When Do – and What Kinds of – Tariffs Make Sense?

Introduction

Mr. Trump’s ‘norm-busting’ ways are to be credited for helping at long last to get past our nation’s suicidal taboo against tariffs. But that is, alas, the most we can say for Trump now. For the way he is now ‘doing’ tariffs is nothing short of moronic, which will both catastrophically damage us and discredit good trade policy for decades to come.

Let’s start with the familiar argument against tariffs, then turn to how smart trade policy flows directly from that argument’s principal idiocies…

Ricardian Imbecility

The standard argument proceeds from the old Ricardian notion of ‘comparative advantage.’ In essence, the idea is that, if country A is better than country B at producing both wine and wool, say, but is ‘more’ better at the wine than the wool, then it should do wine while B does the wool, then trade. That way, you see, aggregate production by A and B combined is maximized while trade takes care of the distribution of proceeds.

In essence, this is simply a variation on Adam Smiths’ and other old time political economists’ brief for the division of labor and the productivity gains wrought by the specialization that it enables. But hold on a minute …

Where do Smithian specialization and Ricardian comparative advantage come from? Well were we to combine ourselves to Ricardo’s examples – literally the wine and wool mentioned above – you might think it a matter of ‘nature,’ of fate. Of course Portugal’s better at wine while England is better at wool, you will reckon – just look at the weather.

The problem with this idea at present, of course, is that with each passing decade since Ricardo’s early 19^th century, the role played by weather, topography, by … nature … in determining who’s best at what has inexorably shrunken. As tech and manufacturing industry grow, agriculture and tourism shrink in proportional terms. Comparative advantage accordingly becomes choice, not fate.

Had China listened to David Ricardo, it would be little more than the world’s largest grower of rice. And had Alexander Hamilton listened to Ricardo’s predecessors – principally Smith, who had argued the same thing – the US would still be an economic colony of the UK, sending it unfinished inputs for use in its factories, which of course were a chosen and built, not a God-given, advantage.

The fact that comparative advantage is actively chosen and built, not passively received, is what renders all Ricardian arguments heard since Hamilton’s late 18^th century – and especially those made by sociopath charlatans like Larry Summers and his former Clinton era colleagues to this very day (!) – so idiotic and so insidious. For they amount in such circumstances to demands we stay backward. In principle, they are no different from the arguments of old white men a century ago telling you why women and Black Americans shouldn’t vote – namely, because they were not (yet) experienced in matters of public policy.

Smart Tariffs – Three Apposite Circumstances

What shows latterday Ricardianism to be idiotic – ‘imbecilic,’ in Hamilton’s rendering – also shows where to use tariffs. In short, we should use them any time and place that the temporary cost that is briefly diminished aggregate global production is outweighed by the benefits – including longer term productivity benefits – that well designed such tariffs can bring.

What, specifically, does this mean for the US right now? Well, in essence, it means that three circumstances can well justify tariffs …

1. National Security: First, if you are reliant on a present or potential adversary, or on readily interrupted global supply chains, for strategically critical finished products or materials, the use of tariffs either to shield your own budding capacities while they develop or to interdict possible ‘contamination’ by the adversary of your supplies can be well worth the cost.

2. Infant Industries: Second, and generalizing the National Security reason, if you decide there are other, less security-rooted reasons to develop domestic capacity in some industry or industries, tariffs again can quite usefully shield your own nascent producers from ‘dumping’ death at the hands of foreign incumbents until such time as they’re able to fend for themselves.

3. Domestic Labor and Environmental Standards: And finally, if ‘free trade’ means backtracking on hard-won domestic labor and environmental protections to ‘compete’ with filthy slave-labor jurisdictions on global markets, tariffs are not only well advised, but are a moral imperative – it is literally evil not to impose them in order to preserve those earlier-made gains.

Now note what Reasons (1) through (3) tell us about Mr. Trump’s recent tariff proposals, starting with countries rather than products …

Peer nations like Canada, Europe, Japan would not seem to implicate any of the three Reasons. None are adversaries, none possess industries that we lack and seek now to start, and all have much higher labor and environmental protections than we have. All three are accordingly fine ‘friends’ for purposes of ‘friendshoring’ – the best means of maximizing Ricardo-friendly transnational production without incurring the unacceptable costs represented by items (1) through (3).

Aspiring peer nations like Mexico or Vietnam, next, represent a more middling case. They do not implicate Reasons (1) or (2) for tariffs, but they definitely implicate Reason (3). Moreover, if and insofar as they serve as conduits for exports from adversary nations (China?), they can indirectly implicate Reasons (1) and (2) as well.

Finally, bona fide adversary nations as Trump (self-fulfillingly prophetically) portrays China as being, and nations that are ahead of us in some desirable industries (EVs, solar power, battery tech, etc.) as China really is, can implicate Reasons (1) and (2), respectively.

