On Trade, Protectionism and Tariffs

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Frederic Bastiat:

The one thing that people overlook is that the sort of dependence that results from exchange, i.e., from commercial transactions, is a reciprocal dependence. We cannot be dependent upon a foreigner without his being dependent upon us. Now, this is what constitutes the very essence of society. To sever natural interrelations is not to make oneself independent, but to isolate oneself completely.

David Ricardo:

Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world.

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The Illogic of Protectionism
http://cafehayek.com/2017/02/42160.html" onclick="window.open(this.href);return false;

People work in order to loosen the grip of scarcity – to make goods and services more abundant. Making goods and services more abundant is the end; work is the means.

Seeing a connection between work and a reduction of scarcity, protectionists falsely suppose that, by artificially increasing scarcity, the resulting increase in work-effort will make the people more prosperous.

Rightly seeing work as a means of reducing scarcity, protectionists illogically conclude that policies that increase scarcity, because these policies increase work-effort, must therefore actually enrich the people by reducing scarcity. But protectionist policies tighten the grip of scarcity – they make goods and services less abundant. With scarcity artificially raised by tariffs and other ‘protections’ – with abundance artificially reduced by these measures – the people must, as a result, work harder in order to consume the same amount of goods and services as they consumed before, or, if they work as before, settle for consuming fewer goods and services.

Protectionists observe the greater work effort and conclude that this greater effort will cause the people to become more prosperous. Free traders observe the greater work effort and recognize that that this greater effort is the consequence of the people being made less prosperous.

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Obstacles to Trade Are Obstacles to Trade No Matter Who Erects Them
http://cafehayek.com/2017/02/42165.html" onclick="window.open(this.href);return false;

Commenting on this Cafe Hayek post, GMU Econ doctoral candidate Jon Murphy writes:

Of course, some will object by saying “well, we don’t live “under a system of perfectly free trade.” That is true, but wholly irrelevent. Ricardo’s treatment of trade under a perfectly free system is done for simplicity. His insights do not lose anything by adding into the system human foibles.

The lesson is that the freer trade is, the more benefits we get. As trade freedoms are reduced, so are the benefits there from.

Jon is correct.

Let’s say (realistically) that governments A and B restrict their subjects’ freedom to trade with the subjects of all other governments. Most people who are subjects of government C recognize that these obstacles to trade, erected in A and B, harm the people of C (although the people of C do not understand that the bulk of the damage done by these obstacles is suffered by the peoples of A and B). Yet if the government of C “retaliates” by restricting its own subjects’ freedom to trade with the subjects of governments A and B, many people in C applaud; they suppose that the erection of even more obstacles to trade somehow reduces the damage done to the people of C by the obstacles erected by the government of A and B.

But how can this be? Save in the unlikely circumstance that C’s retaliation will incite A and B to lower their trade barriers significantly enough and for long enough to offset whatever damage to the people of C is done by such retaliation, the government of C’s retaliation simply adds to the harm that obstructions to trade inflict on the people of C. If obstacles to the commerce of the peoples of A and B with the peoples of C harm the people C (as they do), how can adding more and higher obstacles help the people of C?

Suppose that the obstacles to trade initially imposed by the governments of A and B are, on a scale of 1 to 100, 35 (where 1 is complete and unconditional free trade and 100 is total and permanent prohibition of all foreign commerce). Further suppose that government C’s retaliation causes those obstacles to rise on the scale to 45. What difference does it make if the the increase in the size of the obstacles to trade is done by foreign governments of by the home government? None.

Surely protectionists in C would be more outraged had A’s and B’s initial trade restrictions measured (on our scale) 45 rather than 35. On what basis, then, can protectionists in C assert that their own retaliation – retaliation that raises the size of the obstacles from 35 to 45 – are now good for the people of C?

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President Reagan on Trade, Peace, and Prosperity
http://dailysignal.com/2013/01/23/presi ... rosperity/" onclick="window.open(this.href);return false;

As President Obama crafts his 2013 trade agenda, he should look to the words of Ronald Reagan for inspiration:

Free trade serves the cause of economic progress, and it serves the cause of world peace.

When governments get too involved in trade, economic costs increase and political disputes multiply. Peace is threatened. In the 1930’s, the world experienced an ugly specter—protectionism and trade wars and, eventually, real wars and unprecedented suffering and loss of life.

There are some who seem to believe that we should run up the American flag in defense of our markets. They would embrace protectionism again and insulate our markets from world competition. Well, the last time the United States tried that, there was enormous economic distress in the world. World trade fell by 60 percent, and young Americans soon followed the American flag into World War II.

Reagan was right. Politicians should not protect politically powerful special interests, such as the sugar industry or the clothing industry, from international competition at the expense of average Americans. The recently released 2013 Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal, shows that countries with low trade barriers are much more prosperous than those that restrict imports.

Some believe that the government should restrict imports from countries when we disagree with their trade policies or that U.S. taxpayers should subsidize politically connected corporations because other countries subsidize theirs. President Reagan had an unambiguous answer for them:

We’re in the same boat with our trading partners. If one partner shoots a hole in the boat, does it make sense for the other one to shoot another hole in the boat? Some say, yes, and call that getting tough. Well, I call it stupid.

In 2013, President Obama should pursue an intelligent trade policy that expands economic freedom in the United States and around the globe.

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Economic stupidity
http://townhall.com/columnists/walterew ... _stupidity" onclick="window.open(this.href);return false;

Walter Williams

Imagine that you and I are in a rowboat. I commit the stupid act of shooting a hole in my end of the boat. Would it be intelligent for you to respond by shooting a hole in your end of the boat?

Or, imagine I were a politician and told you that the Russian, Chinese, Korean, Brazilian and German governments were ripping off their citizens by, on the one hand, taxing them to provide subsidies to their domestic steel industries and, on the other, erecting tariff barriers forcing them to pay higher prices for products made with or containing steel. Would you deem it responsible or intelligent of me to propose retaliatory tariff policy, whereby Americans are ripped off until Russia, China, Korea, Brazilian and German governments stop ripping off their citizens?

Both of these scenarios are applicable to the Bush administration's 30 percent steel tariffs imposed last year. Those tariffs caused the domestic price for some steel products, such as hot-rolled steel, to rise by as much as 40 percent. The clear beneficiaries of the Bush steel tariffs were steel industry executives, stockholders and the approximately 1,700 steelworker jobs that were saved.

Tariff policy beneficiaries are always visible, but its victims are mostly invisible. Politicians love this. The reason is simple: The beneficiaries know for whom to cast their ballots, and the victims don't know whom to blame for their calamity.

According to a study by the Institute for International Economics, saving those 1,700 jobs in the steel industry cost American consumers $800,000 in the form of higher prices for each steelworker job saved. That's just the monetary side of the picture. According to a study commissioned by the Consuming Industries Trade Action Association, higher steel prices have caused at least 4,500 job losses in no fewer than 16 states -- over 19,000 jobs in California, 16,000 in Texas, and 10,000 in Ohio, Michigan and Illinois. In other words, industries that use steel are forced to pay higher prices, the products they produce become less competitive and they must lay off workers.

