Pat Buchanan Doesn’t Understand Trade, Tariffs Nor Even History

Pat Buchanan has been going on for decades about how wondrous tariffs are and if only they were brought back then things would be just peachy. Sadly, this all seems to be based on his not understanding trade, tariffs, nor apparently even history. That’s not a good set of recommendations for a policy about trade and tariffs, one that has been tried many a time in history.

Now, it is entirely true that if we returned to a more Hamiltonian policy era then we’d all be richer. But that wouldn’t be because we had tariffs which paid for government rather than an income or corporate tax. It’s because government would be confiscating a very much smaller portion of what we all produce to pay for itself. If the Feds took 3% of everything we do instead of the current 18% or so then sure, we’d all be richer. But that’s true however that tax is raised.

Other than that there’s not much left that Buchanan is right about.

From Lincoln to William McKinley to Theodore Roosevelt, and from Warren Harding through Calvin Coolidge, the Republican Party erected the most awesome manufacturing machine the world had ever seen.

And, as the party of high tariffs through those seven decades, the GOP was rewarded by becoming America’s Party.

Thirteen Republican presidents served from 1860 to 1930, and only two Democrats. And Grover Cleveland and Woodrow Wilson were elected only because the Republicans had split.

Why, then, this terror of tariffs that grips the GOP?

That’s the history bit that Dear Old Pat is getting wrong. Yes, it’s entirely true that post-Civil War tariffs were increased. It’s also true that the American economy boomed. But the one is not because of the other.

His argument is that, protected from foreign competition, American business was able to develop and grow into being world beaters. No, I don’t think this is true – I insist that behind tariff barriers companies stagnate. Indeed it’s standard economics that the medium to long term effects of trade are that the competition from foreigners is what makes the domestic companies stronger and more productive. But put that argument to one side. Assume that Buchanan is correct.

For his conclusion to be correct then it must have been true that the total costs of trade were rising in that time period. Total costs being tariffs plus transport. Only if the total costs were rising was protection rising. The tariffs are only part of the story. And as it happens total protection was falling over this time period. The falls in the costs of transport – for the US externally primarily the steam ship – were greater than the rises in the tariffs. Thus the US was becoming more open to trade at this time when industry was booming and growing to world class levels.

That’s not an argument in favour of trade protection now, is it?

The U.S. relied on tariffs to convert from an agricultural economy in 1800 to the mightiest manufacturing power on earth by 1900.

Well, it’s also true that what the US was inside those tariff barriers was the largest free trade area in the world. I’m the guy insisting that free trade makes places grow, Pat the opposite. And the place with more free trade among more people than anywhere else grows fastest? That’s a point in my favour, no, not Pat’s? Remember, the US Constitution expressly forbids the individual states from having tariffs between them…..that regulation is left to the Feds who have never imposed them.

How have EU nations run up endless trade surpluses with America? By imposing a value-added tax, or VAT, on imports from the U.S., while rebating the VAT on exports to the USA. Works just like a tariff.

No, a VAT does not work like a tariff. In no manner at all does it do so in fact. As every economist keeps trying to point out. Within the EU all goods and services, no matter where they’re made, pay the exact same rate of VAT. Well, OK, ladies unmentionables pay a lower rate than motor cars, that’s true, but all unmentionables pay the same rate, all cars. There is no difference made between domestic and foreign production. It’s entirely unlike a tariff therefore, the crucial component of which is that distinction made between home and foreign production.

Stuff made in the EU and sold in the US pays no VAT. Stuff made in the US and sold in the US pays no VAT. Again, we’ve no distinction by source or origin, this is entirely and completely unlike a tariff.

A VAT works in the same way as a sales tax. Stuff sold in California, wherever it is made, pays sales tax. Stuff sold in Oregon, wherever it is made, doesn’t pay sales tax – or collect it if you prefer. No one says this works just like a tariff because to say so would be stupid. As is true when we discuss a VAT. It isn’t a tariff, it’s entirely unlike one, to call it one is stupid.

The principles behind a policy of economic nationalism, to turn our trade deficits, which subtract from GDP, into trade surpluses, which add to GDP, are these

That’s to misunderstand the second page of the standard textbook explanation of trade deficits and surpluses. Even, of how we calculate GDP in the first place. Pat Buchanan’s far too clever not to understand this so I am forced into the opinion that this is malice, not ignorance.

Yes, here is one of the three methods of calculating GDP:

GDP = C + I + G + (X-M) where

C: Household spending on goods and services
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services

One way of reading that is that a trade deficit reduces GDP. Except, on the next page of every standard textbook they say it doesn’t. Because the C, I and G are all of those things which go on in the country. And quite obviously, some of the consumption, some of the government and investment spending, is upon imports. So, we’ve already counted all those imports. The X-M is necessary to make sure we don’t double count.

There’s another way of making the same point. For we’ve two other ways of measuring GDP:

The Income Method – adding together factor incomes

GDP is the sum of the incomes earned through the production of goods and services. This is:

Income from people in jobs and in self-employment (e.g. wages and salaries)
+
Profits of private sector businesses
+
Rent income from the ownership of land
=
Gross Domestic product (by sum of factor incomes)

There’s nothing there about imports or exports, is there?

Gross Value Added and Contributions to a nation’s GDP

There are three main wealth-generating sectors in an economy – manufacturing and construction, primary (including oil& gas, farming, forestry & fishing) and a wide range of service-sector industries.
This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. .
Value added is the increase in the value of goods or services as a result of the production process

And that’s the third method. Nothing about imports there, is there?

Note that, by definition, these three methods of calculation produce the same result. And we’re not using imports nor exports in two of those methods, are we? That is, they’re not relevant to the size of GDP.

So, Pat Buchanan is historically wrong, trade protection was falling, not rising, as American industry grew. He’s wrong about trade and the effect of it upon GDP and he’s even wrong about taxation and tariffs – a VAT is not a tariff. Being quite so wrong about everything – other than that growth would be faster with less government – isn’t a great starting point or an economic policy suggestion is it?

Nope, tariffs are still a bad idea. They make us poorer.