Sunday, July 29, 2018

The Delusion of a Win-Win Trade War

President Trump and anti-trade adviser Peter Navarro
By Robert Higgs

It is no surprise that President Trump’s trade war has many supporters. An understanding of the law of comparative advantage has never been a prominent feature of people’s knowledge in the USA or anywhere else. And special interests have honed their propaganda over centuries of angling for the use of government power to protect them from foreign competition, maneuvering to pick the pockets of consumers in their own country.

But even as Trump spouts venerable fallacies to justify and seek support for his destructive trade policies and related ad hoc actions, he and his supporters have sometimes offered a strange defense of their tactics: they purport to be seeking, at the end of the game, universal free trade, a world in which all countries have abandoned tariffs, quotas, subsidies, and other government intrusions in international exchange. In Wilsonian terms, they claim to be waging the trade war to end all trade wars. The idea is that by raising U.S. tariffs, they will induce other governments to lower and ultimately eliminate their own.

Of course, this rationale may be nothing more than wily claptrap, tossed out as a rhetorical bone to Republicans who favor freer trade. The administration’s actions to date certainly give no indication that it is aiming at global free trade. On the contrary. So the Wilsonian gambit may consist of nothing but hot air.

But if Trump and his trade advisers actually
take this tactic seriously, they are deluding themselves.

First, and surely obviously, U.S. tariff increases will not induce other governments to lower their own, but to raise them, as the EU, China, Mexico, Canada, and other trading partners have already demonstrated. That’s why it’s called a trade war—because the “enemy” shoots back. History has shown repeatedly, most notably in the early 1930s, in the wake of the Smoot-Hawley Tariff Act of 1930, that such trade wars only spiral downward, choking off more and more trade, despoiling the international division of labor in accordance with comparative advantage, and thereby diminishing real income in all the trading countries.

Second, the prospect of the U.S. government’s ever abandoning tariffs is slim to none. Tariffs are the classic example of government interventions with concentrated benefits and dispersed costs. This character makes them attract great support from protected special interests and little opposition from the general public—including other producers—when they are enacted or extended. They are easy for politicians to put in place and diabolically difficult for anyone to eliminate. Although the costs are great—much greater than the benefits for the economy as a whole—hardly anyone’s costs are great enough to justify mounting a potent political attack on the tariffs.

People who get tariffs put in place to protect them in the first place are well positioned to marshal strong opposition to any political attempt to eliminate these taxes on consumers who buy from competing, foreign suppliers. Consumers rarely know anything about why foreign goods are priced as they are, and producers, in general, are usually not affected enough by tariffs on imported raw materials and components to justify well-funded politicking against them.

Third, even if the trade-war tactic eventually gave rise to a general abandonment of tariffs and other trade restrictions, this outcome would not necessarily mean that the trade war had been a win-win conflict. Of course, a completely free-trading world would be a wonderful, highly beneficial situation, but the question would remain: were the benefits of attaining this result by means of a trade war great enough to justify bearing that war’s undeniable costs?

And make no mistake: this trade war is already proving highly disruptive and destructive. Firms unable to sell to their usual customers abroad are reducing production and laying off workers; firms faced with much higher costs of obtaining foreign raw materials and components for their products are acting likewise.

Moreover, the uncertainty about what the president will do next in conducting his allegedly good war is weighing heavily on entrepreneurs and managers, who are reacting normally to such uncertainty by hunkering down, delaying or canceling investments and new hiring. The greater the uncertainty, the greater the economic paralysis. Back in the 1930s, such regime uncertainty played a major role in prolonging the Great Depression.

Fourth, as trade and trade-related income decline because of the U.S. trade war and other countries’ reactions to it, even U.S. and foreign firms whose products may not have been subjected to increased tariffs or other restrictions will suffer, simply because a world with reduced income will demand fewer imports in general. A trade war makes the whole world less efficient; the world economy as a whole produces less output and pays out less income to the producers than it otherwise would. Poorer people make poorer customers for all U.S. firms that sell abroad and for all foreign firms that sell in the USA.

The foregoing considerations are only a few of the many that weigh against the initiation and continuation of a trade war. Trump says such wars are easy to win. In this regard, he apparently doesn’t even understand what winning means. The supposition that such a war can be won is a delusion. A trade war may serve Trump’s political ambitions by appealing to supporters ignorant of economics and easily bamboozled by anything wrapped in the flag, but the idea of a win-win trade war is the height of folly so far as economic rationality is concerned—not to mention its further suppression of economic liberties already being crushed by taxes and regulations. In fact, the only way to win a trade war is not to fight one.

Robert Higgs is author of Crisis and Leviathan: Critical Episodes in the Growth of American Government and Taking a Stand: Reflections on Life, Liberty, and the Economy.

The above originally appeared at the Independent Institute.

10 comments:

  1. Bona fides notwithstanding, Higgs is just too stupid to understand the incredibly complex game of 4-D chess. Trump and apologists may as well try and explain nuclear fission to a tribe of Yanomami Indians.