The average hourly wage of steelworkers ranges between $15 and $20 plus fringe benefits, so we might be talking about an annual wage package averaging $50,000 to $55,000. Here's my question to you: How much sense does it make for American consumers to have to pay $800,000 in higher prices to save a $50,000- to $55,000-a-year job?

It'd make better economic sense for Congress to pass an Aid to Dependent Steelworkers Act, whereby we'd tax ourselves so as to give each of those 1,700 steelworkers, whose jobs were saved, $100,000 year so they might take off and live in a nice beachfront condo in Florida or Bermuda. While less costly to Americans than President Bush's steel tariffs, it has no political future. The handout would make the protectionist policies apparent and hence repulsive to most Americans.

Article I, Section 8 of the U.S. Constitution says Congress has the authority "To regulate commerce with foreign nations, and among the several states, and with the Indian tribes." It wasn't the Framers' intent to give one group of Americans, such as those in the steel industry, the power to use Congress tax other Americans.

When Congress creates a special advantage for some Americans, it must of necessity come at the expense of other Americans. Those Americans who're harmed, such as steel-using industries, descend on Congress, asking for some kind of relief for themselves. It all reminds me of a passage from Marcus Connelly Cook's play "Green Pastures," wherein God laments to the Angel Gabriel, "Every time Ah passes a miracle, Ah has to pass fo' or five mo' to ketch up wid it."

I think Congress ought to get out of the miracle business.

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25 reasons why protectionism is taken seriously when it’s actually a form of economic suicide
https://www.aei.org/publication/25-reas ... c-suicide/" onclick="window.open(this.href);return false;

1. The false belief that trade is a zero-sum game (win-lose), when in fact it’s win-win.

2. The costs of protectionism to consumers are mostly hidden.

3. The benefits of protectionism to producers are easily identifiable and visible.

4. The jobs saved by protectionism are observable and visible.

5. The jobs lost from protectionism are not easily observable or visible.

6. The benefits of protectionism to individual producers are very high.

7. The costs of protectionism to individual consumers is very low.

8. The costs of protectionism to consumers are delayed over many years.

9. The benefits of protectionism to producers are immediate.

10. Producers seeking the benefits of protectionism are concentrated and well-organized.

11. Consumers paying the costs of protectionism are dispersed and disorganized.

12. There is a huge political payoff to politicians from protectionism in the form of votes, political support, and financial contributions from protected domestic firms and industries.

13. There is a huge political cost to politicians who attempt to remove or lower trade barriers in the form of lost votes, support and financial contributions from previously protected domestic producers.

14. The pathological, but false obsession that exports are good.

15. The pathological, but false obsession that imports are bad.

16. The fact that most Americans work for a company that produces a single product or group of similar products (e.g. cars, steel, textiles, appliances) and are therefore favorably disposed to supporting protectionist trade policies that benefit their employer and industry.

17. The fact that American consumers purchase hundreds, if not thousands of individual products, goods and services, and are therefore unlikely to be fully aware of the negative effects of protectionism or be motivated to fight protectionism.

18. Many Americans think that exporting US products is patriotic.

19. Many Americans think that importing foreign products is unpatriotic.

20. The false belief that trade deficits are a sign of economic weakness.

21. The false belief that trade surpluses are a sign of economic strength.

22. The fact that protectionism is guaranteed to create economic deadweight losses is not easily understood, nor are those losses easily observable or measurable.

23. The general lack of economic literacy among the general public.

24. The general lack of economic literacy among politicians, or their intentional disregard for the economics of protectionism in favor of enacting public policies that help them get re-elected.

25. The failure to recognize that most imports are inputs purchased by American firms, which allow them to be as competitive as possible when selling their outputs in global markets.

Bottom Line: Taken together, the 25 reasons above help us understand the popularity of protectionism, despite the fact that it’s guaranteed to inflict great economic harm. Protectionism is popular primarily for political reasons, not economic reasons. To paraphrase Thomas Sowell, the first lesson of international economics is that free trade makes us better off and protectionism makes us worse off. The first lesson of politics when it comes to international trade is to ignore the first lesson of international economics, and impose protectionist trade policies when they further the political interests of short-sighted elected officials. When politicians can count on the economic illiteracy of the general public and their blind patriotism to “Buy American,” the political payoffs from protectionism are too tempting to ignore despite the reality that it’s a form of economic suicide. And because the benefits of tariffs to producers (and jobs created or saved) are concentrated, immediate and visible, while the costs to consumers (and jobs lost) are diffused, delayed and invisible, it’s pretty easy to understand why protectionism is popular, even though the economic costs far outweigh the economic benefits (i.e. deadweight losses result) and it’s therefore ultimately a form of self-inflicted economic poison.

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http://cafehayek.com/2017/02/bonus-quot ... y-216.html" onclick="window.open(this.href);return false;

"Protectionism, as it is misleadingly known, has always been an insider’s game, a political gambit aimed at enriching those to whom the government is especially beholden or seeks to seduce at the expense of other people. Incumbent producers who produce products on which tariffs are imposed succeed in repelling competition by force of the government’s customs officers, which is to say that they succeed in increasing their profits by force, not by offering consumers a better deal."

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Backfire Economics: How the Trump steel and aluminum tariffs are harming US companies and workers
https://www.aei.org/publication/backfir ... d-workers/

Major Nail Company on the Edge of Bankruptcy Because of Trump Steel Tariffs
http://www.economicpolicyjournal.com/20 ... ge-of.html

Trump's Trade War Causing Harley-Davidson to Move Some Production Out of the United States
http://www.economicpolicyjournal.com/20 ... arley.html

[Jonesy]

This is tough one. My understanding is that we originally had zero tariffs. We have been getting screwed over by other countries’ high tariffs, China in particular. Isn’t trade supposed to be an agreement? But we’ve been getting screwed on tariffs. I’m really interested to see if China will back off eventually and make it fair...we’ll see.

I think a nation’s industry is one of the most important things for self-dependence and a healthy economy. Maybe when these tariffs are straightened out, we can bring industry back to the USA.

Ajax, what are your thoughts of other countries screwing us on tariffs while we have allowed zero tariffs?

[larsenb]

This is tough one. My understanding is that we originally had zero tariffs. We have been getting screwed over by other countries’ high tariffs, China in particular. Isn’t trade supposed to be an agreement? But we’ve been getting screwed on tariffs. I’m really interested to see if China will back off eventually and make it fair...we’ll see.

I think a nation’s industry is one of the most important things for self-dependence and a healthy economy. Maybe when these tariffs are straightened out, we can bring industry back to the USA.

Ajax, what are your thoughts of other countries screwing us on tariffs while we have allowed zero tariffs?

It's called 'free trade' , Jonesy. Doncha know?

