Monday, March 5, 2018

On tariffs

An oped on tariffs, for Fox news here. That tariffs are bad is rather obvious to readers of this blog, but perhaps marshaling and digesting things we've known for 250 years is worthwhile.

In a remarkable achievement, President Trump has united the nation’s economists by proposing tariffs on imported steel and aluminum, tariffs designed to reduce imports of those goods. Tariffs are bad for the economy. Tariffs on raw materials, produced by machine-intensive dirty declining industries are worse. Trade is good.

Trade is good. Why? Follow the money. If China sells us, say, a solar panel, what does it do with the dollars? There is only one thing to do with dollars — buy American goods, invest in America, or buy our government debt. Oh, and we also get a nice cheap solar panel.

China might use the dollars to buy, say, wheat from Australia, so it looks like China sells us more than we sell them. But then Australia must use the dollars here in America. Dollars always come home to roost.  So how much more one country sells us than we sell them — the “bilateral trade deficit” — really is pretty meaningless.

The rest of the world sells us more than we sell them. But the rest of the world uses every cent of the extra dollars it gets from that trade to invest in the U.S. and to buy our government bonds. If we sell the whole world exactly as much as they sell us every year — in other words, if there were no overall U.S. trade deficit — we’re the ones who would have to start saving huge much larger amounts of our incomes in order to invest in U.S. companies, give mortgages to people to buy houses, and to fund the governments’ $1 trillion deficits.

Think of it this way: You run a huge “trade deficit” with the grocery store. Why not grow your own food? Well, you’re not very good at growing food. And if you do, the grocer will not have money to buy what you make, or to give to the bank to fund your mortgage.

So, trade is good. And tariffs? Tariffs are not good. Tariffs on steel hurt businesses that use steel, especially those that compete with imported products made of steel. Tariffs hurt consumers, who pay more for steel-using products. But perhaps the greatest damage is to the steel industry itself. Tariffs, like all protection, shield the industry from competition. And industries shielded from competition do not innovate, do not cut costs, do not make better products. Only when the Big Three faced import competition did they start to make better cars, and cut costs.

If it is good for each country to protect its businesses with tariffs, then it is good for each state to do the same, i.e. California should keep out those cheap Arizona surfboards. A key to U.S. prosperity is precisely our Constitution’s firm ban on state politicians’ desire to please local industries with protection. Until the EU came along, the U.S. was the world’s largest free trade area. Hint: Bigger is better.

Why is this so hard to understand? Tariffs, like all protection from competition, are great for the protected business and its workers, at least for a while. If you're a practical businessperson you think the way to get the economy going is to just to replicate for the economy what is good for your business, and hand out protection to everyone. But protection only helps one business at the expense of all the others, and at the expense of consumers, and the damage is worse than the gain. What is good for an individual business is not good, scaled up, for the economy as a whole. Business people and bankers turned policy makers miss that.

Tariffs, like other protections, also help visible, large, and politically powerful constituencies. The larger pain is spread throughout the economy, in ways most of us may not even notice in day-to-day living. But it adds up.

Some of the blame belongs to Congress. The trade laws invite protection. The standard for protection is only that the industry is hurt. Imagine if United Airlines could demand that Southwest pay tariffs – an extra tax at an airport – and in order to do so United needs only to show that Southwest might hurt United’s profits.

The “national security” clause under which the Trump administration is acting is weaker still. Even the defense department doesn’t want this tariff!

We pass populist laws, and then count on administrations not to enforce them. Well, President Trump may help here too, by acting on silly laws and forcing Congress to pass sane laws.

Perhaps some of the blame belongs to economists as well. The words “deficit” and “imbalance” make it sound like something is wrong with trade.

Tariffs do have one thing going for them however – they’re better than quotas! With a tariff, at least we can measure and limit the damage — steel will be 25 percent too expensive. But you can still buy it when you need it. Under a quota, in which countries are only allowed to sell a certain amount, the damage can be much larger and you never even know.

John H. Cochrane is a Senior Fellow of the Hoover Institution and an Adjunct Scholar of the Cato Institute.


