. Every liberalization we initiate means a welfare gain for us and one trading partner, who would do well to follow our example and reciprocate in full. Not doing so foregoes welfare gains and leads to incremental losses in income relative to more trade-friendly nations. Across all of our trading relationships, a unilateral end to U.S. trade barriers would almost certainly convince some countries to reciprocate. Those that refuse would suffer. Let them self-flagulate. Let them tax themselves.

The Tariff Games

08 Tuesday Apr 2025

Posted by in Protectionism, Tariffs

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Donald Trump’s imposition of higher tariffs — much higher tariffs — on our trading partners carries tremendous risk. See this article for a good summary of the tariffs Trump levied (and now paused for 90 days) on imported goods from different countries. The President believes he can win major concessions from other nations in terms of trade barriers as well as foreign policy objectives. But he would also have us believe that we’ll be better off even if those concessions fall short of his hopes.

Perhaps he’s posturing, but Trump seems to thinks tariffs are some kind of elixir. That is nonsense for a variety of reasons. I’ve discussed several of those previously and I’ll add more in a subsequent post. Here, I’ll attempt to give Trump his due. I’m highly skeptical, but I’ll be happy to eat crow if he is successful in achieving a trade regime with lower tariffs and other barriers across many of our trading partners.

Markets

The tariff announcements last week on “Liberation Day” spooked markets, prompting a continuation of the classic flight to safety we’ve witnessed since Trump began to rattle his trade saber. This has driven bond prices up and long-term interest rates down, though now we’re seeing a partial reversal (if it holds). Will lower interest rates help save the day for Trump? It will bring lower borrowing costs to many borrowers, including the federal government, and it should help to buttress stock values, softening the blow to some extent.

The tariffs, should they remain in place, are likely to boost inflation temporarily (a one-time increase in the price level) and could very well tip the U.S. economy into recession. Depending on the severity, those developments would undercut the GOP’s hopes of maintaining a congressional majority in the 2026 mid-term elections. Then, he’d truly have managed to cut off his nose to spite his face. Still, Trump thinks he knows something about tariffs that markets don’t.

Dominoes

Bill Ackman has expressed a view of how markets are reacting and how they might evolve under Trump’s trade policy. He thinks markets would be fine had the President set tariffs at levels matching our trading partners (doubtful at best), but Trump went bigger in order to jolt other nations into negotiating. Ackman thinks there might be a “tipping point” when countries line up at the negotiating table. And indeed, as of April 7, the administration said “up to” 70 countries had reached out to enter new trade negotiations with the U.S. That probably helped bring investors out of their doldrums, pending actual deals.

Elon Musk states a desire to see tariffs eliminated between the U.S. and the EU, and the EU has made a limited offer along those lines. This might be indicative of similar thinking by others in the administration. But Trump insists he’ll always revisit tariffs wherever he sees a bilateral trade deficit. Contrary to all economic logic, he is convinced that trade deficits are harmful, when in fact they mainly reflect our relative prosperity.

Hard-Nosed, High Stakes

Economists have been almost uniform in their condemnation of Trump’s approach trade. To some extent, that’s a visceral reaction to Trump’s pro-tariff rhetoric and revulsion to his opening moves. But is there an economic rationale for this type of aggressive attempt to bargain for lower trade barriers? Yes, and it’s not a terribly deep insight, and it carries great risks in the real world.

From a game-theoretic perspective, it’s possible that a dominant trading partner, in repeated rounds, can ultimately achieve lower bilateral trade barriers through the threat or imposition of higher barriers to imports from a trading partner. The key is the difference in costs that barriers impose on the two nations. One is in a position to leverage its dominant position, inflicting greater costs on the other nation as an inducement to gain concessions and achieve improved conditions for mutual trade.

The U.S. is almost uniformly the dominant partner in bilateral trade relationships. That’s because U.S. GDP is so large and U.S. trade with any given country is a comparatively small fraction of GDP. But dominance can mean different things: there are countries that supply critical goods to the U.S., like oil, semiconductors, or rare earths, which may give certain countries disproportionate leverage in trade negotiation. Those products along with many others are exempted from Trump’s tariffs.