[gkearney]

The problem as I see it is that Trump has based this on a false view of the world. We are not living in a post-World War II world, one where the United States was the absolute world power and you had better trade with us because there was no one else who had any money.

The word is a very different place today. Let's consider Canada, our largest trading partner by far. At one time you could put a tariff on steal and aluminium and Canada would come to heal because who else were they going to sell to? But Canada has major seaports on both coasts now. So they can just as well sell to Europe or Asia as they can to the U.S. With these markets in place Canada can just tell Trump to go stuff it, which is in effect what they did.

Further there is a major world economic power in the form of China today. This world power and emerging markets in India and Southern Africa mean that there are alternative markets for goods which did not exist in the past. Added to this is the fact that China is not a democratic nation and so your ability to apply tariff pressure is rather limited while China can pick and choose it tariffs to do maximum harm to Trumps supporters in Congress by placing tariff that harm Tumps allies the most. Trump doesn't have that option as China's leaders need not concern themselves with elections.

The other issue is that tariff will make China and to some degree Canada and other nations less, and not more, dependent upon trade with the United States. As the price of U.S. good rise in China as they impose retaliatory tariffs there will arrive in China local sources to fill the openings in the market. With local sources in place there will be less need to import U.S. goods going forward even when the tariffs are ended.

So while all this trade war talk sounded good in decade past we just do not live in that world any longer. We no longer have the economic pull we once did. There are major players, China, the EU (with which Canada has a free trade agreement with) Japan, the Commonwealth. If China and the EU decide to gang up on the U.S. in a trade war we will come out the worse for it.

[Jonesy]

This is tough one. My understanding is that we originally had zero tariffs. We have been getting screwed over by other countries’ high tariffs, China in particular. Isn’t trade supposed to be an agreement? But we’ve been getting screwed on tariffs. I’m really interested to see if China will back off eventually and make it fair...we’ll see.

I think a nation’s industry is one of the most important things for self-dependence and a healthy economy. Maybe when these tariffs are straightened out, we can bring industry back to the USA.

Ajax, what are your thoughts of other countries screwing us on tariffs while we have allowed zero tariffs?

It's called 'free trade' , Jonesy. Doncha know?

So, you think China should stop with the tariffs?

[ajax]

This is tough one. My understanding is that we originally had zero tariffs. We have been getting screwed over by other countries’ high tariffs, China in particular. Isn’t trade supposed to be an agreement? But we’ve been getting screwed on tariffs. I’m really interested to see if China will back off eventually and make it fair...we’ll see.

I think a nation’s industry is one of the most important things for self-dependence and a healthy economy. Maybe when these tariffs are straightened out, we can bring industry back to the USA.

Ajax, what are your thoughts of other countries screwing us on tariffs while we have allowed zero tariffs?

If the Chinese government wishes to subsidize my standard of living by taxing their own citizens (Chinese tariffs are taxes on their citizens), so be it. I don't think the proper response from our government is to then start taxing us as a measure some sort of "equal" retaliation. All are made worse off.

Is the US screwing other nations it has a trade surplus with?

Am I being screwed by purchasing a low cost item made in China at Walmart? If so, how so? The supplier in China is offering me an item at a price that I find favorable. I get the good, he gets my "paper" dollars. The trade is self contained. It is closed. And both are presumably made better off or the voluntary transaction wouldn't have occurred. I can now use the excess money I saved purchasing that Chinese made good, by purchasing other items I otherwise wouldn't have been able to.

The tariff mongers would like to look over the shoulder of my individual transaction, to see if I'm getting a "fair" deal according to them, without ever asking me. And if they deem any unfairness in the enterprise, seek to make me pay more, wherein I would have been happy and willing to pay less. Please note that the ones looking over my shoulders are statists, who use the tariff revenue to fill their own coffers.

There is no such thing as "unfair trade", unless someone if forcing me to trade against my will. All trade is "fair", actually beneficial to both parties, if entered into voluntarily, by definition.

Hong Kong went from third world backwater to first world city in a generation partly on a policy of zero tariffs. It perpetually runs trade deficits. That doesn't mean it owes people anything.

Balance of trade is a non-issue, used by politicians to drum up fear. I have personal balance of trade deficits with people all over town (whoever I give dollars to for goods and services). All these people don't then purchase what I produce. They just take my paper for tangible goods. We are square. I'm not somehow mystically made worse off because I have a balance of payment deficit with my local grocer week after week. I get lots of stuff and he just gets my dollars. It is an old mercantilist myth that a country is made rich by sending out more goods than it receives.

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Tariff Wars and the Fallacy of the Balance of Trade
http://www.economicpolicyjournal.com/20 ... .html#more

Richard Ebeling emails:

Dear Bob,

My new and first article for AIER is on, “Tariff Wars and the Fallacy of the Balance of Trade.”

The world is possibly on the brink of trade wars between the United States and both the European Union and China. Combined, the U.S., the EU and China produce over 62 percent of global output. Trade wars among them would be disaster for everyone, everywhere.

The force behind this danger is President Donald Trump’s misguided and, in fact, fallacious idea that a balance of trade deficit with other countries in general and China in particular is a cause of “American Greatness” denied.

Nothing further can be from the truth. The fundamental gains from any trade are the goods you are able to buy from others (“imports”), not the goods you have to produce and sell (“exports”) to be able to pay for them. In addition, Trump’s narrow, blindered view of trade in terms of trade deficits or surpluses in finished goods, ignores international trade in services, and the flows of savings and investment.

When these and some other accounting components are properly included in the balance of payments ledger book, the trade balance always balances. And when properly understood trade among individuals and nations always betters and improves the participants. But Trump’s failure to understand this may very well result in the world falling into the abyss of destructive trade wars.

Best,
Richard

Tariff Wars and the Fallacy of the Balance of Trade
By Richard Ebeling

The world may be on the brink of a series of trade wars between the United States and both the European Union and China. All the parties say they don’t want this — though President has asserted that trade wars are not a problem and easy to win. That remains to be seen!

It may have become a cliché, but we do live in a global economy. The days of actual or attempted national self-sufficiency are long gone. Even in some of the remaining most underdeveloped countries, multitudes of people walk around with cell phones seemingly glued to their ears, communicating with family, friends and business associates a mile away or on the other side of the world.

The clothes that people wear, the music they listen to, the foods they often eat, many of the everyday goods they buy are frequently imported from other continents or from facilities in their own country or region of the world that are owned and operated by international corporations and companies or their local affiliates that serve everyone, everywhere.

An Interconnected and Interdependent World

Manufacturing supply-chains often zig and zag back and forth from one country or continent to another before the final products are ready to be shipped to and sold at the retail stores where the finished goods are offered to ultimate consumers all over our planet. Raw materials are mined or extracted in country “X,” then shipped for refining in country “B,” after which they are sent off to country “C” as an input or component part for the manufacture of a product in country “D,” and then sent on to country “E” for final assembly and finishing up, followed by being shipped off for sale in multitudes of other countries, including those in which these steps in the worldwide stages of the production process have all been undertaken.