There is so much good stuff on trade, it's hard to know when to stop. A friend writes

"we blockade wartime enemies to stop the flow of goods, and levy tariffs on ourselves to do the same thing!"

A colleague catches me being mercantilist. What if the dollars stay overseas, he asks? The answer is, Great! We can print dollars cheaper than the Chinese can make solar panels. Working to make exports to buy imports is a cost not a benefit. And if China wants to tax its citizens to send us cheap solar panels, or steel, the proper response is a nice thank you card with flowers and chocolates.

I cannot resist the urge to notice that at the same time we are imposing sanctions on Iran, Russia and North Korea to ... stop them from importing things. So, we are doing to ourselves exactly what we are dong at great expense to these, to hurt them.

A friend urged me to read the comments on Fox. If economists want to understand what we're up against this is a good sobering read. The amazing thing is that most of the commenters seem not to be steel workers or steel executives. They genuinely believe that laws which will force them to pay a lot more for the benefit of a very few, and will actually lower their wages or eliminate their jobs, are a good thing. They might get that banning machines is bad, but if the exact same thing -- produce more at lower cost -- is labeled "China," they don't. The art of rhetoric is understanding your audience's frame of mind, and these comments are a good education for us. Alas, I think explaining trade to the public, which is a bit like explaining why yes the earth goes around the sun from a scientific point of view, is so boring that most economists don't bother. Me included, usually, I must admit.


  1. But you do not include the effect that competition has on the labor force that is in the industry. I have spent the better part of my career in places that have been devastated by trade--Pittsfield Mass, Buffalo NY, Bloomington Indiana. In every place there are more winners than losers but the losers are disillusioned and angry, not to mention divorced, and often addicted. Free trade built this country including the lower class that Charles Murray documents in his book "Coming Apart". These are Trump voters and they hate the argument you make. I can introduce you to a few of them...

    1. Whether or not disillusioned Trump voters hate free-trade does not make tariffs an intelligent trade policy. If individuals are put out of work by free-trade, give them help individually (i.e. a strong and rational safety net).

    2. The hell with the safety net. But the lazy asses to work! Through a Job Gty as part of a Full Employment Fiscal Policy:

  2. Sure, free trade. But chronic and large and growing current-account trade deficits?

    About one-third of Corporate America is foreign-owned now, and rising every year. I assume property about the same, but I am not sure records are kept. In any event, we have to sell assets to pay for the imports. No free lunches! Or go deeper into debt, and we do that too.

    At some point you get a disparity between gross national income and GDP.

    That is, the US economy could grow, but the income flows offshore.

    Americans will increasingly work to produce goods and services for offshore consumption.

    That is a lower living standard.

    There are other concerns, such as the exploding house prices seen in nations that run chronic current-account trade deficits, such as Australia, Great Britain, New Zealand, Canada and the US.

    So unaffordable housing and lower living standards could stem from chronic current-account trade deficits.

    Add on: Is what we have now "free trade" or managed trade as organized by multinationals and perhaps China mercantilists?

    Who is influential in trade talks? Who has resources and lobbyists to influence law and regulation? Not me!

    Are we so sure that bona-fide free trade would result in the chronic current-account trade deficits we see now?


    1. "Americans will increasingly work to produce goods and services for offshore consumption."

      Think about this sentence.

    2. "About one-third of Corporate America is foreign-owned now,"

      Sure but American companies operate globally. If Apple has half its sales outside the United States, there may be no harm in foreigners owing a significant share of the company.

      There seem to be two primary drivers of the reported current account deficit: (1) tax avoidance schemes that under report exports by companies like Apple; (2) US government fiscal deficits financed by borrowing from Asia and Europe.

    3. Absalon:

      I agree it is nearly impossible to track international commerce and money flows---and ponder this: there is about $32 trillion in offshore bank accounts.

      Side note: This makes a case to tax property, not income. With globalization, income has become squishy and unknowable.

