Tuesday, December 4, 2018

Flowers not tariffs

I wrote a little commentary on trade for The Hill, which they titled "The US should give China Flowers not Tariffs." Chocolates too.

Source: The Hill
(The facial expressions in the picture are priceless) 

The US should Give China Flowers not Tariffs

Trump and Xi met, and declared a 90 day cease fire. Where will this end? It’s hard to forecast. Our commander in chief is less predictable than the stock market. But we can opine on what should happen. And we can look for interest — what is in everybody’s interest to have happen? 

That answer is clear: Come to a quick deal, declare victory, and get back to work fixing real economic problems. China makes some commitments about intellectual property (reasonably good for both sides, though not as important as all the fuss makes it seem); China makes some promises to buy American goods (crony capitalist mercantilism, but it makes politicians feel good); the US announces the 25% tariffs are off the table. Both politicians announce a great triumph. In sum, roughly what happened with NAFTA. Better still, we could do some reciprocal opening: repeal the 25% tariff on pickup trucks, and our own restrictions on foreign investments.

Large additional tariffs would be terrible for the US economy. Tariffs are taxes. Traditionally anti-tax Republicans, fresh off a hard-won victory to lower corporate taxes, should get that. And these taxes are starting to bite. For just one example, GM’s decision to close car plants was not completely unaffected by the price of steel and aluminum needed to make cars. And the constant threat of tariffs is in some ways worse than tariffs themselves. Companies managing global supply chains need to know where and how to invest. Big uncertainty postpones those investments. The point of the corporate tax cut was to encourage companies to invest. The threat of tariffs undoes that incentive.

Big tariffs, with exemptions granted on a discretionary basis, are corrosive to our political system. The rest of the admirable deregulatory effort is trying to get government agencies out of this racket.  

If it ever was true that China stole our jobs, that’s not today’s problem. With a 3.9% unemployment rate, employers can’t find enough qualified workers. Our economy needs efficiency and productivity to grow, not protection for some and high prices for others.

The US economy is doing well, but it’s an iffy time. When does the long expansion end and the next recession come? Storm clouds are gathering. The stock market is dribbling down. Auto sales, home prices and sales are softening. America remains waist-deep in debt. With split government, there will be no significant economic legislation legislation for the next two years, and the House will do everything they can to stymie the deregulation effort. A big disruption of trade and immigration is a self-inflicted wound at a bad time.

It’s an even iffier time for China. Be careful what you wish for. A major downturn in China, which could well lead to financial crisis, could be just the spark for a global recession. 

What’s the long run goal? The right approach to trade is simple: zero tariffs or restrictions. Americans are free to buy from the cheapest and best supplier. Whether foreigners put in tariffs or not is irrelevant to that conclusion.

Trade is no different than new companies that can produce things cheaper or better. And just as hurtful to old companies and their workers, but we generally see that it’s unwise to stop innovation. Trade between countries is no different than trade between states, and we all recognize that tariffs between states are a terrible idea. 

Any money that goes to China to buy goods must — must, this is arithmetic, not economics — come back. It just comes back to a less politically favored industry. To the extent that trade is “imbalanced,” that means China works hard, puts goods on boats, and takes our government bonds in return. Would we really be better off if we worked hard, put the fruits of our labor on boats, in exchange for Chinese government bonds?  Paper and promises are cheap. 

If China wants to tax her citizens to subsidize goods for US consumers, the right answer is flowers, chocolates and a nice thank-you card, as you would for any gift. Even intellectual property protection is an iffy cause. Theft is bad. But if selling the technology isn’t worth the market access, US companies don’t have to do it. Moreover, much intellectual property protection is the right to just the kind of continuing profits that we bemoan at home, in the new worry about increasing monopoly. Just how enthusiastic are we about defending pharmaceutical companies’ right to charge whatever they want in the US for their intellectual property? 

If one wants to help the US economy, effort is far best spent at home — fix health care, financial regulation, the obscene tax code, zoning, occupational licensing, labor laws and on and on. The rewards are infinitely larger than any imaginable benefit from trade threats. 

US GDP per capita is $60,000. China’s is $9,000. The average American is more than six times better off than the average Chinese.  The air in Beijing is unbreathable. For the US to complain about China hurting us is like the captain of the football team complaining that a six grader cheated him out of lunch money. 

Even in the best case, tariffs and trade restrictions are zero sum — they make the US better off by making China worse off. There is no case that they increase the size of the pie. In fact they make us all worse off. Is this America’s place in the world? Would we send in the marines to take wealth from Chinese people to benefit Americans? That’s the case for tariffs.

The idea that we can use tariffs to threaten China into freer trade is dangerous. It’s hard to credibly threaten to do something that hurts us, without denying that it does hurt us, and then getting trapped doing it. It took decades to get rid of the trade restrictions of the 1930s. 