Other Cards

Nevertheless, the U.S. has economic leverage over individual trading partners in the vast majority of cases, which Trump certainly is willing to exploit. And Trump has another powerful tool with which to negotiate with some trading partners: U.S. military protection. Using it might expose the U.S. to strategic disadvantages, but don’t put it past Trump to bring this up in negotiations!

Trump is doing his best to prove a readiness to escalate. That might build his credibility except for a couple of critical facts: first, his actions have already violated at least 15 existing treaties. Why should they trust him? Second, some groups of nations are likely to present a united front, putting them on a more equal footing with the U.S. This makes a trade war between the U.S. and the rest of the world more likely. One nation in particular stands ready to capitalize on severed relations between other nations and “Donald Trump’s” America: Xi Jinping’s China. Bilateral trade with China might just be the Super Bowl of these tariff games. Unfortunately, it could be a Super Bowl where everyone loses!

An additional complication: while the U.S. has dominance in most of its trade relationships, the barriers to U.S. goods erected by other nations are often supported by powerful special interests. Trump’s ability to strike deals will be complicated where governments are captive to these interests, which might be concentrated among powerful elites or of a more diffuse, nationalist/populist nature.

Deep In the Woods

There is optimism in some quarters that a few successful trade deals will lead to a “tipping point” in the willingness of other nations to negotiate with Trump. Despite the sudden clamor among our trade partners to negotiate, we’re a long way from getting solid agreements. Investors still assess a greater risk of a world trade war than vanishing barriers to trade.

I’ll close with a take on the situation by the reliably funny Iowahawk:

Tariffs, Content Quotas, and What Passes for Patriotism

10 Friday Mar 2023

Posted by in Free Trade, Protectionism

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If there’s one simple lesson in economics that’s hard to get across it’s the destructive nature of protectionism. The economics aren’t hard to explain, but for many, the lessons of protectionist failure just don’t want to sink in. Putting aside matters of national security, the harms of protectionism to the domestic economy are greater than any gains that might inure to protected firms and workers. Shielding home industries and workers from foreign competition is generally not smart nor an act of patriotism, but that sentiment seems fairly common nonetheless.

The Pathology of Protectionism

Jingoistic slogans like “Buy American” are a pitch for voluntary loyalty to American brands. I’m all for voluntary action. Still, that propaganda relies on shaming those who find certain foreign products to have superior attributes or to be more economical. This feeds a psychology of economic insularity and encourages those who favors trade barriers, which is one of the earliest species of failed central planning.

The cognitive resistance to a liberal trade regime might have to do with the concentrated benefits of protectionist measures relative to the more diffuse (but high) costs it imposes on society. Some of the costs of protectionism manifest only with time, which makes the connection to policy less obvious to observers. Or again, obstructing trade and taxing “others” in the hope of helping ourselves may simply inflame nationalist passions.

Both Democrats and Republicans rally around policy measures that tilt the playing field in favor of domestic producers, often severely. And again, this near unanimity exists despite innumerable bouts with the laws of economics. I mean, how many times do you have to be beaten over the head to realize that this is a mistake? Unfortunately, politicians just don’t live in the long-term, they leap to defend powerful interests, and they seldom pay the long-term consequences of their mistakes.

Joe Biden’s “Buy American”

The Biden Administration has pushed a “Made In America” agenda since the President took office, It’s partly a sop to unions for their election support. Much of it had to do with tightening waivers granted under made-in-America laws (dating back to 1933) governing foreign content in goods procured by the federal government. The most recent change by Biden is an increase in the requirement for domestic content to 60% immediately and gradually to 75% from there. Also, “price preferences” will be granted to domestic producers of goods to strengthen supply chains identified as “critical”, including active pharmaceutical ingredients, certain minerals including rare earths and carbon fibers, semiconductors and their advanced packaging, and large capacity batteries such as those used in EVs.

There’s a strong case to be made for developing domestic supplies of certain goods based on national security considerations. That can play a legitimate role where defense goods or even some kinds of civilian infrastructure are involved, but Biden’s order applies much more broadly, including protections for industries that are already heavily subsidized by taxpayers. For example, the CHIPS Act of 2022 included $76 billion of subsidies and tax credits to the semiconductor industry.