      A thought:

      The US economy a chock-a-block full of structural impediments, including the entire USDA and especially the ethanol program. 10% of the gasoline you buy is mandated and subsidized ethanol.

      Property zoning is another topic.

      The regulations in the financial sector.

      Yet Trump proposes two rather minor tariffs and the DC commentariat goes nuts! (I exclude Cochrane from this group, and he is not inside the Beltway in fact).

      Don Boudreaux (inside the Beltway) has suggested that public servants and interest groups make good PR, but really serve special interests (their own).

      We have seen Russian influence of late.

      Is DC just a globalist money-sewer?

      What explains DC economists scaling the very pinnacles of righteous indignation on two rather minor Trump tariffs, but then going mute on ethanol?

      And why are the same DC economist, so very, very concerned about global free trade, never concerned about China trade barriers?

      Where are the op-eds denigrating Beijing for protectionism?

      Why not constant elevated umbrage that China operates a mercantilist economy?

    4. Benjamin

      If there are $32 Trillion in offshore accounts that means that a lot of "property" is probably beyond the reach of taxation as well.

      It seems to me that the "real" problem is that China is saving 50% of GDP and Korea over 35%. The flow of savings from Asia and Europe to USA is what is driving the US trade deficit, not cheating by Canada or Mexico. Any trade deficits with Canada and Mexico are probably just the result of China lending money to the US and then selling goods to Canada/Mexico who sell different goods to USA to close the circle on the money flow.

      The answer, which no one in the United States wants to hear, is for the United States to reduce consumption by about 5% across the board. The problem is that if the USA cut back and Asia and Europe did not pick up the slack and start consuming more, it would just tip the world into a deflationary spiral.

      What the west really needs is for the Chinese government to make it easier for Chinese consumers to save less and consume more. If no one is writing that it is because there such a limited audience that would understand or accept it.

      Taking steps against third world elites, including Chinese elites, who are looting their countries and hiding the money offshore would be a small step to fix the savings glut. Eg. the Russian people would be much better off if Putin and his cronies were not stashing hundreds of billions off shore.

      My opinion. Other's views will differ.

    5. Absalom: how do you hide an office tower? You may be able to hide ownership, but the property tax must be paid for the tower eventually will get seized.

    6. RE: "... In any event, we have to sell assets to pay for the imports. No free lunches! Or go deeper into debt, and we do that too. ... That is, the US economy could grow, but the income flows offshore. ..."
      • Why would we have to sell assets? If we run deficits foreign folk do indeed accumulate dollars, but they can buy assets or govt bonds. In any event the money ends up as a reserve deposit. And if they own assets, so what? The income or losses may flow abroad. So what? They have dollars, they can buy our output - and we get to full employment.

      RE: "... Americans will increasingly work to produce goods and services for offshore consumption. ... That is a lower living standard. ..."
      • Americans are born naked, get educated, and work for their share of the pie. What do they care whether the owner of the capital is a Norwegian Sovereign Fund, a Chinese industrialist, or the guy in the big house two towns over. Why would they care? They work, they get paid, they can buy stuff, made here, or abroad.

      RE: "... exploding house prices ... ..."
      • I guess we need to put our lazy-ass developers to work building more houses.

      RE: "... o unaffordable housing and lower living standards could stem from chronic current-account trade deficits.
      ... ..."
      • Not buying it.

  3. Curious Finance StudentMarch 6, 2018 at 8:39 AM

    Hi John, I have a genuine question about this and would like to know what your thoughts on this are.

    Although I agree that free trade is always better, I have a genuine question about this follow the money story. If the US buys foreign goods in excess of what it produces, yes those dollars are flowing outside of the US and indeed will have to come back. But while it might come back in (1) the form of US goods that will be purchased in the future or (2) invested back in the US as you say, another alternative is that (3) these foreign sellers want to invest in their own country instead, selling their dollars to buy their home currency. I imagine this would shift the demand curve for the dollar and it would lower its price relative to the foreign currency, making future imports more costly. While this mechanism would eventually eliminate the trade imbalance (US goods become relatively cheaper), won't US consumers be worse off? Since the dollar depreciates, the purchasing power of the US consumer would also decrease, is this right? Or does the existence of this trade imbalance imply that (1) and (2) are more important?