We should get a grip, set a standard for good self-interested free-trade behavior, and work with our allies to get China to obey the same rules. Such a China is far more likely to cooperate on security issues than one already at war with us over trade.


I left out lots of obvious pot shots. An obvious one: Sanctions on North Korea, Iran, Cuba, Russia,  and so forth are designed to.. reduce imports. So we are doing to ourselves exactly what we are doing to them.


  1. "work with our allies to get China to obey the same rules" This, unfortunately, is what the past administrations hoped to do and failed. The whole essay is very nice till the very end. The doctor diagnosed and told the patient just to watch the diet and exercise. Not helping.

  2. Spot on. But unlikely to be heeded by your current president.

  3. An import duties serve a dual role: a tax on consumption of the imported article, and a subsidy to protect or to promote a domestic industry or special interest.

    As duties go, the 25% import duty surcharge on imported steel is hardly remarkable. During the 1990s, the import duty on Mercedes Benz automobiles imported into Malaysia attracted a duty rate of 100% of the C.I.F. cost of the automobile. It didn't stop the importation of Mercedes Benz vehicles, or other German-made automobiles, at the time--it simply made the ownership of those brands more exclusive thereby improving the brands' cache as a status symbol of the affluent and the influential. Admittedly, it would be difficult, today, to envision PRC-made automobiles imported at a duty surcharge of 25% becoming as a result of the import duty more desirable than, say, a domestic Chevrolet, but it's idle to speculate on the notions that today's or tomorrow's American consumer will have in the way of automobile 'chic'.

    My career was made in manufacturing, from the shop floor to the executive suite. I don't share the author's point of view, but then I'm not an academic. Manufacturing plays an important role in the economy of most if not all developed countries. That those who control the finances of those countries fail to see the importance of a manufacturing sector is, today, a singular error that we will pay dearly for in the future. Yet, that is the situation we find ourselves in--manufacturing is outsourced to an unreliable and repressive country that shares not our values or our social outlook or our mores and norms. Whom would you place your trust in--those sitting to the left of the bouquets, or those sitting to the right of the flower display? If you value your liberty and freedoms, the answer is too obvious to need stating.

    If an import duty (or "tax", if you will) is the price to pay for a chance to correct that imbalance and improve the country's manufacturing capability and capacity, then amongst all the other useful and not so useful taxes we pay, it may well be seen to be in hindsight money well-spent. Regrettably, most people are current-period oriented--the future is too far off and uncertain to contemplate--businessmen, men and women of finance, and academics not excepted.

  4. "Would we really be better off if we worked hard, put the fruits of our labor on boats, in exchange for Chinese government bonds?"

    Well no, of course not, but that has never been the relevant question. Instead you need to ask something more like: "would swing-voters in the Rust Belt be better off?" That's a bit harder to answer.

    To avoid any misunderstanding, I am anti-tariff. My point is simply that if you don't want tariffs, you need to convince the people asking for the all the tariffs in the first place. And those people seem to very much want to be working long hours, for less than stellar pay, in less than ideal conditions, in order to build stuff to ship over to China. Or at least they think that's what they want, which I suppose amounts to the same thing in the end.

  5. "And those people seem to very much want to be working long hours, for less than stellar pay, in less than ideal conditions, in order to build stuff to ship over to China."

    I expect they want to make things to sell in America rather than hoping to ship to China. The reality seems to be that America is borrowing a lot of money from Asia and Europe and that when, for example, Japan lends a billion dollars to the US Federal government, it does not ship over bales of yen, it sends a boat load of cars or sends electronic components to China which then sends a boatload of cellphones.

    The burden of international capital flows falls primarily on tradeable goods sectors. If the United States wants to cut its merchandise deficit in a meaningful way it is going to have to stop with the international borrowing.

    1. That's all correct of course, but the point is that I don't think the people asking for the tariffs care. They just want to make stuff, in the same places where they (or their parents) previously made similar stuff. And they think big tariffs will help that come to pass.

      There are four choices here: (1) find a way for those folks to make the stuff they want to make without tariffs; (2) find a way to convince those folks they would be better off not making the stuff (note "they" not "we"); (3) realign political factions so the votes of the people who want to make the stuff no longer decide U.S. elections; or (4) impose tariffs.

  6. "We should get a grip, set a standard for good self-interested free-trade behavior, and work with our allies to get China to obey the same rules. Such a China is far more likely to cooperate on security issues than one already at war with us over trade." -JC

    Precisely. The TPP trade agreement was a step in that direction. Too bad, the President who speaks with forked tongue ripped up the agreement and sent out a very negative, damaging signal about the reliability of contracts with Americans. -Erik


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