George Will describes the cost of protectionism and Biden’s “Buy American”:

“‘Buy American,’ like protectionism generally, can protect some blue-collar jobs — but at a steep price: A Peterson Institute for International Economics study concludes that it costs taxpayers $250,000 annually for each job saved in a protected industry. And lots of white-collar jobs are created for lawyers seeking waivers from the rules. And for accountants tabulating U.S. content in this and that, when, say, an auto component might cross international borders (U.S., Canadian, Mexican) five times before it is ready for installation in a vehicle.”

Biden’s new rules will increase the cost of federal procurement. They will squeeze out contracts with foreign suppliers whose wares are sometimes the most price-competitive or best-suited to a project. This is not a prescription for spending restraint, and it comes at a time when the federal budget is under severe strain. Here’s George Will again:

“This will mean more borrowing, not fewer projects. Federal spending is not constrained by a mere shortage of revenue. So, Biden was promising to increase the deficit. And this policy, which elicited red-and-blue bonhomie in the State of the Union audience, also will give other nations an excuse to retaliate (often doing what they want to do anyway) by penalizing U.S. exporters of manufactured goods. ….. Washington lobbyists for both will prosper.”

Domestic manufacturers who find their contracting status “protected” from foreign competition will face less incentive to perform efficiently. They can relax, rather than improve or even maintain productivity levels, and they’ll feel less pressure to price competitively. Those domestic firms providing goods designated by the government as “critical” will be advantaged by the “price preferences” granted in the rules, leading to a less competitive landscape and higher prices. Thus, Biden’s “Buy American” order is likely to mean higher prices and more federal spending. This is destructive and counter to our national interests.

Donald Trump’s Tariffs

In a recent set of proposals trialed for his presidential election campaign, Donald Trump called for “Universal Baseline Tariffs” on imported goods. In a testament to how far Trump has stumbled down the path of economic ignorance, his campaign mentions “patriotic protectionism” and “mercantilism for the 21st century”. Good God! Trump might be worse than Biden!

This isn’t just about China, though there are some specific sanctions against China in the proposal. After all, these new tariffs would be “universal”. Nevertheless, the Trump campaign took great pains to cloak the tariffs in anti-China rhetoric. Now, I’m very unfavorably disposed to the CCP and to businesses who serve or rely on China and (by implication) the CCP. Certainly, in the case of China, national security may dictate the imposition of certain forms of protectionism, slippery slope though it might be. Nevertheless, that is not what universal tariffs are about.

One destructive consequence of imposing tariffs or import quotas is that foreign governments are usually quick to retaliate with tariffs and quotas of their own. Thus, export markets are shut off to American producers in an escalating trade conflict. That creates serious recession risks or might reinforce other recessionary forces. Lost production for foreign markets and job losses in the affected export industries are the most obvious examples of protectionist harm.

Then consider what happens in protected industries in the U.S. and the negative repercussions in other sectors. The prices charged for protected goods by domestic producers rise for two reasons: more output is demanded of them, and protected firms have less incentive to restrain pricing. Just what the protectionists wanted! In turn, with their new-found, government-granted market power, protected firms will compete more aggressively for workers and other inputs. That puts non-protected firms in a bind, as they’ll be forced to pay higher wages to compete with protected firms for labor. Other inputs may be more costly as well, particularly if they are imported. These distortions lead to reduced output and jobs in non-protected industries. It also means American consumers pay higher prices for both protected and unprotected goods.

Consumers not only lose on price. They also suffer a loss of consumer sovereignty to a government wishing to manipulate their choices. When choices are curtailed, consumers typically lose on other product attributes they value. It also curtails capital inflows to the U.S. from abroad, which can have further negative repercussions for U.S. productivity growth.

When imports constitute a large share of a particular market, it implies that foreign nations have a comparative advantage in producing the good in question. In other words, they sacrifice less to produce the good than we would sacrifice to produce it in the U.S. But if country X has a comparative advantage in producing good X, it means it must have a comparative disadvantage in producing certain other goods, let’s say good Y. (That is, positive tradeoffs in one direction necessarily imply negative tradeoffs in the other.) It makes more economic sense for other countries (country Y, or perhaps the U.S.) to produce good Y, rather than country X, since country Y sacrifices less to do so. And that is why countries engage in trade with each other, or allow their free citizens to do so. It is mutually beneficial. It makes economic sense!