Labels on things may still say, made in the USA, or made in China, or made in India, or made in Costa Rica, or . . . But in fact they are products made across the globe to serve and satisfy all of us as consumers, after many of us have participated in the respective production processes in the international system of division of labor that improves the standards and qualities of living of almost all of the over seven billion people inhabiting Planet Earth.

Adam Smith and the Global Reach of Production

While the degrees, forms and interconnections of this global division of labor have intensified and become more complex in our modern times, there is nothing new in all this. Indeed, it is a process that has been going on, now, for centuries. For instance, almost 250 years ago, the famous Scottish philosopher and economist, Adam Smith, explained in his book, The Wealth of Nations (1776) the then already existing network of global trade just for the manufacture of a simple and modest day laborer’s coat:

“Observe the accommodation of the most common artificer or day-laborer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation.

“The woolen coat, for example, which covers the day-laborer, as coarse and rough as it may appear, is the produce of the joint labor of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production.

“How many merchants and carriers, besides, must have been employed in transporting the materials from some of these workmen to others who often live in a very distant part of the country! How much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which come from the remotest corners of the world!

“What variety of labor too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver . . .”

What seemed like such an unnoticed marvel in the time of Adam Smith in terms of the production of a simple item of clothing has been multiplied hundreds of thousands of times to our own day and age in terms of our mutual and tightly knit interdependency with people in every other part of the world.

Global Production and Trade

The World Trade Organization (WTO) estimates that in 2017 global output came to $74 trillion. The largest contributors to the world’s economy in 2017 were the United States with a 24.3 percent share of global output, followed by the European Union (EU) having a share of 23.1 percent of the world’s production, with China next in line with 14.8 percent of global output. Combined, they made up over 62 percent of the entire world’s production.

At the same time, the value of all import-export trade in manufactured goods and services around the world came to over $35 trillion in 2017. That is, internationally traded goods and services made up over 47 percent of global output. Of this total, the U.S. combined imports and exports represented 11.5 percent of that $35 trillion in global trade, the European Union, almost 16 percent, and China, 16.5 percent. Together, America, the EU and China contributed 44 percent of the international trade in goods and services.

This means that any trade wars between the United States and the EU and China could dramatically impact not only the economic “belligerents” in such a conflict, but inescapably many other parts of the world, as well. After all, those production links in the worldwide supply-chains connect the U.S., the EU and China with many other countries that would, in various ways, experience the “fallout” from tariff and other trade restricting attacks and retaliatory counter-attacks between the actual “combatants.”

Donald Trump’s View of World Trade

If foreign trade among the nations of the world plays such a large and significant part of almost everyone’s interdependent economic well-being, then why are trade wars threatened among the three largest participants in global production and exchange?

The answer is: Donald Trump’s view of the world. During his presidential campaign in 2016 and now into the second year of his presidency, Mr. Trump insists that America is being taken advantage of by its trading partners, especially though not exclusively, the European Union and China. He has also railed against Canada, Mexico and a host of other countries.

What is the basis of his accusations, and do they have any real importance or significance in terms of American standards of living and job opportunities within the country? The first one worth discussing is Trump’s charge that America’s trade deficits with the world in general and with China in particular are harmful to the present and future economic betterment of the people of the United States.

According to the United States Census Bureau, in 2017 total U.S. exports of goods came to a dollar value of a bit more than $1.54 trillion; foreign goods imported into the United States totaled $2.34 trillion, resulting in a trade deficit of about $796 billion. With China, in particular, U.S. exported goods totaled slightly less than $130 billion, while imports of goods from China came to around $505 billion, for a trade deficit of over $375 billion with China.

Mr. Trump insists that these trade deficits are, in themselves, proof that America is a “loser” in the arena of global trade. In this, the president shows that he has fallen into many of the same Mercantilist fallacies of the eighteenth century that Adam Smith and others after him refuted long ago. The gains from trade do not come from what is exported, but from what is imported, and this applies to both an individual or to a group of individuals defined as the combined citizens of any particular country. A balance of trade deficit or surplus in finished goods, therefore, tells little about the overall economic situation for a person or a country.

Looking at trade deficit data since 1992, there seems to be a clear method for reducing it in the way that Trump desires: have a financial crisis and enter into recession.

Specialized Trade Equals Multitudes of Trade Deficits and Surpluses

I earn my living as a professor of economics. I use this niche in the division of labor as the means to supply others with economics lectures and writings of various sorts so to earn my regular money income. But my selling of these economics lecture services is not an end in itself. It is the means by which I acquire the money revenues to have the financial wherewithal to reenter the market as a consumer to demand all the large variety of goods that others have for sale that I am unable or unwilling to make for myself.

I have trade deficits and trade surpluses with a large number of my trading partners in society. Many of the students (or their parents) who pay the tuition to the institution for higher learning through which I’m paid my teaching salary likely produce few if any of the particular goods and services I’m interested in buying. As a result, I have a trade surplus with most of those to whom I sell my teaching abilities. That is, they buy more from me than I buy from them, which, of course, means that those paying the tuition have a trade deficit with me, in that the dollars they spend to pay my salary is more than I likely spend on buying the goods and services those specific students or parents bring to market as their own way of earning a living.

On the other hand, most of those from whom I buy the wide variety of goods upon which I spend my money income are – shockingly! – probably not interested in hearing economic lectures I could deliver or reading economics articles that I write. Hence, I buy far more from those particular individual sellers of goods than they spend on my economics teaching and writing services, with the money they’ve earned from supplying me with the goods and services I desire as a consumer. Thus, I run balance of trade deficits with these sellers and they have balance of trade surpluses with me, the buyer, as the flip side of those transactions.

This is a primary advantage of a money-using economy rather than one based on direct barter exchange. I do not have to find just the right people who have what I want to buy and reciprocally desire the specific good I could offer in trade for their wares. Instead, I can earn money income from some who may have nothing I’m interested in buying and use that money income to purchase what others have for sale who may have no interest in the particular good or service I bring to the market as a seller.

The Overall Trade Ledger Book Does Balance

What does have to balance is my overall balance of payments. That is, my income-earning inflows have to equal my income-spending outflows, regardless of my individual balances of trade with all the individuals with whom I interact in the marketplace. But I need not have a “balance” just in terms of actual goods and services I sell to and buy from others. I can also save or borrow.

If I spend less than my income, I save, and in our modern world savings do not sit idle under a mattress. I lend that savings out (through financial intermediaries) to others who desire to spend in the present more than their own financial means would allow them to, and from which I expect to earn, as the lender, future interest income. The borrower agrees to this because he considers the profitable opportunities to use someone’s else’s savings closer to the present more than justifies the paying of that interest, plus the paid back principle, at that point in the future.

Again, on the overall balance sheets there would be included a record of savings lent and expected future interest income earned for the lender. And for the borrower, an entry of money borrowed in the present and anticipated profits to be earned and interest payments to be made in the future. The two individual’s balance of payments will, respectively, balance.