    (Although from the perspective that (3) is more important, tariffs or no tariffs, the trade imbalance shifts to zero regardless and tariffs are at best, pointless)

    1. It IS complicated. But tariffs will trigger a counterproductive trade war. The solution is a Job Gty as part of a Full Employment Fiscal Policy:

  4. I understand the argument that free trade is 'best' as in most efficient and from a macro it is cut and dried. However, in a world where there are is a lot of unilateral tariffs, manipulation, and other bad behavior. It would seem that tariffs, embargos, and blockades (maybe even quotas) have there proper places. So the question is that if in the less than ideal world of sovereign states, there is a role for these impediments? If so, than how to determine proper? If not, then how do we ensure that we can compete freely in other countries? Or more destructive behaviors. I am guessing that there is a role, however the evaluation of proper is both subjective and the evaluation of consequences mostly impossible. That unfortunately reinforces the desire for a uniform lack of impediments, but doesn't seem to necessarily justify it in the current world state.

  5. The reason for the implementation of the tariffs is because the Chinese and others are not engaged in free trade. These are government controlled industries and business tactics with the goal of negatively effecting our manufacturing capability. Remember our real power has been our economies ability to move to massive war production quickly. Through product dumping and cheap labor we have lost a lot of the large steel plants and production capabilities. Yes we still have steel production but they are much smaller and do a lot of specialty steel. Meanwhile their governments absorb what would otherwise be massive losses and in a capitalist economy would destroy the companies. So I for one am willing to pay $45 or $100 more for a car for more robust industries that give us better self sufficiency. I also believe that if we implement and stand by this tariff it won’t take long to have its desired effect and some or most of these countries will stop dumping their artificially cheap products on us.

    1. If they want to send us cheap stuff, why would we argue?

    2. "Remember our real power has been our economies ability to move to massive war production quickly. Through product dumping and cheap labor we have lost a lot of the large steel plants and production capabilities."

      WWII is long over. WWIII will not require massive war production because it'll be fought with thermonuclear weapons and it will last about 1/2 hour.

    3. Defense uses a tiny amount of steel, and that mostly fancy stuff. You don't make fighter jets out of rebar. Also, if national defense requires steel plants, then put a sufficient number or operating subsidies on the defense budget and let the rest of the market compete. Tariffs create an inefficient steel industry not a larger steel industry.

  6. Interesting statement that Trump has united economist. At the same time he has divided the leftist. The still prevalent union leftist have sent out the word to support tariffs while the rest of the leftist type remain in anti-Trump mode.


  7. Lawrence L. WoodMarch 7, 2018 at 2:02 PM

    Please! If you want to be taken seriously regarding your opinions of the international use and applications of tariff structures STOP selling the long dead and totally misapplied concept of "free trade". It doesn't exist in today's global economy and frankly hasn't at any period in either the 20th or 21st centuries. It's a chimera that is used to bedazzle the uninformed with a pollyannaish reality that just doesn't exist. If you have an argument to make to address how the United States can proactively address it's massive trade deficits that have severely impacted both our citizens economic wellbeing and massively contributed to out spirling national debt without counter applying tariffs to the worst of the international abusers we will be all ears to listen to your suggestions. Wrapping yourself in the "free trade" fallacy chant justs confirms to the knowledgeable that either you have little understanding of the actual trade situation on the ground today or are satisfied with the American public being placed internationally at a massive economic disadvantage along with our critical national strategic manufacturing sector interests.

  8. The impetus for imposing a tariff is the fact that we don't live in an economy with a Job Gty as part of a Full Employment Fiscal policy. If we implemented a JG, we wouldn't need a tariff to keep folks working. But,
    • The JG jobs would probably provide lower value-added service jobs compared to higher paying heavy industrial jobs.
    • Maintaining a high trade deficit is providing foreign folk a claim on our grandkids' output. But why should they care who owns the capital (or has a claim on it) when they come into the world naked and ready to work. Why should they care who gets the output of their labor: a Chinese family or the rich guy in the town over. It doesn't matter to them.

