Sunday, March 04, 2018

Why Tariffs

If you want to blow up the global order you need help. The USA could quit NATO, the WTO and the UN, but these organizations might survive and become anti-American. Not likely, but possible. If instead other countries do the same as you, quit NATO, the UN and blow up the WTO, then those institutions are well and truly dead.

Free traders make the argument that free trade is always good and therefore you should not retaliate. If country A passes tariffs, country B should do nothing because taxes are paid by consumers. Country A harms itself, country B should not be stupid. Since countries always retaliate, we can posit two theories: free trade theory is wrong or countries/voters are uniformly stupid. However, you'd expect at least some non-democratic countries such as supposedly smart China to not retaliate, since it's being run by smart economists who don't need to win electoins. Yet, I know of no example. Nobody believes free trade theory in practice.

Free trade theory rests on the idea that if your car factory moves overseas, the plant and equipment are sold at market prices, the machines turn into computers and the workers become software engineers. Instead, the factory equipment is sold at a discount or rots, the owners don't open a new company but instead invest their capital in the overseas plant and in building a supply chain to import products, the workers try to find jobs with similar skill requirements, but if none exist, they end up earning far less or on long-term unemployment. Finally, the web of businesses that supply a car company: engine makers, tire makers, research, glass makers, paint, seat materials and on and on, migrate to the source of production.

China and Japan have advanced commercial aviation industries largely because they told jet manufacturers: if you want us to buy your planes, you have to build some factories here. They slowly build up suppliers, force technology transfers, force foreign makers to use local suppliers, until they have all the pieces. Then they start building their own planes and stop importing yours. Congratulations on hitting your quarterly targets for a decade or more, but now you have Chinese and Japanese competition taking away Asian markets and soon will be taking away the North American and European markets. And free traders will say why do we even need to have Boeing when we can import cheaper and better Chinese and Japanese jets? And all the engineers, and suppliers, and aluminum makers, and all the supporting companies all the way down to restaurants and janitors become poorer.

Trade policy supports this because the government does nothing to protect domestic business from foreign governments. If Boeing refuses to play ball, Airbus will play ball, crush them for a decade with much greater sales, and 10 to 15 years later, Boeing still has to face Chinese and Japanese competition.

Trump said winning a trade war is easy. He's wrong and right. Wrong if he means painless. Trade wars disrupt economic activity, it's not the case that the U.S. immediately wins from a trade war. Easy because the U.S. already lost the last trade war. Factories moved from the USA to overseas. Whatever you want to theorize about the cost of a trade war, it will involve production returning to the United States. Factories will open, employment will rise. The opposite will happen overseas. The US has been drinking Coke laced with iocaine powder for 40 years.

When jobs and production and employment return to the USA, free trade theory will be destroyed. Free trade theory isn't entirely false, autarky is not a good strategy, but it is a good strategy to maximize the productive capacity of your own nation, in whatever industries you can dominate, before considering imports.

America's enemies operate through a web of multinational institutions. Those institutions were designed for America to dominate the world and defeat the Russians in the Cold War (the U.S. banned trade with the U.S.S.R. and it didn't end well for the U.S.S.R.). Those institutions have now become a noose hanging the American people and a tool for oppression of anti-globalists around the world. The institutions are riddled with globalists. They are riddled with people who believe free trade theory and open borders. There is no managerial class of global bureaucrats ready to step in and lead new multinational, nationalist institutions that defend protectionism and borders. It took total victory in a world war plus the enemy refusing to participate, to build the institutions in the first place. WTO delenda est.

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