Trade Includes Goods, Services, and Direct and Indirect Investment

What has this have to do with the U.S. balance of trade deficit? It is merely the same logic just discussed, only on a wider national canvas. The error in the balance of trade hysteria is a failure to look at and incorporate all the columns that should be included on the ledger book of America’s trade with the rest of the world.

Let’s use an example. In 2017, the U.S. had a balance of trade deficit with Japan. American export of goods to Japan came to almost $68 billion; but Americans imported and purchased over $136 billion of Japanese goods, resulting in a trade deficit of nearly $69 billion. But what did the Japanese manufacturers who earned that $69 billion do with that sum?

Part of that money took the form of direct foreign investment in the United States. That is, some of those Japanese earners of dollars used them to invest in, start up or expand a business in the U.S. Those dollars would have been partly spent on buying or leasing land; in purchasing an existing factory facility or building a new one; in purchasing goods, services, and component parts from American suppliers; and hiring American workers to work in the business.

Or those Japanese earners of dollars may have indirectly invested in the United States, by leaving on deposit some of those dollars in American financial institutions to earn future interest income, no different than when you or I set aside some of the income we’ve earned to increase our savings nest egg looking to tomorrow by lending to others and earning interest income.

At the same time, to the extent that Japanese and other foreign exporters leave a part of their unspent dollar earnings on deposit in U.S. financial markets, they add to the pool of savings available to American borrowers to draw upon, which lowers what might otherwise have been the cost of borrowing in the United States and increases the savings wherewithal to undertake potentially profitable investments within America.

But what if some of these Japanese export earners of dollars did not want to buy more American finished goods or services, or did not want to spend more on direct investment within the United States, or did not find U.S. financial security and interest rates sufficiently attractive to leave more in American banks? Suppose that, instead, some of those Japanese exporters were more interested in buying, say, goods available in Europe.

In this instance, these Japanese would enter the foreign exchange market and offer to sell dollars for desired Euros, or British pounds, or Swiss francs. Someone would be found to sell certain amounts of those European currencies in exchange for those dollars at the prevailing foreign exchange rates. And why would someone sell these currencies for those dollars unless they wanted to do, what? Buy American goods, directly investment in American enterprises, or indirectly invest in the U.S. by having dollars to deposit at American financial institutions in return for promised interest income.

Adding up all the relevant columns in the overall balance of payments of the United States – all finished goods and services imported and exported between America and the rest of the world; all direct foreign investment in the U.S. and all American direct foreign investment in other places around the globe; all indirect investment by Americans elsewhere and all foreign indirect investment within the United States; plus a variety of other remittances, payments and receipts, and it is found that the American balance of payments balances.

Misconceptions About Trade Deficits Can Trade Wars Make

The hoopla and hysteria about balance of trade deficits, and that somehow “others” are taking advantage of us because we buy more from them than they buy from us, in fact, is the result of an analytical myopia of failing to “follow the money” through all the different forms and channels that import and export spending can take, both for an individual or the country as a whole. Once you do, you realize that the balance of trade “problem” is all an illusion.

Donald Trump is threatening to possibly unleash a series of trade wars with the European Union, China and a number of other countries based a misguided, indeed, a false conception of the meaning of America’s trading patterns with the rest of the world.

The optimistic scenario, according to Mr. Trump and his supporters, is that other countries need the American market so much more to sell and buy than Americans need them that they will “cave.” That is, they will give in to Mr. Trump’s desired renegotiated terms of trade rather than face the consequences from trade wars that America can weather better than them. That’s the assumption behind the president saying that trade wars are “easy to win.”

But what if Mr. Trump is wrong? What if, instead, America’s trading partners follow through with their stated declarations of planned retaliatory counter-tariffs, if the president implements all the higher import duties against an expanded number of foreign goods that he has promised to do in the near future?

Mr. Trump’s temperament, as we’ve seen over the last couple of years, is to double down against those who question, challenge, or oppose him on almost any issue on which he takes a public stand. To do otherwise, in his mind, is a sign of weakness , which means you lose and the other guy wins.

Mr. Trump’s erroneous understanding of trade accounts and his often arrogant assumption of knowing far more than any others around him – combined with his personality of taking all challenges to whatever he says or does as personal affronts to which he must forcefully respond – may very well end up being the human frailties that set in motion destructive trade wars among the leading economies of the world.

The above originally appeared at the American Institute for Economic Research.

[BackBlast]

Not going to take the time to review all the posted material...

I'm generally supportive of the move by Trump to raise tariffs because it weakens the "free trade" agreements that seem to be selling our national sovereignty piecemeal.

Is it an ideal policy? No. But to claw back some of our independence from the growing tree of internationalism, I'm in favor.

[ajax]

Not going to take the time to review all the posted material... No worries, most don't

I'm generally supportive of the move by Trump to raise tariffs taxes and prices on my neighbors because it weakens the "free trade" agreements that seem to be selling our national sovereignty piecemeal. (Sorry for this minor adjustment. Just for clarity's sake)

[Jonesy]

This is tough one. My understanding is that we originally had zero tariffs. We have been getting screwed over by other countries’ high tariffs, China in particular. Isn’t trade supposed to be an agreement? But we’ve been getting screwed on tariffs. I’m really interested to see if China will back off eventually and make it fair...we’ll see.

I think a nation’s industry is one of the most important things for self-dependence and a healthy economy. Maybe when these tariffs are straightened out, we can bring industry back to the USA.

Ajax, what are your thoughts of other countries screwing us on tariffs while we have allowed zero tariffs?

If the Chinese government wishes to subsidize my standard of living by taxing their own citizens (Chinese tariffs are taxes on their citizens), so be it. I don't think the proper response from our government is to then start taxing us as a measure some sort of "equal" retaliation. All are made worse off.

Is the US screwing other nations it has a trade surplus with?

Am I being screwed by purchasing a low cost item made in China at Walmart? If so, how so? The supplier in China is offering me an item at a price that I find favorable. I get the good, he gets my "paper" dollars. The trade is self contained. It is closed. And both are presumably made better off or the voluntary transaction wouldn't have occurred. I can now use the excess money I saved purchasing that Chinese made good, by purchasing other items I otherwise wouldn't have been able to.

The tariff mongers would like to look over the shoulder of my individual transaction, to see if I'm getting a "fair" deal according to them, without ever asking me. And if they deem any unfairness in the enterprise, seek to make me pay more, wherein I would have been happy and willing to pay less. Please note that the ones looking over my shoulders are statists, who use the tariff revenue to fill their own coffers.

There is no such thing as "unfair trade", unless someone if forcing me to trade against my will. All trade is "fair", actually beneficial to both parties, if entered into voluntarily, by definition.

Hong Kong went from third world backwater to first world city in a generation partly on a policy of zero tariffs. It perpetually runs trade deficits. That doesn't mean it owes people anything.