    • A tariff is a tax on everybody else. Why should everybody subsidize the few industrial workers and companies in steel/aluminum?
    • It will also cause retaliation, and massive disruption in production/distribution with Canada and Mexico.
    • If someone wants to send us cheap stuff, we would be crazy not to take it.

    Right now we have the worst situation: high trade deficit, no Job Gty, resulting in low labor utilization --> unemployment/misery.

    The solution:
    - Job Gty (see the pup:;
    - High public investment in higher education (with an emphasis on STEM and trade schools) to maximize the level of people output; and
    - Free Trade.

    Easy Peasy.

  9. Check out this throw back to Milton Friedman for a lesson and a laugh (admittedly, Professor Cochrane has already made some of these points in different language but apparently economists must beat this dead horse):

  10. The author makes a compelling argument, but in his apparent unworldliness he leaves out the reality that changes the conclusion. Free trade does indeed confer benefits. But the US does NOT have a free trade relationship with its trade partners. Our negotiators tended to be unworldly lawyers with no knowledge of economics or business. The US uses tariffs as it primary impediment to imports so they naively assumed, as the author does, that other countries do the same. They do not. So our negotiators concentrated on lowering tariffs. Everyone, of course, agreed. So out imports increased without the tariff barriers; our exports basically did not. Why. Because our so-called "partners" did as they have always done and used non-tariff barriers such as quotas and, more common, "understandings" wherein imports from the US (and everywhere else) are just plain buried in excuses and bureaucratic obfuscation. There is a good rule of thumb for gauging the success of American trade negotiations - if the negotiators crow about having gotten tariffs reduced or how they need to be lowered, you can be pretty sure they are incompetent and grossly unqualified to do their duties. Result - trade deficits that would not occur with "free trade."

    1. True dat. But if these countries want to send us cheap stuff, we would be silly to object. The key is to have a mechanism to have our people employed in high value-added economic activities. How? The pup spells it out here:

  11. I have not looked at the Fox comments, but several skeptical comments here suggest that tariffs may be optimal in a strategic setting where other countries do not pursue a free trade strategy. There's a large academic literature on strategic trade policy. For the curious, here's an old but (to me) helpful academic lit review:

    And here's a quote, from page 1430, in the context of reviewing work by Dixit from the mid 1980s:

    "Thus, for example, an export subsidy adopted by a foreign government could be "countervailed" by a simultaneously chosen domestic import tariff....The interesting point about these countervailing effects is that they do not eliminate incentives to use strategic trade policy, and the equilibrium normally implies positive subsidies and tariffs."

    This sounds suspiciously similar to the pro-tariff political arguments one hears, but it is not off-the-cuff: there is a model backing it up.

    There are other reviews - P. Krugman edited an one done for the 50th anniversary of the Ex-Im Bank.

    Probably there's something newer and more concise out there - maybe a trade economist has a good link?

    I'm not suggesting that today's steel and aluminum tariffs are a good idea. But the skeptics have concerns that aren't superficially unreasonable, and I've not seen much popular commentary explaining why the strategic arguments aren't compelling.

    1. Here's a quote from the dog's blurb: "• A tariff is a tax on everybody else. Why should everybody subsidize the few industrial workers and companies in steel/aluminum?"

      She bullet-points a solution for us:

  12. Sure, tariffs are bad and free trade is good. But why is it that economists have this overwrought reaction to tariffs when they idly stand by and whistle dixie while other and worse offenses pass them by in a long march towards Pareto destruction? Our economy is full of disastrous interventions by special interests restricting trade, through regulations, taxes, and subsidies. Occupational licensing, sugar and tobacco subsidies and restriction, ethanol, Davis Bacon, the Jones Act -- I mean, the list is pretty darn long, eh? And immigration? Why prohibitive tariffs on labor, say? Tariffs on steel and aluminium are just a drop in the bucket -- and they are obviously imposed for political reasons, not economic. There's an election coming up (have you heard?), Trump promised tough stand on trade, and is clearly planning this action as a negotiating tactic. So, why this almost moralistic emotional outbursts from economists? I know we remember the '30s and the trade wars, but -- really! -- is anyone seriously expecting a repeat of that? I don't think that's even half-way realistic. A bit of perspective, please!

