Trade Wars are a Tariffic Idea

There has been a lot of bitching and moaning about Trump’s plan to impose tariffs on imported Steel and Aluminum.

People say that consumers will feel pain because prices will go up. But, they shouldn’t go up by the full amount of the tariffs. Domestic supply can increase and foreign supply will decrease/shift to the lowest cost producers. End user prices will rise somewhat, but by less than the full amount of the tariffs. Furthermore, the prices of these products are already volatile and subject to the forces of global supply and demand. After the tariffs were announced the price of steel in the US climbed to around $800/ton but it was over $1100/ton in 2008. If you didn’t notice the high price of steel 10 years ago then you probably won’t notice it now either.

According to this: “Production of a ton of steel generates almost two tons of CO2 emissions, according to steel industry figures, accounting for as much as 5 percent of the world’s total greenhouse-gas emissions.”   At the margin, a tariff on steel decreases global demand and is a form of carbon tax. Carbon taxes are often considered the most efficient form of anti-global warming policy. People who claim to be worried about global warming should welcome policies that will decrease global emissions, but as soon as any policy threatens even the slightest harm to the economy the environmentalists are nowhere to be seen. It seems that virtually everyone who claims to care about the environment is actually using it as an excuse to push for policies that they like for other reasons.

Tariffs have a long history in the United States:

File:Federal taxes by type.pdf

100% of Federal revenue came from tariffs until the 20th Century.  Some countries still generate a large amount of income from Tariffs. For instance, The Bahamas has no income tax and generates almost all government revenues from tariffs and also by taxing tourists. Both of those revenue sources have a great feature which is that they are partially paid for by foreigners. It is economics 101 that the incidence of a tariff will be shared between the domestic consumer and foreign producer. Consumer prices will rise somewhat and producers will sell somewhat less of the produce and sell it at a lower price. The difference between what the producers sells at and the consumer pays is the revenue produced by the tariff.

If the long term goal is a world of low tariffs and fair and free trade between nations, then raising tariffs has to be part of our strategy to make that happen. If we commit to never raising a tariff then foreign nations can impose tariffs on our goods with impunity. By doing so their governments can generate revenue from US citizens. In many countries US intellectual property rights are not well enforced. That is a massive tax on US IP holders that directly benefits foreign consumers. The goal of US trade policy should be to make sure that US producers and consumers are getting the best deals they can. If US producers are being taxed by other nations but their producers are not being taxes by the US then that is a net transfer from the US to the rest of the world. The US government should do what is in its power to minimize that.

The US is in a great position to exert its market power to make trade cheaper and freer across the globe. The US is the #2 exporter in the world (behind China) but according to this as a percentage of GDP we are around 150th on a list of 183 nations. Every other major economy (and most other minor ones) are much more dependent on exports than the US. The US economy is enormous and very diverse. We mostly just trade with each other, but because our economy is so large, selling things to us is critical for most of the rest of the world economy. In a trade war we can hurt the world more than the world can hurt us. Why shouldn’t we maximize that enormous leverage to get the best trade deals we can?

We spend $700 billion annually on a military to enforce our political and economic priorities around the world. At worst a trade war would cost a fraction of that (Total US exports are only $2 Trillion/year so they would need to be cut 35% to equal the annual cost of the military). Often the actual wars that we engage have unpredictable and negative long term consequences. Almost everything we do in the middle east seems to make it worse.  If a trade war succeeds in creating lower overall barriers to trade across the world then that is positive that is unlikely to have unintended side effects. In the worst case scenario, it is a simpler matter to return to the status quo.

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