Balance of trade is a non-issue, used by politicians to drum up fear. I have personal balance of trade deficits with people all over town (whoever I give dollars to for goods and services). All these people don't then purchase what I produce. They just take my paper for tangible goods. We are square. I'm not somehow mystically made worse off because I have a balance of payment deficit with my local grocer week after week. I get lots of stuff and he just gets my dollars. It is an old mercantilist myth that a country is made rich by sending out more goods than it receives.

This is really interesting. At first I didn’t really understand what you were saying because I think we’re looking at it at opposite perspectives, in a sense. I admit, this is kind of new for me.

This is how I see it:

Import and export taxes make it more expensive for users of foreign goods, causing a decline in imports, a decline in the supply of the good, and a resulting increase in the price of the good. The price increase usually motivates domestic producers to increase their output of the product.

The way I see it, what China is doing is basically hyper-fueling their already industrious economy. They’re basically discouraging their citizens from buying imports so their economy continues to grow (by encouraging their citizens to buy products from their own homeland) . Meanwhile, here in the USA, our economy is becoming more and more of a service-based economy—which I think is a bad thing. Tariffs on foreign imports would basically equal the playground.

So, for me, the only reasonable solution is to either continue these foreign tariffs OR do a free trade ONLY if other countries discontinue tariffs on our exports. This encourages industry in our country, which is a great thing. It seems only fair.

I mean, who really cares about cheap and inexpensive products? That’s why we’re becoming a service-based economy. Not good. Maybe that’s why Walmarts and Amazons and large corporations are monopolizing our economy. We’re becoming a nation where our large corporations are getting rich off of other countries’ cheap labor and industry. With tariffs on foreign imports OR a free trade system would get us back on track to a more healthy industrious economy. I remember reading a talk about the dangers of becoming a service-based economy vs a nation of industry. A nation should become self-dependent through their own industry—but alas, I can’t find it.

[Jonesy]

The more I look into this, the more I think Trump is right. Screw the MSM. Bring back jobs and industry to America.

https://www.execrank.com/board-of-direc ... and-needed

Also, check this out:

[BackBlast]

There is an underlying theme of warfare to this, I believe the comparisons to it are apt. But the critics of protectionism I have read here seem to discount strategic labor markets or the war making potential of the labor available. Which, seems to me to be a valid subtext to protectionism. For the same purpose we have a standing army.

[BackBlast]

A comment on balance of trade "fallacy".

A balance of trade is a requirement. One country, cannot, in perpetuity, sustain an imbalance. Eventually the imbalance will be corrected in the currency exchange rate - or some other even less pleasant method.

In fairness, we should be looking at total imports vs total exports rather than picking and choosing particular countries. There can certainly exist triangles where there is balance, with a deficit on one hand and a surplus on the other.

As the posted article points out, there are other vehicles for money to flow and balance the total inputs and outputs. Investments. That can balance the goods and services side of the ledger

However, investments are also a liability. While they interconnect us they are much easier to unwind and stop than a production contract. The larger our deficit and more dependent on these investments we become for our financial footing in the world, the more vulnerable and dependent we become to those hands that control those investments.

I believe that while it is useful to say, "look what is happening, and lo, the consequences aren't so bad!". In long term strategic planning I believe it is also useful to ask "What is the worst that could happen? What would the end results of that be?" It is because of such questions that we have a government with checks and balances. Because someone did ask the question "What if there was a bozo in this position of power and he wanted to loot and pillage..." instead of "It would be most efficient if we reduced the number of decision makers as much as possible. Maybe to, one? Perfect! Lets select a king. It's the most efficient and ideal form if he is awesome!"

I believe there is wisdom in the founder's choice to not allow states the opportunity for protectionism of their own. Yet they specifically granted that power to the federal government.

I believe that being dependent on foreign good will for those investment dollars to balance our ledger sheet is a position of vulnerability. Vulnerability makes me nervous.

[ajax]

Wow, Did Krugman Get This Right Or What!
http://www.economicpolicyjournal.com/20 ... -what.html

It doesn't happen often but Paul Krugman nailed this one.

Yesterday, the New York Times dropped a Krugman opinion piece, The Great Soybean Conspiracy, in it he said:

So how will this conspiracy-minded administration react when domestic victims of its trade policy start complaining? ...

What I predict...is that it will start seeing villains under every bed. It will attribute the downsides of trade conflict not to its own actions, but to George Soros and the deep state. I’m not sure how they can work MS-13 into it, but they’ll surely try.

The point is that the politics of trade war will probably end up looking like Trump politics in general: a search for innocent people to demonize.

Less than 24 hours later, the demonization has begun by Trump, following news that because of the Trump launched trade war Harley-Davidson was moving some of its production overseas.

Trump immediately started lashing out at the motorcycle manufacturer and ended his tweetstorm with a threat to tax the company like "never before" because "Harley-Davidson's should never be made anywhere other than America," when the company is opening up overseas only because it does want to not lose business as a result of Trump's trade war.

Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag. I fought hard for them and ultimately they will not pay tariffs selling into the E.U., which has hurt us badly on trade, down $151 Billion. Taxes just a Harley excuse - be patient! #MAGA
— Donald J. Trump (@realDonaldTrump) June 25, 2018

Early this year Harley-Davidson said they would move much of their plant operations in Kansas City to Thailand. That was long before Tariffs were announced. Hence, they were just using Tariffs/Trade War as an excuse. Shows how unbalanced & unfair trade is, but we will fix it.....
— Donald J. Trump (@realDonaldTrump) June 26, 2018

....When I had Harley-Davidson officials over to the White House, I chided them about tariffs in other countries, like India, being too high. Companies are now coming back to America. Harley must know that they won’t be able to sell back into U.S. without paying a big tax!
— Donald J. Trump (@realDonaldTrump) June 26, 2018

A Harley-Davidson should never be built in another country-never! Their employees and customers are already very angry at them. If they move, watch, it will be the beginning of the end - they surrendered, they quit! The Aura will be gone and they will be taxed like never before!
— Donald J. Trump (@realDonaldTrump) June 26, 2018

-RW

[ajax]

More from Krugman:

The Great Soybean Conspiracy
https://www.nytimes.com/2018/06/25/opin ... eft-region

The Trump administration appears to be headed for a trade war on three fronts. As far as anyone can tell, it is simultaneously going to take on China, the European Union and our partners in the North American Free Trade Agreement. The economic fallout will be ugly.

But that’s probably not the whole story: There’s also likely to be ugly political fallout, not just abroad but here at home, too. In fact, I predict that as the downsides of hard-line trade policy become apparent, we’ll see a nasty search by President Trump and company for people to scapegoat. In fact, that search has already started.

To understand what’s coming, you need to understand two crucial points.

First, the administration has no idea what it’s doing. Its ideas on trade don’t seem to have evolved at all from those expressed in a white paper circulated by Wilbur Ross, now the commerce secretary, and Peter Navarro, now the trade czar, in 2016. That white paper was a display of sheer ignorance that had actual trade experts banging their heads on their desks. So these people are completely unprepared for the coming blowback.

