With all the hullaballoo surrounding President Trump’s decision to impose tariffs on our trading partners, a lot gets lost in the noise. The free trade purist states, rightly, that tariffs are taxes on consumers because the company affected negatively by the tariff doesn’t eat that additional cost; they pass it on to you. Higher prices hurt consumers and retard economic growth.
Conversely, free trade spurs competition which results in lower prices and benefits consumers. The best way to shrink the disparity between the cost of a foreign good and a domestic good should not be to impose punitive tariffs on foreign competition, but to reduce the regulatory burden at home for the simple reason that the former action is guaranteed to raise the cost to the consumer, whereas the latter is guaranteed to lower it. This administration is certainly slashing regulations, but perhaps POTUS felt the benefits weren’t materializing fast enough.
The pro-tariff crowd is not without valid points. The Smoot-Hawley Tariff Act that preceded the Great Depression is often cited as an example of why tariffs are bad for the economy and would be just as devastating today. But this assumption does not take into account the size of the current American economy relative to its trading partners versus a century ago. The U.S. is the biggest and richest consumer market on earth, and with that buying power comes leverage. If the President’s stated end goal is getting to no tariffs or barriers by anyone, then this is a laudable effort. Both sides just disagree on the means to get there. The recent trade deal struck with Mexico highlights the benefits of such an approach.
But none of this really gets at the root of why we have unfair/skewed trade to begin with, let alone proposing a practical way to get freer, fairer trade with all nations. In order to get truly free/fair trade, we must first ask what the single underlying factor is that prevents a pure free trade agreement. It’s the politics of self interest. Politicians always pay lip service to free trade, but then get inundated with requests for special treatment from their friends and lobbyists and campaign contributors and suddenly there are carve-outs and exceptions and tariffs penalizing competitors of those “connected” parties.
Tariffs are good politics because protectionism tends to garner votes. But this falls afoul of what 19th century French economist Frederic Bastiat describes as “the seen versus the unseen.” A few hundred jobs saved at a Carrier plant in Ohio is a localized, tangible effect that can be pointed to showing the benefit of tariffs. This is the “seen.” What is “unseen,” or at least harder to discern, are the tens of thousands of people buying an air conditioner this year paying 20% more for it.
Bottom line, a tariff on BMW is not only a tax on potential car buyers, it is a subsidy to Ford. It’s government picking winners and losers. In my previous piece on Universal Basic Income, I explain how government subsidies distort the economy. If free market conservatives and libertarians wish to maintain ideological consistency, opposition to subsidies must equal opposition to tariffs.
So how can unfair trade be prevented? Remove the politics of self interest and replace it with chance. For example, a trade deal between, say, the US and Japan would take the current state of trade (existing tariffs included), but recalibrate based on a random selection of a “good” and a “tariff level.”
Envision a dual axis grid; on the “X” axis would be the good (rice, apples, beef, cars, etc) and on the “Y” axis would be a tariff level (remove all tariffs, reduce tariffs 50%, current tariff level remains). Mind you, these are arbitrary goods and arbitrary tariff levels to demonstrate the proposed method—negotiations in the run up to signing such a deal would involve hashing out the parameters and then accepting whatever chance might deliver.
Once signed, establish a forum in which a lottery ball is drawn representing a good listed in the agreement, followed by a lottery ball representing a tariff level listed in the agreement. Perhaps Japan lucks out and rice, a national staple heavily protected by tariffs on foreign imports, gets to maintain current tariff levels, thus protecting Japanese growers. Or perhaps all tariffs must be removed day one when the agreement takes effect, benefitting American growers and Japanese consumers. Bottom line, chance decides, not politicians and those that would curry their favor. Free trade becomes fair trade.
As for the elevator pitch to President Trump? I can think of nothing more befitting a President who has been described as the showman PT Barnum than to have him personally promote this idea, make it a primetime television event akin to the NFL draft, sell the rights to it, and earmark the proceeds to pay down the national debt. Showtime!