To outlaw or penalize opportunities for mutually beneficial trade will only bring harm to both erstwhile trading partners, though it might well benefit specific interests, including some third parties. Those third parties include opportunistic politicians wishing to leverage nationalist sentiments, their cronies in protected industries, and the bureaucrats, attorneys, and bean counters who manage compliance.

When Is Trade Problematic?

Protectionists often accuse other nations of subsidizing their export industries, giving them unfair advantages or dumping their exports below cost on the U.S. market. There are cases in which this happens, but all such self-interested claims should be approached with a degree of skepticism. There are established channels for filing complaints (and see here) with government agencies and trade organizations, and specific instances often prompt penalties or formal retaliatory actions.

There are frequently claims that foreign producers and even prominent American businesses are beneficiaries of foreign slave labor. A prominent example is the enslavement of Uyghur Muslims in China, who reportedly have been used in the manufacture of goods sold by a number of big-name American companies. This should not be tolerated by these American firms, their customers, or by the U.S. government. Unfortunately, there is a notable lack of responsiveness among many of these parties.

Much less compelling are assertions of slave labor based on low foreign wage rates without actual evidence of compulsion. This is a case of severely misplaced righteousness. Foreign wage rates may be very low by American standards, but they typically provide for a standard of living in the workers’ home country that is better than average. There is no sin in providing jobs to foreign workers at a local wage premium or even a discount, depending on the job. In fact, a foreign wage that is low relative to American wages is often the basis for their comparative advantage in producing certain goods. Under these innocent circumstances, there is no rational argument for producing those goods at much higher cost in the U.S.

Very troublesome are the national security risks that are sometimes attendant to foreign trade. When dealing with a clear adversary nation, there is no easy “free trade” answer. It is not always clear or agreed, however, when international relations have become truly adversarial, and whether trade can be usefully leveraged in diplomacy.

Conclusion

As I noted earlier, protectionism has appeal from a nationalist perspective, but it is seldom a legitimate form of patriotism. It’s not patriotic to limit the choices and sovereignty of the individual, nor to favor certain firms or workers by shielding them from competition while penalizing firms requiring inputs from abroad. We want our domestic industries to be healthy and competitive. Shielding them from competition is the wrong approach.

So much of the “problem” we have with trade is the infatuation with goals tied to jobs and production. Those things are good, but protectionists focus primarily on first-order effects without considering the damaging second-order consequences. And of course, jobs and production are not the ultimate goals of economic activity. In the end, we engage in economic activity in order to consume. We are a rich nation, and we can afford to consume what we like from abroad. It satisfies wants, it brings market discipline, and it leads to foreign investment in the American economy.

Biden and Trump share the misplaced objectives of mercantilism. They are both salesmen in the end, though with strikingly different personas. Salesmen want to sell, and I’m almost tempted to say that their compulsion causes them see trade as a one-way street. Biden is selling his newest “Buy American” rules not only as patriotic, but as a national security imperative. The former is false and the latter is largely false. In fact, obstructions to trade make us weaker. They will also contribute to our fiscal imbalances, and that contributes to monetary and price instability.

Like “Buy American”, Trump’s tariffs are misguided. Apparently, Trump and other protectionists wish to tax the purchases of foreign goods by American consumers and businesses. In fact, they fail to recognize tariffs as the taxes on Americans that they are! And tariffs represent a pointed invitation to foreign trading partners to impose tariffs of their own on American goods. You really can’t maximize anything by foreclosing opportunities for gain, but that’s what protectionism does. It’s astonishing that such a distorted perspective sells so well.

Trump Bumbles On Trade With Tariffs

02 Friday Mar 2018

Posted by in Free Trade, Protectionism, Tariffs

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You can get away with lousy policy by calling it a “negotiating tactic” for only so long. But that dubious ploy is one of the rationales offered last week by the Trump Administration for imposing a 25% tariff on imported steel and a 10% tariff on imported aluminum. Sure, the tariffs are like gifts rendered onto American steel and aluminum producers, their shareholders, and their unionized workers. The tariffs allow them to compete more effectively, without any effort, with foreign steel and aluminum in the domestic market, and the tariffs may also give them leeway to raise prices. The tariffs are also forgiving of degraded performance by domestic producers, since reduced competition relieves pressure for efficiency, a primary social cost of monopoly power.