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  2. But, professor Higgs, Trump may be right and a trade war can be won! Didn't you see when Trump eagerly announced the bare bones of a trade deal with European Commission President Jean-Claude Juncker that would see the E.U. importing more soybeans? Ok, the European Commission doesn't actually have the power to lower tariffs or to say how many more soybeans Europeans should buy, but that counts for something, no?

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  3. Trump says that not trading saves us a 'lot of money'. There's evidence he believes his own claptrap.

    ---- "Our trade deficit ballooned to $817 billion," Donald Trump said during a speech to steelworkers in Granite City, Illinois, yesterday. "Think of that. We lost $817 billion a year over the last number of years in trade. In other words, if we didn't trade, we'd save a hell of a lot of money."

    According to the U.S. Census Bureau, the president exaggerated the size of the 2017 trade deficit by ***48 percent***. But that's a mere quibble compared to his fundamental misunderstanding of what that number means, which in turn reflects a zero-sum view of economic exchange that does not bode well for the outcome of a tariff war supposedly aimed at promoting free trade.

    "Without trade, we could have piles of money," Cato Institute trade specialist Scott Lincicome concedes in an interview with The New York Times. "But we'd have no food, clothing, housing, etc. So the money would be worthless, unless you swam in it like Scrooge McDuck or something."

    The president, despite his Wharton degree and business career, frequently seems baffled by this concept, prompting corrective analogies from people with a firmer grasp of economics. "When you're almost 800 Billion Dollars a year down on Trade, you can't lose a Trade War!" Trump asserted on Twitter last month. "I'm way down on trade with restaurants, grocery stores, malls, and movie theaters," Rep. Justin Amash (R-Mich.) replied. "I keep buying from them, but they never buy from me. I must be getting ripped off, right?" ----

    http://reason.com/blog/2018/07/27/if-we-didnt-trade-trump-argues-wed-save

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  4. Higgs is the usual idiot. He should just stay in his libertardian paradise of Mexico and not write anything at all. Vox Day has done a good job of demolishing the nonsense of comparative advantage.

    https://voxday.blogspot.com/2014/08/the-end-of-comparative-advantage.html

    Maybe RW could challenge Vox Day to a debate about free trade open border libertardianism. I would enjoy Vox shredding his arguments.

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    Replies
    1. “Nonsense of comparative advantage”

      LOL so do you grow your own food and make your own clothes?

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    2. Re: The Lab Mismanager,

      --- Vox Day [who?] has done a good job [Ha Ha Ha!] of demolishing the nonsense of comparative advantage. ---

      So did Marx. Both did a very good job.

      You better keep your commentary limited to racist pap because when it comes to economics, you sound like an even bigger fool, Lab. Are you going to find another Vox Day commentary disproving division of labor and specialization, too? Why don't you tell us that one about how the earth is flat while you're at it?

      Trumpista ignoramus.

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  5. The time for we'll eliminate our tariffs if you eliminate yours ended when it was decided when the crony trade deals where the USA eliminated tariffs and other nations would not eliminate theirs or at least keep a lot of them were put in place. Trump wants regain a lost bargaining position and to do so will cause damage in effort and probably fail.

    Trump's tariffs are the by product of this crony trade labeled free trade. It's damaged the name of free trade in people's minds so they support Trump's protectionism nonsense.

    When the comparative advantage of manufacturing in China is China's domestic content requirements and tariffs what does that do to people in the USA? That made a factory to supply the US and Chinese market be located in China. There was little cost bringing the output to the USA and it avoided the tariffs and such for selling in China. The relocation costs are quickly recovered. With that factory went the suppliers' business as well. Even after domestic content and such is dropped its too late, the factory is in China and will be there for decades to come due to relocation costs alone. Unless it pays for itself the factories remain where they are.

    The consistent failure of many leading libertarians to understand the harm done by their better-than-nothing support of crony trade deals repels a lot of people and sends them to Trump and other cargo cultists as well as socialists who want to use government force to redistribute the gains those deals set to the top.

    What's the solution now? I don't know. But the bargaining power wrt tariffs, market access, and such was given up long ago.

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    Replies
    1. Re: Jimmi Joe Meeker,

      --- The consistent failure of many leading libertarians to understand the harm done by their better-than-nothing [...] ---


      What the hell are you talking about? The argument has never been to favor crony deals over free trade. The argument is that an imperfect deal that gets people closer to freer trade is better than keeping tariffs high. Also, you're conflating trade with outsourcing. Even counting with pure free trade between nations, companies wouod continue to move capital where it is more profitable. That has nothing to do with trade agreements.

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  6. Part of me thinks these Losertarians don't want free trade. In that case, they'd have nothing to bitch about from the sidelines.

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    Replies
    1. Re: Incompetent Surgeon,

      --- Part of me thinks these Losertarians don't want free trade. ---

      You mean Trumpistas want free trade? Why, beat me with a stick and call me a 'piñata'! Who wouldva thunk it?

      Ridiculous Trumpista. And liar.

      Delete