Richard M. Ebeling – June 18, 2018
In the Bible it says, “He that is without sin among you, let him first cast a stone . . .” It also has been said that the one who strikes the second blow starts any fight. If the world is to avoid trade wars due to tariffs being imposed by the Trump Administration, both the United States and its trading partners in Europe and North America should look within themselves and ask if they are blameless in their own trade practices, and if it would not be far better if everyone were to simply follow a policy of free trade.
Donald Trump recently reasserted his intention to impose new tariffs of as much as 25 percent on steel and aluminum imports from Europe and America’s Canadian and Mexican neighbors under the rationale of “national security.” In general, the response by European, Canadian and Mexican government officials and by many in the news media has been that the affected countries must respond in kind, with retaliatory tariffs and related trade restrictions on American goods. Trump added gasoline to the political fire by replying that European automobile imports might be the next threat to U. S. national security.
Then just before leaving for the G-7 meeting of leading industrial nations in Canada over the weekend of June 9-10, 2018, Trump proposed that America and the European Union reduce their existing tariff and other trade barriers to zero. But he later warned that if America’s European trading partners did not do this, then under his executive authority, Europe might be excluded from business in general within the United States. The gist of the European response after Trump had left Canada for his meeting in Singapore with the totalitarian tyrant of North Korea was outraged indignation; how dare Trump speak to them in that way. Trade retaliation would follow. After all, the national dignity of Europe’s governments is at stake!
Neither the U.S. nor Europe Practice Free Trade
The fact is, while the U.S. and the major European countries have emphasized the idea and benefits from free trade, all of these governments impose various types of tariff and other barriers to shelter selected sectors of their respective economies. Most import taxes between America and the European Union are relatively low, in the range of 2.5 to 5.5 percent on a wide range of goods. On both sides of the Atlantic, however, there are types and categories of domestically manufactured goods or farm products that receive significant tariff protection, sometimes high in the double digits.
What the sensitive sensibilities of the Europeans find so shocking is Donald Trump’s explicit worldview, which is a throwback to many of the Mercantilist ideas of the 1700s, when kings and their governments saw international relations as a combative zero-sum game. If one country became economically stronger it could only be because one or more of its nation-state rivals had become poorer and weaker. Increased economic strength meant more political and military power in the global combat for survival and dominance.
The sign of economic success for those eighteenth century Mercantilists was a “positive” balance of trade, that is, that your own country exported more goods than it imported from other nations so the rest of the world owed more to your country than you owed to them. The net payment was to be in gold, so as your country’s financial war chest of money increased, that of other countries decreased. Gold could buy anything, anywhere, so that if a real war were to break out, your country would have the monetary means to purchase the greater amount of needed military and related materials to triumph over the enemy nation-state.
Trump’s Mercantilist View of the Balance of Trade
For Donald Trump, a balance of trade deficit means that other countries are selling more goods to America than America is selling to them. Dollars flow out of the United States to pay for that net in-flow of foreign goods, which means more profits and jobs in other countries, and less business, profits and jobs for American employers and workers.
The loss of that business and those jobs means America is economically weaker and other nations are stronger. That’s a primary reason why Trump keeps saying that the U.S. “negative” trade balance is hollowing out America vis-a-vis it’s trading partners, particularly since he thinks of a nation’s economic strength in terms of traditional manufacturing and energy sectors. Having a big steel industry means you can build a lot of warships and combat planes at a time of war, while a large oil and coal sector means the war machine can be kept going until “victory.”
A good number of critics have pointed out that it’s absurd to impose tariffs on Canada, Mexico and leading European countries due to “national security” concerns since these are among America’s leading political and military allies on the world stage, and have been during the entire post-World War II era.
For those earlier Mercantilists of the 1700s, there were no permanent allies, only expedient alliances on the changing global scene for power and domination; today’s “friend” could be tomorrow’s “enemy.” For Donald Trump, America’s political and military allies not only pick Uncle Sam’s pocket by “free riding” under U.S. military protection around the world, but also steal American jobs and business while doing so. In Trump’s mind, “With friends like these . . .” who play Americans for suckers.
Trump’s Mind Doesn’t Understand a Changing World
Trump seems unable to understand that dollars earned by foreign sellers end up being spent in the U.S. one way or another. If not on finished American goods and services, than as dollars directly or indirectly invested in the U.S. economy. And if the earner of those dollars does not want to spend it himself in one of these ways in the Unites States, he will sell those dollars on the foreign exchange market to someone who does. (See my article, “Trade Deficits Don’t Matter – Unless Caused by Government”.)