So who pays for these gifts to the domestic steel and aluminum industries? A tariff, of course, is a tax, and a significant portion of it will be passed along into higher prices of both imported and domestically-produced steel and aluminum. Therefore, the burden of that tax will be borne to a large extent by domestics users, including every domestic industry that uses steel or aluminum as an input, and by consumers who purchase those products. That erodes the job security of many domestic workers outside of the steel and aluminum industries. In fact, the tariffs are unlikely to create more jobs even in the steel and aluminum industries given the negative impact of higher prices on the quantities of those metals demanded.

The desperate story line in support of tariffs also includes the assertion that the U.S. steel and aluminum industries are in such dire straits that they are in danger of vanishing. Statistics on U.S. production hardly suggest that is the case, however. Steel output in the U.S. has been reasonably steady since recovering from the last recession, though it has not achieved its pre-recession level. While aluminum output has been declining, it is hardly in a free fall. The stock prices of major steel and aluminum producers, which are forward-looking, have not demonstrated a particular need for government aid (as if that could ever justify a too-big or too-important-to-fail mentality).

Defenders of the tariffs claim that one effect will include additional direct investment in the U.S. by foreign producers of steel and aluminum, because they can avoid the tariffs by setting up production within our borders. Perhaps a few will, but capital is mobile in other sectors as well. Producers in other industries requiring intensive use of steel or aluminum inputs will now have an incentive to shift production overseas, where the tariffs won’t apply. Attempting to prevent such shifts via import tariffs on final products would quickly become a nightmare of central planning.

Apologists for the tariffs go even further, noting that our new regulatory and tax environment will bring foreign producers to the U.S., essentially making the tariffs irrelevant. If that’s the case, why bother imposing the tariffs at all? And why penalize consumers and industries requiring intensive use of steel or aluminum?

The argument that tariffs provide a stronger position from which to negotiate with foreign “trading partners” (or rather, their governments) is tenuous at best. More likely, the tariffs will prompt retaliation by foreign governments against a range of American products. The very notion that “trade wars are good”, tweeted by President Trump on Friday morning, is as nonsensical as a suggestion that voluntary exchange is destructive. Already, the EU has announced plans to retaliate by imposing tariffs  on bourbon and motorcycles produced in the U.S.

Negotiations are unlikely to be successful. Perhaps some foreign governments who subsidize their steel and aluminum producers could be persuaded to enter talks. Our own domestic producers are penalized by various tariffs and quotas in place abroad, and those might be used by foreign interests as a lever in negotiations. However, the most fundamental foreign trade advantages, when they exist, have to do with low wages, less regulation, more efficient production facilities, and sometimes a more favorable tax environment. Wage levels reflect labor productivity, but those wage levels are valued more highly in their home countries than in the U.S, and penalizing these countries with trade sanctions merely penalizes their workers. Not all dimensions of a cost advantage can be negotiated, and in any case, healthy competition in any industry is always in the interests of a nation’s consumers.

National security is another standard argument in favor of protectionist measures. We’re told, for example, that we cannot allow China to produce all of the steel, but China provides only a small fraction of U.S. steel imports. Canada, Brazil and Mexico provide far more. In fact, China was in 11th place on that list in 2017. So our sources of steel are fairly well diversified. A domestic shortage of steel or aluminum caused by a breakdown in relations with one or more steel-exporting countries would lead to higher prices, but it would bring forth greater supplies from other countries and even from high-cost domestic sources. That is not a national emergency.

It’s possible that the Trump Administration will create “carve-outs”, exempting goods from certain countries from the tariffs. Presumably, those would be based on an assessment of each country’s trade policies and whether they are consistent with “fair” trade, in the judgement of U.S. trade authorities. However, all nations play the protectionist game in one form or another, including the U.S. Any carve outs would be better than none at all, but the remaining tariffs imposed by the administration will be a net burden to the U.S. economy.