Now, have you seen any analysis along these line in the Trump White House’s proposed plans or justificatory rhetoric around tariffs? …

Didn’t think so.

Smart Tariffs – Three Requisite Complements

But now note what else is missing from Team Trump’s planning – if we can call it that – and rhetoric: there is not only nothing on, there is actual hostility to, the necessary complements required to enable tariffs to work.

What do I mean by that? Well, remind yourself of the purpose of tariffs: they are to shield nascent domestic capacity till such time as it no longer requires protection. But this means that we minimize the costs of tariffs only by maximizing the speed at which we jumpstart domestic capacity. And this, too, requires concerted collective action. There are three types of such action, each with its own reasons …

1. Targeted National Investment: First, targeted public investment to speed up development of new industries typically is needed. The reason is obvious: Private capital can earn a far quicker buck betting on price movements in secondary financial and tertiary derivative markets than on new primary goods markets. Such are the wages of decades of ‘financialization,’ which now assure you that the human-lifespan-limited time-horizons of individual investors will channel finance capital to speculation, not production. Only the effectively perpetual-lifespanned nation has the right time-horizon to optimize productive investment.

2. Guaranteed Procurement: Second, ex ante guaranteed procurement of new production at the front end of a new industry’s lifespan also is typically needed. The front-end costs of starting a new industry from scratch are sufficiently high that, without at least some degree of confidence that there will be an actual market for new production such as can enable cost-recoupment, the risk-averse will not dare to tread into the new field.

3. National Coordination / ‘Industrial Clustering’: And finally third, some degree of coordination of nationwide development by the entity with the widest jurisdiction – that would be our federal government – also is typically needed, at least in massive redevelopment or mobilization projects like the World War I and II mobilizations. Only that way do you get the ‘industrial clusters’ that enabled the mobilization miracles achieved by the US in the 20^th century and China in the present century. For no private sector firm has the authority – nor do we wish it to – to ensure that where new factories are built, so are new neighborhoods, roads, powerlines, schools, hospitals, and the like for the new workforces that man them.

Regrettably, the Trump types don’t seem to ‘get’ this. Hence their tariffing will likely not bring domestic production on line quickly enough to substitute for foreign imports and thus circumvent inflation. Their tariffs will function more like the 1970s oil embargoes than like the Hamiltonian, Lincolnian, Wilsonian, and Rooseveltian development miracles that we worked in the past.

But wait, there’s more …

Chinageddon

I want to close this meditation with a bit more detail on just how idiotically, in light of the foregoing observations, the Trump people are handling even the one country in connection with which some sort of tariffs would, for the nonce, seem advisable – China.

So, note first that to get tariffs right, you must target not only the right countries as described above, but the right products. China is certainly the right country in some ways that, say, Canada (!) and Europe (!) are not.

But what are the products?

For Trump, it is all of them. Simply all of them. That is insane. There are at least two reasons ...

(1) First, does the US really need or even want to produce everything domestically that we now import from China? Even clothing, Chinese vegetables, and cheap plastic toys? Trump shows no sign of even having posed himself this query. That is bizarre. For the more things you target, the more things you will have to develop domestic capacities on, and that is both costly and logistically taxing,

(2) Second, inasmuch as many current imports from China are crucial inputs to US production itself, does Trump have a plan in place for rapid substitution? Again, he shows no sign of even having asked himself the question.

Meanwhile, and relatedly, as noted above, the fool is continually denouncing strategic public investment, procurement, and coordination – the latter, again, being that which gives you the 'industrial clusters' that (a) Wilson and FDR invented to win WWI and WWII, (b) we now have only one of (in Silicon Valley), and (c) China has thousands of, everywhere. Hence it is virtually certain that the answer to the query in (2) above is: ...

NO.

Now consider what this means: It means all these vital inputs that we get from China, which again are not unlike what petroleum was in the 1970s, will be shooting up in price overnight. And since we have no plan or means to substitute for them - again like oil in the '70s - ... it means: …

WELCOME BACK, '70s STAGFLATION.

A smart tariff policy on China would have had plans in place - plans for jumpstarting domestic capacity and/or 'friendsourcing' - before declaring trade war. But that would have meant strategic thinking, executing, and friend-making or -keeping. Trump seems incapable of any of this.

Even animals prepare for winter. Even animals plan. Not Trump. He is below human and even below nonhuman animals where strategy is concerned. He is more like a deciduous plant, defenseless against existential change - even when he is the cause of that change. A child with matches and no water-hose.

Conclusion

And this is a shame. For as noted above, it will not only destroy what little health now remains in our national productive and distributive capacities, but will also discredit the very policies we shall soon need to undo the damage.

Congress, your move. Save this fool from himself. And save us as well.