With a mind frozen in conceptual time, Trump fails to fully understand and appreciate that the world is changing, and always is. A good part of the immediate post-1945 world was unnatural, with so many industrial countries heavily destroyed and America industrially and economically unscathed in comparison.
But over the decades the world has been rebalancing. First, Western Europe and Japan recovered from the destruction of the Second World War. And especially during the last nearly thirty years of the post-Cold War era, more and more parts of Eastern Europe, Asia, Africa, and Latin America are modernizing and economically developing by introducing freer market policies after the epoch of Soviet-style socialist central planning.
The global division of labor has been, is, and will continue to change, in a world of changing supply and demand conditions. Some of these changes are primarily market-driven, while others are influenced to varying degrees by the hand of government interventionism. These are sometimes so intertwined that it’s difficult to sort out how much is market-based and how much is due to different types of political “cronyism.” But nonetheless, the patterns and potential profitable specializations are constantly shifting around the world.
There is no better way of finding out where the most profitable niches of individual and national comparative advantages may be than leaving a country’s domestic and international trade free from the intervening hand of the state. Not only do each of us know our own circumstances and potential opportunities better than politicians and bureaucrats sitting in their government offices, but government interventions inescapably carry with them political privileges and favors for some at the expense of many others that diminish individual freedom of choice and market association that potentially lowers everyone’s possible standard of living.
Whether Trump’s tariffs are motivated by Mercantilist fallacies or merely fulfilling campaign promises to assist his re-election in 2020 (or both), they will harm American consumers and producers whose choices for finished goods and inputs for future production will be narrowed, while raising the costs of whatever they end up buying. Trump may wail against foreign businesses stealing American jobs, but to assist some crony collaborators with his trade walls hurts the economic liberty and prosperity of far more Americans in the process. (See my articles, “Trump’s Economic Warfare Targets Innocent Bystanders” and “Trump’s Protectionist Follies Threaten a Trade War”.)
Tariff Retaliation Misguided and Harmful
So what should America’s trading partners do? The consensus in the countries threatened with Trump’s tariffs is retaliation. The foreign politicians and pundits indignantly say that the insult and the injury must be responded to in kind. That hurting “us” in Europe will be matched with counter-tariffs equally harming “you” in America. In fact, if America’s European and North American trading partners follow this path, they not only threaten to further undermine the international system of division of labor, but will greatly harm their own respective citizens.
This was all clearly explained by the British economist, Henry Dunning MacLeod, in his 1896 book, The History of Economics, at a time when protectionist sentiments were beginning to re-emerge after the triumph of free trade in Great Britain in the 1840s. MacLeod warned that, “If foreign nations smite us on one cheek by their hostile tariffs, if we followed the advice of the reciprocitarians, and retaliated, we should simply smite ourselves very hard on the other cheek.”
He asks us to imagine that for some reason France decides to impose new and high tariffs on the importation of British goods. Certainly, MacLeod admits, this does harm to the British manufacturers now burdened with an import duty on the goods they have been selling in France. Their export sales decrease, revenues and profits decline, and some workers in these export sectors of the British economy may lose their jobs.
Immediately the cry is heard that Britain must retaliate, MacLeod continues. An import tax is imposed on a variety of French goods to teach “them” a lesson. This will, no doubt, result in loss of business for the French exporters now unable to as easily sell their wares in Great Britain. But what is not always appreciated in the protectionist argument is that it is not the French exporters who pay the British import tax that increases the revenues of the British government. Said MacLeod:
“It is clear that it is not the Frenchmen who pays [the import tax], but the British consumer. The import duties are charged in the price to the consumer, and, therefore, by placing import duties on goods, it is ourselves we tax, and not the foreigner. Thus, England, irritated at French ill-temper, gets in a passion and immediately fines herself [the monetary value of the import tax].”
Furthermore, since at the higher import price, the French exporters will likely earn fewer British pounds from smaller sales in Great Britain, their ability to purchase as many British goods as they, perhaps, had done before will be reduced. This will negatively affect British exporters, with jobs losses and reduced business throughout the British export supply-chain. Concluded MacLeod:
“By the method of retaliatory duties, when the Frenchmen smites us on one cheek, we immediately hit ourselves an extremely hard slap on the other. The Frenchman, by his duties, does us an injury, and we, by retaliating, immediately do ourselves a great deal more; and, indeed, it would not be difficult to show that the country which imposes the [retaliatory] duty does itself a great deal more injury than its antagonist.”