Up till now, I have been pleasantly surprised by the Trump Administration’s efforts to de-tax and deregulate the U.S. economy. However, the threat that Donald Trump would adopt protectionist trade policies was one of my major trepidations about his candidacy. And here it is, as he promised. The dilemma often expressed by protectionists is that foreign producers can put elements of the domestic economy out of business by selling below cost. That drain on a country’s resources cannot span all industries — the U.S. has a comparative advantage in many areas. Such an effort cannot last forever or else these nations would cannibalize their own industrial base. Foreign governments quite simply cannot afford it economically and politically. On our end, the best advice is to accept the gift of low-cost goods. With access to ultra-cheap goods, whether steel, sorghum, or some finished product, American consumers and producers who use those imports gain unambiguously, and the purchasing power released can be spent on other goods and services.

Good Leaders Aren’t Trade Warriors

30 Wednesday Mar 2016

Posted by in Free Trade, Protectionism

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Protectionism

The protectionist foreign trade rhetoric issued by the major-party presidential candidates is intended to appeal to ignorant economic instincts. Donald Trump and Bernie Sanders come to mind most readily, but Ted Cruz and Hillary Clinton are jumping in with similar campaign positioning. The thrust of these populist, anti-trade appeals is that America is losing jobs to “unfair” foreign competition, an argument that distorts the very objective of trade: consumers take part in exchange in order to consume; they capture value from high quality, unique merchandise and competitive terms. Ultimately, producers engage in trade to gain the wherewithal to consume. Consumption is the real end-game.

It can be misleading to talk about “nations” engaging in trade with each other, despite the emphasis placed on trade agreements like NAFTA and TPP. In the first place, it is better to stress consumers and producers, rather than “nations”, because most foreign trade is private, cooperative activity, not national decision-making. But the candidates persist in characterizing trade as a “contest”. That misleading notion is what prompts governments to muck up the trade environment by imposing restrictions on the free flow of goods and services. Trade agreements have been heralded as great achievements, but they never approximate a regime of truly liberalized trade because the latter requires no formal agreement whatsoever, merely a hands-off approach by government. And trade agreements tend to entangle trade issues with other policy objectives, holding consumers hostage in the process.

We hear from opportunistic candidates that jobs are lost to trade with foreigners. But again, consumption, not “jobs” per se, is the real objective of economic activity. If domestic jobs are lost, it is generally because consumers judge the value produced inferior to what’s offered from abroad. American consumers should not be obliged to support inferior value, domestic market power unchecked by competition, monopoly prices and limited choices. Patriotic jingoism attempts to blind us from these economic imperatives.

The standard protectionist narrative is that foreign “nations” cheat on trade with the U.S. via currency manipulation, predatory pricing or “dumping”, “unfair” wages or other unfair labor practices. Do any of these objections to free trade hold water?

The “fairness” of foreign wages and labor practices is a matter of perspective. Wages cannot be considered unfair merely because they are low relative to U.S. wages. Wages paid to workers by foreign exporters tend to be consistent with the standard of living in those societies, and they are often some of the best income opportunities available there. This is economic dynamism that lifts masses from the grips of poverty. It’s absurd to caste it as “exploitation”.

Is it “unfair” to competitors in the U.S.? Not if they know how to compete and are allowed to do so. Unfortunately, government regulatory policies in the U.S. often present obstacles to the competitiveness of domestic producers. This is well-illustrated by Daniel J. Ikenson of The CATO Institute in “Crucifying Trade For The Sins Of Domestic Policy“. He emphasizes that trade promotes economic growth, but when it causes job losses for some workers, U.S. economic policies make it difficult for those workers to find new jobs.

“Incentivize businesses to hire people to train them in exchange for their commitment to work for the company for a period of time. Reform a corporate tax system that currently discourages repatriation of an estimated $2 trillion of profits parked in U.S. corporate coffers abroad, deterring domestic investment, which is needed for job creation. Curb excessive and superfluous regulations that raise the costs of establishing and operating businesses without any marginal improvements in social, safety, environmental, or health outcomes. Permanently eliminate imports duties on intermediate goods to reduce production costs and make U.S.-based businesses more globally competitive. Advocate the retirement of protectionist occupational licensing practices.“

So-called “dumping” by foreign producers, or selling below cost, is an unsustainable practice, by definition. Pricing below cost is difficult to prove, especially if local wages are low and raw inputs are plentiful. If dumping can be proven, retaliation might feel good but would punish American consumers. A foreign producer might be subsidized by its government as a matter of industrial policy and economic planning, an unhealthy policy to begin with, and possibly to facilitate a long-run market advantage in foreign trade. The U.S. itself is thick with subsidized industry, however, so arguing for retaliation on those grounds is more than a little hypocritical.