  13. Its hard to disagree with John (or David Ricardo) that Free Trade is an optimal solution, but there are assumptions behind the optimality of Comparative Advantage.
    Beyond non-tariff barriers, currency manipulation and government subsidized industries create an artificially low market price that are disruptive and not efficient. If they were, we would see trade flows even out currency balances over time and that simply hasn’t happened. If we saw sustained artificially low prices in domestic markets, we would call that predatory pricing and a violation of US Anti-Trust laws.
    That being said, the recently imposed tariffs are a blunt instrument to correct for these foreign government / central bank coordinated assaults on markets. There only true value is if they force governments to unwind strategic subsidies, non-trade tariffs, and currency manipulations to allow markets to operate efficiently.

  14. John, the motivation that you cite against imposition of trade tariffs is not compelling as an argument. In the simple case of the grocer and the householder, the small matter of where the householder is obtaining the legal tender for the payment to the grocer for the householder's purchases is omitted in the example. The grocer will accept a 'note of hand' for a while until the householder's credit is exhausted, at which point the grocer will refuse the householder's imprecations for further supply of groceries. In the case of a national unit, the nation dependent on another nation for the satisfaction of its material wants must itself have another nation dependent on it for satisfaction of that other nation's material wants. If, the trade is one-way between two nations, say the PRC and the USA, and the USA does not or cannot supply goods to the PRC, then it is merely a matter of time before the USA runs out of credit with the PRC.

    To assert, as you do, that the PRC is supplying real commodities to the USA in exchange for I.O.U.s in the form of Treasury notes and that this is a "good" exchange overlooks the Ponzi-scheme nature of the exchange. At some point the notes become due and payable in real goods and not in more flim-flam paper. At that point the USA loses its 'sovereign nation' character, as many a third-world nation has done in the past.

    The US survives this situation at present because it provides the world with a "reserve currency", namely, the US dollar. This is a precarious situation that is dependent on the US maintaining military superiority in the world. This "Might make Right" postulate, in the case of the USA commenced shortly after independence was achieved, and it advanced greatly in the aftermath of the Great War (WW I) as the USA imposed conditions of military parity upon the Great Powers. In the wake of WW II, this military dominance increased and the US dollar displaced the UK Pound as the world's reserve currency. Mismanagement of the US debt position led to depreciation of the dollar and rising inflation, but there was no alternative at the time to the US dollar as the reserve currency and the Ponzi-scheme nature of US debt continued apace.

    Today, the situation is alike the situation leading up to the Great War. The PRC is challenging the US influence in Asia and Africa, and it is making inroads in Europe and South America. The imbalance of trade between the PRC and the USA is funding these developments.

    On terminology, steel and aluminum are semi-finished products, not raw materials. The raw materials are iron ore and bauxite, respectively. Tariffs seldom lead to exclusion of imported products, and in the case of steel and aluminum, imports will continue to arrive in the USA albeit at somewhat lower annual volumes. The principal effect of tariffs is to raise domestic prices for domestic producers. Higher prices lead to increased investment, if the returns are such that economic rents result from the investment. The tariffs are an implicit tax on consumption, but the impact of the tariffs on consumption is a function of the price-elasticity of demand. As an economist, you can work that out for yourself.

    To determine the effect on US employment, one would have to run the numbers through a model of the US economy. The answer to the question is not straight-forward.

    Wilbur Ross, Commerce Secretary, states that the impact on the price of a domestic-made automobile is a few dollars added to the manufacturing cost of the car. No one else seems to have a better estimate that this writer has heard of yet. If you know of any, pass it along--Wilbur will be happy to 'eat crow'.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.