Second, this administration is infested — I use that word advisedly — with conspiracy theorists. In fact, it seems, literally, to treat belief in absurd conspiracy theories as a job qualification. You may remember the case of an official at the Department of Health and Human Services who was temporarily suspended after reports that she had worked for a conspiracy-theory website. Well, it turns out that she listed that connection on her résumé when she applied for government employment. She was hired not despite but because of her connection to paranoid politics.

So what will happen when cluelessness meets conspiracy theorizing?

About that trade blowback: Trump famously declared that “trade wars are good, and easy to win.” Never mind the goodness issue: It’s already becoming apparent that the “easy to win” part is delusional. Other countries won’t quickly give in to U.S. demands, in part because those demands are incoherent — Trump is demanding that Europe end the “horrific” tariffs it doesn’t actually impose, while the Chinese can’t even figure out what the Trump administration wants, with officials calling America “capricious.”

Add in the enormous amount of ill will Trump has generated around the world, and the idea that America is going to get major concessions anytime soon is deeply implausible. In fact, I’m finding it hard to see how we avoid a series of tit-for-tat retaliations that end up taking us well down the path toward full-blown trade war.

And while some import-competing industries might gain from such a trade war, there would be a lot of American losers. For one thing, a lot of American jobs — more than 10 million, according to the Commerce Department — are supported by exports. Agriculture, in particular, is a very export-centered sector, sending more than 20 percent of what it produces abroad. A trade war would eliminate many of these jobs; it would create new jobs in import-competing industries, but they wouldn’t be the same jobs for the same people, so there would be a lot of disruption.

And the damage wouldn’t be limited to export industries: More than half of U.S. imports, and 95 percent of the Chinese goods about to face Trump tariffs, are intermediate inputs or capital goods — that is, things that U.S. producers use to make themselves more efficient. So the coming trade war will raise costs and hurt prospects for many businesses, even if they aren’t exporters.

So how will this conspiracy-minded administration react when domestic victims of its trade policy start complaining? We’ve already had a preview.

To date we’ve only had some minor trade skirmishes; but even these have sent the price of soybeans, which we export to China, plunging, while the price of steel has soared. And farmers and steel-using businesses are unhappy.

So did the administration say, “Look, we’re taking a tough stand, and there will be some costs”? Why, no. Instead, Ross declared that the price changes were the work of “antisocial” speculators engaged in “profiteering,” and called for an investigation. See, we aren’t looking at the predictable effects of administration policy; we’re looking at an anti-Trump conspiracy.

By the way, this kind of accusation isn’t normal for a top government official. I follow these things, and I’ve never seen anything like it.

And remember, soybeans and steel offer just a minor preview of the disruptions ahead. How will the administration react to the blowback when the trade war really gets going? Will it admit that it misjudged the effects of its policies? Of course not.

What I predict, instead, is that it will start seeing villains under every bed. It will attribute the downsides of trade conflict not to its own actions, but to George Soros and the deep state. I’m not sure how they can work MS-13 into it, but they’ll surely try.

The point is that the politics of trade war will probably end up looking like Trump politics in general: a search for innocent people to demonize.

[ajax]

Moody's: Tariffs threaten 'nearly every segment' of auto industry
https://www.freep.com/story/money/cars/ ... 731677002/

The auto industry and everyone who relies on it should get ready for some pain if President Donald Trump follows through on a threat to levy tariffs on imported vehicles and parts.

Moody's Investors Service said the move would harm the credit rating outlook for the global industry, highlighting the danger faced even by domestic automakers Ford and General Motors.

"A 25 percent tariff on imported vehicles and parts would be negative for nearly every segment of the auto industry — carmakers, parts suppliers, car dealers and transportation companies — as it rippled across the globalized supply chain that we forecast will produce about 96.7 million light vehicles this year," according to the assessment released Monday.

The report called tariffs a negative for Ford and GM, although it said "the burden would be greater for GM because it depends more on imports from Mexico and Canada to support US operations – 30 percent of its U.S. unit sales versus 20 percent of U.S. sales for Ford."

The report said some of GM's most profitable vehicles, the Silverado and Sierra pickups, are assembled in Mexico and "returns generated on these vehicles would be severely compromised by the proposed tariffs."

The report noted that Fiat Chrysler Automobiles makes "about half its vehicles in U.S., with the remaining units imported mainly from Mexico and Canada."

Concerns about the potential impact of tariffs on the auto industry come as the possibility of a wide-ranging trade war has grown in recent months, with Trump threatening to hit other countries with tariffs and other countries threatening retaliation.

The president asserts that the U.S. has been treated unfairly in international trade deals. The Commerce Department is weighing whether to institute tariffs of up to 25 percent on auto imports should the imports be deemed a threat to national security.

The administration has already imposed tariffs on steel and aluminum imports.

Economists have pointed to the potential for unintended consequences related to tariffs, perhaps exemplified best by the announcement Monday that U.S. motorcycle manufacturer Harley-Davidson would shift some of its production overseas because of European tariffs.

The Moody's report noted that European automakers without U.S. plants such as Jaguar Land Rover would "suffer disproportionately" and that Japanese automakers "would need to significantly adjust production."

Automakers in China, a common target of Trump's ire, would see little impact because Chinese automakers export few vehicles.

Bill Ford, executive chairman of Ford Motor Co., said June 19 that the Dearborn-based carmaker may be “better positioned” than competitors to absorb tariff costs, based on its significant cash reserves and international investments.

“We’ve dealt with different trade regimes all around the world many times,” Ford said. “One thing we don’t like is uncertainty.”

Car manufacturing requires longer lead times than other industries, he noted. “The more certainty we have, the better. In general, we’re more for free trade.”

Dave Sullivan, manager of product analysis at AutoPacific Inc. voiced concern about the potential impact of new tariffs.

“All of the positive momentum from investments in U.S. manufacturing could really hurt the U.S. for quite some time to come due to the long product life cycles of the auto industry,” he said. “The U.S. market is no longer the 800-pound gorilla that it once was when it comes to the auto industry. China now has that clout, and the Trump administration needs to be sensitive to all of the new investment [in the U.S.] from automakers such as Volvo, BMW and Honda.”

Sullivan continued, “The auto industry can't react quickly enough to 25 percent tariffs on parts. It would take a few years, at least, to phase something like this in without crippling the healthy industry we have today. Tariffs will only wall off our auto industry from new investments for the future leading to less choice and higher prices for consumers.”

[ajax]

Woodrow Wilson and the Tariff: Lessons for Today
https://mises.org/wire/woodrow-wilson-a ... sons-today

•William Poole


Theodore Roosevelt (president 1901–09) and Woodrow Wilson (president 1913–21) are the two celebrated progressive presidents. Many of today’s observers, not familiar with the detailed history of that era, fail to appreciate the fundamental importance of the tariff issue to debates of that time.