I rarely quote Paul Krugman, but when I do, it’s from work he’s done as an actual economist, not as an agenda-driven pundit. So we have the following Krugman quote courtesy of Don Boudreaux:

“I believe that if the rhetoric that portrays international trade as a struggle continues to dominate the discourse, then policy debate will in the end be dominated by men like [James] Goldsmith, who are willing to take that rhetoric to its logical conclusion. That is, trade will be treated as war, and the current system of relatively open world markets will disintegrate because nobody but a few professors believes in the ideology of free trade.

And that will be a shame, because for all their faults the professors are right. The conflict among nations that so many policy intellectuals imagines prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade.“

David Harsanyi asks how American consumers will like more restrictive trade policy when forced to pay more for smart phones, laptops, HDTVs, cars, food, and any number of other goods. The usual anti-trade narrative is that foreign producers have harmed the manufacturing sector disproportionately, but in another article, Ikenson lays bare the fallacy that U.S. manufacturing has been victimized by trade.

The consequences of trade restrictions are higher prices, reduced production and reduced consumption, an undesirable combination of outcomes. This means higher prices of imported goods as well as domestic goods, whose producers will face less competition by virtue of the trade barriers. With reduced availability of imported goods, economic theory predicts that domestic producers will not fully meet the frustrated demands. This is a classic response of producers with monopoly power: restraint of trade. The negative consequences are compounded when foreign governments impose retaliatory measures against the U.S., harming American exporters.

A further misgiving expressed by politicians regarding free trade is that America’s trade deficit implies greater indebtedness to the rest of the world. This argument has been made by a few leftist economists who misunderstand the nature of direct investment, and who tend to think erroneously of economic outcomes as zero-sum. It’s true that foreign producers who receive dollars in exchange for goods often invest those proceeds in U.S. assets. A fairly small share of that investment is in debt issued by U.S. governments and private companies. But a much larger share is invested in U.S. equities and real assets, which are not U.S. debts. As Don Boudreaux points out, the domestic sellers of those assets generally reinvest in other U.S. assets, so private U.S. ownership of global capital is not diminished by increased foreign investment in the U.S.

An interesting aspect of the trade debate is that the dollar’s role as a global reserve currency implies that the U.S. must run a chronic trade deficit. The rest of the world uses dollars to trade goods and assets, but to acquire dollars, foreigners must sell things to holders of dollars in the U.S. This keeps the foreign exchange value of the dollar elevated, which makes imports cheaper to Americans and U.S. exports more costly to foreigners. Those dollars are a form of U.S. debt, but it is debt for which we should feel flattered, as long as confidence in the dollar remains. A diminished role for the dollar in world trade would lead to a surplus of dollars, undermining its value and promoting inflation in the U.S. Let’s hope for a gradual transition to that world.

Finally, the presidential candidates allege that foreign currency manipulation is another reason for American job losses. One prominent example occurred last year when China allowed the renminbi to decline to more realistic levels on foreign exchange markets. Donald Trump called this an unfair trade tactic, but apparently the People’s Bank felt that it couldn’t support the renminbi without undermining economic growth. The earlier dollar peg also helped to keep Chinese inflation in check. Contrary to Trump’s assertions, if China stopped manipulating its currency altogether, the renminbi would go even lower!

Beyond the opportunistic political arguments, the point is that central banks (including the U.S. Federal Reserve) manage their currencies to achieve a variety of objectives, not merely to promote exports. That is not an endorsement of such policies. It is an objective fact. Anyone can argue that a foreign currency is “too low” if their objective is to demonize a country and it’s exports to the U.S., but the assertion may not be grounded in facts as markets assess them.

The arguments against open trade policies are generally specious, hypocritical or grounded in a mentality of victimhood. Vibrant producers who are free of government restrictions should welcome the expanded markets available to them abroad and should not seek redress against competition via government protection. Liberalized trade has engendered tremendous economic benefits over the years, while protectionist policies have only brought severe contractions. Let’s be free and trade freely!