Some Links
Tariffs expand the scope of government, politicize economic life, increase uncertainty, and reduce individual freedom. Government officials gain arbitrary power while market participants face fewer opportunities for mutually beneficial exchanges and greater uncertainty as the rules of the game change. Tariffs are levied on US importers as goods—both final and intermediate—subject to the tariff enter the country. Importers and consumers typically end up paying the tariffs, as they cut into profit margins and drive consumer prices up.
With free international trade, countries gain by being able to consume more goods than they could produce domestically. Specialization and the division of labor, according to differences in opportunity costs among countries, are limited by the extent of the market, as every beginning economics student knows. Imposing tariffs not only distorts relative prices and leads to a misallocation of resources, it reduces the so-called dynamic gains from trade—that is, the gains due to broadening market exchange, spreading new ideas that improve people’s lives, giving individuals a wider range of opportunities and choices, and thus fostering a competitive environment conducive to innovation and entrepreneurship (see Yeager and Tuerck 1966: 58–59, 62–63). It is not surprising that free trade and free people tend to go together.
Protectionists are fond of pointing out that opening up trade with China has not made China more politically free. There was plenty of optimism in the 1990s that economic liberalization would loosen the communists’ grip on power. It turned out to be false. China is, in some respects, more totalitarian today than it was then, despite considerable trade liberalization.
This error in judgment by some free-trade proponents is at least understandable since, in general, it is true that political liberalization and economic liberalization go together. Think of many of the countries of the former Eastern Bloc, especially the Baltic States, Poland, and the Czech Republic, which, after the fall of communism, were able to transition to market economies and democracy at the same time. On the other side of the coin, most African countries remain unfree economically and politically.
China is an exception to the rule, and since it is also one of the world’s most populous countries with one of the world’s largest economies, it is a major exception that needs better explanation. Free-trade supporters should acknowledge the error.
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Protectionists are now at risk of falling into the same mistaken way of thinking about China.
The protectionist argument seems to go like this: Free-traders thought economic liberalization would weaken the CCP, but it didn’t; therefore, undoing economic liberalization would weaken the CCP.
I assume both sides of the argument agree that the CCP is oppressing the Chinese people. I assume we’d both like to see the CCP weaken and ultimately fall from power. We free-traders have already made the mistake of thinking that the U.S. trade policy could help make that happen. Now, some protectionists are making the same mistake.
“Tariffs are simply taxes,” Republican Senator Rand Paul said. “Taxing trade will mean less trade and higher prices.”
The Budget Lab at Yale University estimates that tariffs Trump has threatened for Canada, Mexico and China would cost the average American household $1,000 to $1,200 annually (Trump has since added an additional 10 percent tariff on Chinese goods, meaning that the damage will actually be greater than that estimate suggests).
And it’s not just consumers who pay the price of a tariff war. Workers do too.
One of the slim hopes I had held out for economic understanding in the Trump administration’s inner circle was that Kevin Hassett, currently director of the National Economic Council, would be saying sensible things about trade and tariffs. Hassett was a very successful chairman of the Council of Economic Advisers during the first Trump term, and he did quite a good job of laying out the positive economic effects on household incomes of the 2017 tax cut.
Unfortunately, those hopes were dashed yesterday. Kevin appeared on ABC News’s “This Week with George Stephanopolous,” where he was interviewed by ABC’s Jonathan Karl.
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Kevin says, “President Trump wants to bring the jobs home, bring the wealth – the wealth home.” But Trump doesn’t show it. The way to have more wealth, as any trade economist can tell you, is to have fewer restrictions on trade, not more.
Kevin says, “Now, what that [the tariff on car imports] does is it bids up the price of labor, it makes wages higher, makes incomes higher, and it makes it easier for people to pay for things.” No. It makes auto workers’ incomes higher. It makes auto buyers’ real incomes lower, making it harder to pay for things.
In an interview by ABC News’ Jonathan Karl on March 9, White House National Economic Council Director Kevin Hassett said of President Trump’s tariffs on products imported from Canada and Mexico, “This is not a trade war, this is a drug war.” My first reaction was that Hassett might be experiencing circadian disruption caused by shifting the clock one hour ahead that morning. But then I recalled Director Hassett saying the same thing on CNBC one month ago.
To be fair to Hassett, Congress ceded authority to the president to raise or lower tariffs if he declared a national emergency or determined certain imports to be a threat to national security. Last month, President Trump issued a statement declaring the illicit fentanyl black market to be a national emergency. So, it is understandable why an administration spokesperson would resort to the drug war excuse.
But as a distinguished economist, Hassett must know that taxing goods with Canadian or Mexican inputs won’t curb drug trafficking—it will only burden American consumers. And the trade war it ignites will punish consumers in all three countries.
Tariff uncertainty is coinciding with rising consumer anxiety. After an uptick last autumn, the Conference Board’s consumer confidence index sank in February as inflation expectations rose. Many respondents cited tariffs.
Wall Street Journal columnist Gerard Baker decries “Capitol Hill’s Republican sycophant caucus.” A slice:
”I don’t mind what Trump does, because I trust Trump.”
Thus spoke Sen. Lindsey Graham last week, cheerfully declaring the unconditional surrender of not only his own judgment, his freedom of thought, his relevance and his dignity, but—and this one actually matters—his role as a leading member of one of the elected branches of the U.S. government.
The submissive senator was responding on Fox News last week to a report that President Trump had started negotiations with Hamas, the terrorist organization whose destruction Mr. Graham had recently called “nonnegotiable.”
Flustered for a moment by this latest sudden turn from the White House, Mr. Graham quickly recovered and gave that neatly laconic affirmation of his self-extinction and his superfluity as a thinker and policymaker. You were left wondering how he might have responded if he had been told that Mr. Trump had just signed an executive order exiling him to Siberia, confiscating his personal property and burning his house to the ground.
I pick on the gentleman from South Carolina only because he is the most ubiquitous and performative of the class of sometime self-sovereign senators turned servile sycophants who are supposed to be making our laws. He isn’t alone.
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