A search for “tariff” in Scott Berg’s biography, Wilson, turns up 66 hits. Then, 250 hits in Doris Kearns Goodwin’s, The Bully Pulpit: Theodore Roosevelt, William Howard Taft, and the Golden Age of Journalism. Wilson’s 1913 book, The New Freedom A Call For the Emancipation of the Generous Energies of a People, was an edited selection of his campaign speeches. Sixty-three hits on this book.

What were the issues? The tariff was a breeding ground for corruption and unfair to those forced to pay elevated prices. The tariff reinforced the position of firms with market power — the “trusts” in the language of that time.

Wilson was thoroughly familiar with how the tariff actually worked, as he explained clearly in The New Freedom. “We have come to recognize in the tariff as it is now constructed, not a system of protection, but a system of favoritism, of privilege, too often granted secretly and by subterfuge, instead of openly and frankly and legitimately, and we have determined to put an end to the whole bad business … .”

Goodwin discusses the difficulties reformers had in making any progress in Congress. “Aware that [Senator Nelson] Aldrich had abundant experience in devising obscure classifications for each of the 4,000 duties in the tariff schedule, …” How familiar does this passage sound?

As is true of pro-tariff arguments today, obfuscation of the issues was a key mechanism of the forces supporting trade restriction during the Progressive Era. Goodwin recounts the campaign against the tariff waged by journalist Ida Tarbell. “Fifty years ago, [Tarbell wrote in 1909] wool was disposed of in perhaps fifty words, which anybody could understand; to-day it takes some three thousand, and as for intelligibility, nobody but an expert versed in the different grades of wools, of yarns, and of woolen articles could tell what the duty really is.” These tariffs pumped up the profits of American firms manufacturing woolen clothing. Tariffs raised the cost of machinery used in cotton production and reduced competition from machinery producers abroad.

Then, as now, log-rolling coalitions made reform difficult. Goodwin writes: “To Taft’s disappointment, the controversial wool schedule was not changed. The combination of ‘the Western wool growers and the Eastern wool manufacturers,’ he lamented, rendered it ‘impossible’ to get lower duties ‘through either the Committee or the House.’ ”

Wilson was a Southerner, born in Virginia and raised in Georgia and South Carolina. He understood the costs high tariffs imposed on the South. The beneficiaries were Eastern manufacturing interests. Farmers were especially disadvantaged as they paid excessive prices for farm equipment in an era of rapid mechanization of agriculture.

A key campaign promise of Wilson’s was reduction of the tariff. This he did after assuming office with the Revenue Act of 1913. Tariff reduction was good for the South and the rest of the country as well. Unfortunately, Wilson failed to institutionalize a lower tariff and did not “put an end to the whole bad business.” In 1922, Congress raised tariffs once again with the Fordney–McCumber Tariff. As I recounted recently in my Tariff of Abominations II, President Trump is taking the United States back to an unhealthy era of tariff controversy, special-interest pleading and retaliation by other countries.

Worse, President Trump has upset a painful and slow institutional process begun after World War II in moving the world toward freer trade. No country will be a winner. Wilson’s experience as president after the election of 1912 should serve as a warning. Winning a battle is not enough to win a war.

Perhaps it is time to start thinking about the tariff in an entirely different way. Starting with the Tariff Act of 1789, the US tariff has been the playground of special interests, and used as a means of rewarding political friends, and harming political enemies. If we must have a tariff, all tariffs ought to be levied at the same rate. This approach would turn the tariff principle from that of “bad business” favoritism to pure revenue.

[ajax]

Shooting Ourselves in the Foot
https://www.lewrockwell.com/2018/07/wal ... -the-foot/

By Walter E. Williams
July 13, 2018

The Canadian government, lining the pockets of its dairy producers, imposes high tariffs on American dairy imports. That forces Canadians to pay higher prices for dairy products. For example, Canadians pay $5.24 for a 10.5-ounce block of cheddar. In Washington, D.C., that same amount of cheddar sells for $3.64. Canadians pay $3.99 for a 1-pound container of yogurt. In Washington, D.C., you can get nearly twice as much yogurt for a little over $4. It’s clear that the Canadian government’s tariffs screw its citizens by forcing them to pay higher prices for dairy products.

What should the U.S. response be to Canada’s screwing its citizens? If you were in the Trump administration, you might propose imposing tariffs on soft wood products that Americans import from Canada — in other words, retaliate against Canada by screwing American citizens. Canadian lumber — such as that from pine, spruce and fir trees — is used in U.S. homebuilding. Guess what tariffs on Canadian lumber do to home prices. If you answered that they raise the cost and American homebuyers are forced to pay higher prices, go to the head of the class.

This retaliation policy is both cruel and not very smart. It’s as if you and I were in a rowboat out at sea and I shot a hole in my end of the boat. What should be your response? If you were Secretary of Commerce Wilbur Ross or Secretary of the Treasury Steven Mnuchin, you might advise retaliating by shooting a hole in your end of the boat. If I were president, I’d try to persuade officials of other countries not to serve special producer interests by forcing their citizens to pay higher prices. But if they insisted, I’d say, “Go ahead, but I’ll be damned if I’ll do the same to Americans!”

The ruse used to promote producer interests through tariff policy is concern about our large trade deficit. It’s true that we have a large current account trade deficit. However, that’s matched exactly by a very large capital account surplus. Translated, that means Americans buy more goods from other countries than they buy from us; that’s our current account deficit. But other countries find our investment climate attractive and invest more in the U.S. than we invest in other countries; that’s our capital account surplus.

Have you ever wondered why foreigners are willing to invest far more money in Texas and California than they are willing to invest in Argentina and Venezuela? Do you think it’s because they like North Americans better than they like South Americans? No. We’ve always had an attractive investment climate, and we’ve had current account deficits and capital account surpluses throughout most of our nation’s history (http://tinyurl.com/jczqrhu). In fact, the only time we had a sustained current account trade surplus was during the Great Depression, when we had a surplus in nine out of 10 years, with 1936 being the lone exception.

Let’s delve a bit into the politics of trade tariffs. Whom do we see spending the most resources lobbying for tariffs on foreign steel and aluminum? Is it American users of steel and aluminum, such as Harley-Davidson and John Deere? Or is it United States Steel Corp. and Alcoa? Of course it’s U.S. Steel and Alcoa. They benefit from tariffs by being able to sell their products at higher prices. Harley-Davidson and John Deere lose by having to pay higher prices for their inputs, steel and aluminum, and their customers lose by having to pay higher product prices.

There’s a lot of nonsense talk about international trade, which some define as one country’s trading with another. When an American purchases a Mercedes, it does not represent the U.S. Congress’ trading with the German Bundestag. It represents an American citizen’s engaging in peaceable, voluntary exchange, through intermediaries, with a German auto producer. When voluntary exchange occurs, it means that both parties are better off in their own estimation — not Trump’s estimation or General Motors’ estimation. I’d like to hear the moral case for third-party interference with such an exchange.