Koopman: We need peaceful trade, not tariffs

Roger Koopman

Some bad ideas, despite centuries of consistently negative consequences, come back to haunt the human race over and over again. The economic warfare of “protective” tariffs is one such bad idea that belongs in the dustbin of history, yet incoming president Donald Trump has given it a veneer of patriotic polish, while trotting out all the tired pro-tariff cliches that have been proven so wrong for so long.

When a bad idea appears to have eternal life, you can bet its life support is coming from two major factors: (1) widely accepted myth and (2) powerful special interests. The tariff myths are many, but the least obvious – and most pervasive – is the belief that tariffs are assessments levied against foreign countries, their producers and foreign-made goods.

But in truth, foreign producers aren’t the ones who bear the cost. Who foots the bill for an American tariff on a foreign good? YOU DO. It is in essence a consumer tax that lands squarely on your family budget and reduces the buying power of every American’s wages. You are forced to either pay the extra sticker price of the foreign good or the higher cost of the “protected” American product.

I call it The Tariff Racket, because in the long run, the only one that comes out ahead is the government itself. Think about it. Say you’re about to buy a foreign product that normally costs $100, but thanks to the Trump 25% tariff, you are now paying $125 for the same item.

The producer still gets $100. The government gets the $25. You get the same product at an inflated price. Now think of this on a worldwide basis, as a hundred or more trading countries patriotically retaliate with tariffs of their own. What you have is a massive wealth transfer from the people of those countries to their governments. Consumers get smaller. Governments get bigger. That’s the net effect of so-called “protective tariffs.”

Another prevailing myth is that American jobs and wages are protected by imposing tariffs. But in reality, tariffs merely prop up companies that are already noncompetitive compared with their foreign counterparts.

Struggling businesses that need protection are, by definition, businesses that are less efficient, less productive, and less capable of creating more jobs and higher pay on their own. The labor and financial capital that sustain these industries could doubtless be put to better entrepreneurial use. But instead, these powerful special interest lobbies demand – and get – tariff protection that shields them from healthy market competition. Competition that would either make them better companies or replace them with domestic industries that, within our unique American setting, can produce more economic output and more employment at lower consumer cost.

There are innumerable examples of this very process throughout our history, including where entire regions pivoted away from certain industries (like textiles) into other forms of manufacturing that was competitive and profitable.

Conservatives love to talk about “free markets,” but not so much about free trade. Yet what is a market but a platform for trade -- for unencumbered transactions between willing sellers and buyers, in their mutual self-interest? Free trade and free markets are interchangeable terms.

Why then, do politicians proclaim they want free markets within our own borders, but managed markets, walled off and weighed down with tariffs, everywhere else on planet earth?

Philosophically, they can’t have it both ways. The popular mantra on the right has been “fair trade, not free trade.” If you’re going to say that, then to be consistent you must also say, “fair markets, not free markets.” It’s top-down government control in both cases. By its very nature, free trade IS fair trade – nationally and internationally.

This brings us to another widely-accepted fantasy – the presumed national harm from so-called “trade deficits.” Not only is the harm a myth, so is the term itself. In a free trade, free market environment, there is no such thing as a trade deficit, whether it’s buying and selling between New York and Namibia, or between New York and New Jersey.

By definition, trade involves a willing seller and a willing buyer, for the self-interested benefit of each. Parenthetically, those transactions will also enhance the economic well-being of their respective communities.

But that’s not the point, nor the incentive behind the trade itself. Whether you are trading Chinese yuan for American soy beans or Federal Reserve notes for Chinese computers, a beneficial trade is a beneficial trade. Fiat “money” is traded for hard goods. As long as there’s no fraud or coercion, “trade deficit” is a phantom. It doesn’t exist. It can’t. Again, consumers are by far the biggest beneficiaries of unburdened free trade.

Invite the isolationists and tariff warriors to kindly explain to us how an American consumer who saves $5,000 buying a foreign car, or $500 buying foreign electronics is hurting his country. Is driving a Subaru really unpatriotic? Or once again, does basic economics teach us that free trade benefits everyone? That $5,000 the consumer avoided spending on a car will in turn be spent in local stores and restaurants, buying American made goods and American grown food.

Meanwhile, the income other countries receive from American purchases comes back to us in the form of foreign investments that help relieve the recession-producing impact of our massive federal borrowing.

History, as Patrick Henry put it, is a “light to our feet.” America’s tariff train wrecks date back to our early days under the Articles of Confederation, when politically powerful merchants convinced their state legislatures to place heavy tariffs on competing goods from neighboring states.

The result was economic disaster, with “infant” industries – the very businesses tariff promoters claim to benefit most – being harmed the greatest by the closed-off markets and growing interstate animus. Only by the inclusion of the interstate commerce clause in the new Constitution was the nation cured of its internal protectionism.

Yet America hadn’t yet learned that international free trade was just as essential to our future prosperity. The disastrous Smoot-Hawley tariff bill of 1930, passed at the beginning of the Depression to protect American industry and workers from the “ravages” of free trade, had the predictably opposite outcome.

Our “friendly” gesture of telling the world to stick their products up these noses, resulted in 25 of our biggest trade partners (read: buyers of American goods) telling us to do exactly the same – retaliating with massive tariff barriers of their own.

What this super-nationalistic stupidity accomplished was to make the Great Depression much deeper and longer – especially on Americans. I grant that tyrannical regimes that make slaves of their citizens, steal our patents, launch cyber-attacks on our shores, invade our borders and threaten our national security present serious challenges.

But the goodwill and interdependence created by trade, nation to nation, people to people, has a way of bringing the world and its people closer together over the course of time. We can’t be naïve’ about the goals and behaviors of totalitarian countries. But we must remind ourselves that tariffs always heighten international tension and conflict. Trade wars precede shooting wars, and in the wise words of economist Ludwig von Mises, “When people and goods cross borders, armies do not.” That’s probably the most important argument of all.

President-elect Trump has a lot of good ideas, but tariffs and threats of tariffs are not among them. Let’s try peace and prosperity – through trade -- instead.