The Best European Response to Trump’s Tariffs? Do Nothing
The Europeans, Canadians, and Mexicans who face higher American tariffs on any of their goods, therefore, should do – nothing. That is, however damaging they view these increased import taxes on some of their export products, to retaliate will do nothing to get back at the specific American domestic industries protected by these increased import taxes, but it will do greater harm to their own citizens.
Those American goods hit by any retaliatory import duties will now cost more for European consumers to buy, thus, reducing their standard of living to that extent. It will diminish the revenues earned by American businesses from sales in the European Union, thus reducing their ability to purchase as many EU manufactured goods as before, thus decreasing some parts of the European export trade and threatening some of the jobs in these sectors of the EU economy. To teach the Americans a retaliatory “lesson,” the Europeans will end up slapping themselves fairly hard on their own face in response to Trump’s tariffs.
But what about Trump’s charge that the Europeans are not playing “fair,” that their existing tariffs and other import restricting policies against American goods are significantly higher in a number of instances than American import taxes on European goods entering into the United States? Trump threatened before he recently left Canada to close the American market to European sellers if they don’t lower their trade barriers.
The Best Response to Foreign Tariffs? Lower Your Own
Henry Dunning MacLeod addressed this issue as well. He insisted that waiting for or insisting upon “reciprocity,” that is, not lowering your own trade restricting policies until your trading partners do so at the same time and to the same degree, only harms the citizens of your own country. The best policy is to simply lower your own existing import tariffs regardless of what any of your nation’s trading partners may or may not do. Explained MacLeod:
“By [Britain unilaterally lowering or abolishing tariffs] the price of French goods are lowered for British consumers, a greater demand for it takes place, and the French producers have more money to spend. Then they in turn take more goods from England, and this sets British industry in motion, gives employment to British workmen and to British shipping. Is it not clear, therefore, that it is to the advantage to lower her duties, whether France does so or not? By lowering the duties we are taking the burden off our own backs, and not that of the foreigner, though of course it benefits him too, as it gives him more employment . . .
“It may be laid down certainly, as a rule, that the country that raises or lowers its import duties injures or benefits itself much more than it injures or benefits its neighbor . . . The true way to fight hostile tariffs is by free imports.”
There is an additional danger of following the protectionist path of retaliatory tariffs and other trade restricting policies, MacLeod pointed out. Its proponents then have a foot in the door to not only insist upon the new import taxes never to be reduced, but to use that as a precedence to make the case for additional protection against other foreign imports under new rationales of “unfair” trading practices by other nations. Thus, a downward spiral may be set in motion of reduced and narrowed trade among countries around the world.
In his passing remark that he wanted all American and European tariffs and related import barriers repealed so that the market arena crossing the Atlantic could be a free trade zone, Trump declared an economic ideal and a policy goal that would increase freedom of choice and improve economic betterment for all concerned.
But Trump’s threat that if the Europeans did not take him up on this proposal, the American response would be to shut America’s door to European businesses would, certainly, bring down great harm to European producers and workers, if implemented. But, as Henry Dunning MacLeod clearly and logically demonstrated, the far greater damage from such a policy would be to the consumers and producers of the United States. Their standard of living and variety of choices among competing goods would be reduced and narrowed; their ability to buy less expensive and preferred European goods would be taken away.
Plus, a new spiders’ web of interest groups now protected behind Trump’s tariff walls from their European rivals would end up fighting tooth and nail for their privileged position in the American domestic market to never be taken away. Political “cronyism,” the use of government power for some to gain financial plunder through government privileges at the expense of the general population, would be reinforced.
Neither the United States nor the European Union are so free of protectionist “sin” to cast retaliatory tariff stones at the other. In addition, the harm to all that would result from trade wars means that neither America nor the Europeans should throw the next punch at the other. Each should lower their interventionist fists, and open their hands in market peace and economic friendship by simply doing away with their, respective, existing trade barriers currently in place and allow, instead, for their citizens to freely trade with whomever they desire on the competitive terms they mutually find beneficial.
To paraphrase Ronald Reagan, Mr. Trump tear down those trade walls! If Donald Trump really wants a legacy most likely to help make America “great again,” few would be as important as to end all the American barriers to freedom of trade at home and abroad.
This article was originally published at FFF.org. Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.
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