The problems with trade wars
There are few things economic populists love more than restricting trade.
Imports are the bogeyman blamed for every economic malady, from lost jobs to every small-town factory closing to recessions. If people just bought things made “here,” everything would be rosy and we’d be prosperous.
In 2018, then-president Donald Trump tweeted, “I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power.”
In other words, selling stuff to Americans is “raiding the great wealth of our nation.”
Trump launched trade wars, primarily with China, with tariffs on solar panels, washing machines, steel, aluminum and other areas. President Joe Biden hasn’t shown any desire to end it. If there’s one thing populist Republicans and Democrats can agree on, it’s that imports are bad.
I remember the line I heard frequently when I drove my first car — a 1985 Honda Civic — around town. “You’re putting Americans out of work by driving a Honda.” I wasn’t “putting anyone out of work,” but simply driving a quality, reliable car and rewarding the company that produced it with my money. Meanwhile, UAW halls prominently display signs that state “foreign cars not permitted.”
But it’s not imports that are bad. It’s the trade barriers themselves.
Imports are simply goods produced elsewhere, acknowledging that other countries may have a comparative advantage in the production of a good. Let them produce goods more cheaply, and let us focus on what we do best and export that to them.
The common retort is that “we don’t make anything here anymore,” and the example being many of the goods sold at Walmart are made in China and elsewhere overseas. But when was the last time you flew across the world on a plane made in China? Or used a smartphone engineered and designed in China or Mexico? That’s not a knock on those countries, but an acknowledgement they do some things well. China manufactures consumer goods cheaply, for example. We do other things well, like build airplanes, handle logistics and engineer high-tech goods.
Yet, the zeal for trade barriers assumes the stuff you buy at Walmart should be designed, assembled and manufactured in the United States, no matter how much more expensive it is for the consumer.
And that’s one of the major problems with trade barriers — they restrict choices and eventually make things more expensive for the consumer. They effectively have the goal of protecting producers from competition at the expense of consumers, as Frederic Bastiat so eloquently noted in the Candlemakers’ Petition.
The retort usually is, “I’ll happily pay a few extra dollars for something that’s made here,” but why waste higly-trained, highly-paid labor manufacturing T-shirts and toys rather than doing things that are more productive, while also lowering our standard of living because everyday goods cost 30–40% more.
But there are three major problems with trade barriers. One is higher prices for consumers. The other two are that they harm exports by inciting retaliation and preventing people in other countries from obtaining dollars to buy American goods. The U.S. currently exports $3.01 trillion of goods, amounting for about 12% of the GDP.
The first issue is that trade barriers harm consumers by restricting their choices and leading to higher prices, while also forcing domestic companies to manufacture goods when they do so less efficiently or at a higher cost than foreign competitors.
Let’s look at a simple example. We have two countries — Alpha and Beta. In Alpha, there’s a demand for 15,000 cars per year. Alpha Autos sells them for $20,000 at cost. While it has the plant capacity to manufacture 12,000 cars per year, it currently only sells 8,000 cars. Meanwhile, Beta Autos exports 7,000 cars per year to Alpha, which it sells for $16,000. Not surpisingly, the first 7,000 customers buy Beta’s cars because they are cheaper. The remaining 8,000 buy Alpha’s.
Everyone is happy, except Alpha Motors and its employees. It runs to the government, begging for it to do something to “save jobs” because it’s had to lay off 1/3 of the workforce. So, the Alpha government “does something.” It can impose a 50% tariff on Beta cars, which would increase their price to $24,000. Now, Alpha will open up its plants to capacity and manufacture — and sell — 12,000 cars at $20,000, while the remaining 3,000 customers, if they purchase a new car, will purchase Beta cars at the newly-inflated price of $24,000.
It could also impose a quota — let’s say it limits Beta Motors’ imports to 2,000 cars per year. So, 2,000 people can buy a $16,000 car and the remaining consumers will buy Alpha cars for $20,000. However, we now have 14,000 cars for 15,000 consumers, which means there’s a shortage, which will force the prices for automobiles up as 15,000 buyers compete with each other for 14,000 cars. The ones willing to pay the most will get the cars, and 1,000 consumers will be left in the cold.
This is reminiscent of the U.S. automakers running to the government to beg for help because they were struggling to compete with superior products being produced by Honda and Toyota, and having the government impose a quota on Japanese imports. The Japanese automakers got around the quota by building plants in the U.S. — which still weren’t enough to make the trade restrictionists happy.
In this scenario, Alpha Motors wins. It expands capacity, sells more cars, hires more workers and everyone is happy. Beta Motors loses, but the government and citizens of Alpha don’t care about them.
However, there is another loser — the consumer. Before the trade barriers, consumers were able to purchase cars for $16,000, and for no more than $20,000. After them, the prices shoot up. With the tariff, the lowest price one can buy a car is now $20,000 — a full 20% more than they could have purchased a car before. With lessened competition, there is no incentive for Alpha Motors to improve its quality or lower its costs, and thus its prices, so the consumer loses in another way. Even with the quota, the prices would shoot up significantly due to the artificially-imposed shortage, again, harming consumers by limiting choice.
The second effect of a trade barrier is the fact that it incites a trade war. One country imposing tariffs on another often invites retaliation. For example, the European Union is about to impose a 50% tariff on American bourbon in retaliation for 2018 American steel and aluminum tariffs. Such tariffs could cost U.S. distilleries more than $100 million in export business, which is unlikely to be made up with increased domestic sales. China has imposed tariffs on more than $100 billion of U.S. goods in retaliation for Trump’s 2018 tariffs on their country, again. One of the major causes of the Great Depression was the Hawley-Smoot Tariff and the retaliatory tariffs that ground worldwide trade to a halt.
While imports are $3.96 trillion, exports from the U.S. are $3.01 trillion. Trying to lessen the first number almost always involves lowering the second number, too, meaning there’s a net loss of jobs and consumer welfare. In fact, trade deficits are usually lowest during recessions and highest during times of high prosperity, blowing holes in the theory that imports cause economic malaise.
Another reason trade barriers harm exports is they prevent dollars from leaving the country and returning to purchase domestic goods. When Americans purchase goods from other countries, they sell dollars and obtain foreign currency to purchase said goods. Those dollars, now in foreign hands, can be used to purchase American exports. We need to import so people in other countries have the dollars necessary to purchase our exports.
We live in a global economy. Trade enhances our standard of living, allowing us to have access to a broad supply of goods from around the world for low prices. It also allows domestic producers to focus on what they do best and not necessarily waste labor and resources on goods and services that can be produced more efficiently elsewhere.
The main barrier trade restrictions provide is a barrier to prosperity. Free trade is the key that unlocks that door.