We hold these truths to be self-evident: Tariffs are taxes, selective taxes imposed on buyers of goods that move across an international border into the country imposing the tariff.
These truths are less self-evident: Though taxes are paid by the buyer, they harm both buyer and seller by inhibiting the transaction. The transaction would not have occurred unless both buyer and seller (neither one the entity imposing the tariff!) felt they were better off. With the additional load of tariffs, an increasing set of transactions no longer have buyer and seller feeling they are better off, and business starts to cease.
Incidentally, since tariffs are imposed on selected goods only, they highlight some of the gross inefficiencies of government, which we only see when a Customs inspector reviews purchases in a foreign country to see whether the traveller must pay a duty, or are properly classified as that nearly identical thing that is exempt. And businessmen lobby furiously to get their industry exempted from the tariff, so that it appears to “punish” them, but doesn’t really.
Now, the United States has several problems with China:
- China steals intellectual property of U.S. corporations, reverse-engineering some products, insisting that companies manufacturing in China disclose their patented processes (which are then often copied), and looking the other way when duplicates of U.S. music and movies are sold.
- China is paving large numbers of atolls and islands in the nearby Pacific Ocean, in apparent preparation to expand its military footprint and inhibit navigation on the open sea.
The first violates the free-trade regime of the World Trade Organization, which should be redressed by the WTO itself. The second is a military problem, and if the U.S. believes it is a significant military problem, there should be a military response. The main response to date has been the U.S. deliberately sailing through waters that China hoped to wall off.
A third fact is that China sells the U.S. more goods than it buys. This is not a problem at all. Those dollar bills return to the U.S., as they must, perhaps through third countries. Chinese kids get student visas and pay for educational services, or the Chinese invest in the U.S., buying its bonds, stocks, and real estate. China essentially “buys the product” of American management and a safe place to store money. To the extent that China does not return the dollar bills, the exchange rates of the two currencies change to make doing so more rewarding.
Unfortunately, President Trump views this imbalance as an act of war, his constituency including a lot of American workers who made potato parers, now underbid by the Chinese (whose workers are not subject to the Department of Labor’s Wage And Hour Division and neither have to provide an Obamacare-compliant health insurance policy nor a non-threatening work environment for cross-dressers).
One could solve these problems. Instead, on Monday, the Trump administration imposed tariffs on China, and the stock market plummeted, anticipating an inhibition on trade and a likely reaction from China. The reaction ensued in 11 hours and the Wednesday market plummeted again, an odd surprise to an event that was already a certainty. (See China retaliates, slaps duties on U.S. soybeans, planes; markets skid from Reuters.)
The Chinese retaliation is highly political. It deliberately focuses on goods manufactured in states whose Electoral Votes went to Trump. And—
Tobacco and whiskey, for example, are both on Beijing’s list and are produced in states including Kentucky, home of Senate Majority Leader Mitch McConnell.
Trump is getting famous for bizarrely harsh opening moves, followed by backing off, his choir singing that the goal was simply to get everyone to the negotiating table for The Art of the Deal where Trump can win, win, win. (This is hardly an art, once the adversary learns your style and tunes out the overture.)
Unfortunately, though Trump may view damaging tariffs as an opening salvo in a war that achieves lasting peace without casualties, he is attached to a government with a sprawling, formerly dormant bureaucracy designed to maintain the damage and convince itself it is doing good. The shocking pull-quote from the article mentioned above is that
USTR developed the tariff targets using a computer algorithm designed to choose products that would inflict maximum pain on Chinese exporters, but limit damage to U.S. consumers….”The remaining products were ranked according to the likely impact on U.S. consumers, based on available trade data involving alternative country sources for each product”….
That is: The federal bureaucracy spent valuable computer time hoping to identify transactions which, if inhibited or prevented, would harm the foreign participant but not the other one. The computer identified countries that were “alternative…sources” for the American, but ignored the fact that the American had not chosen to buy from that country, and the fact that, once it becomes infeasible to buy from China, that country is likely to adjust its prices upward.
WILL CONSUMERS PAY?
Nice subheading by Reuters. Ya think? The real question is whether the Deep State, finally able to ply its trade of arbitrarily cherry-picking individual persons and companies for punishment under false assumptions, will relent even if the President decides to declare peace.
Spike – Chinese kids get student visas and pay for educational services What if Yanks don’t want their universities to turn into diploma mills for Oriental plagiarists? The universities love the bums on seats, but it’s not clear that Americans in general benefit from their HE institutions being increasingly oriented towards hordes of foreign students who generally speak English poorly, drag down standards, and cheat six different ways before breakfast. Might as well fire up the Xerox and start mass-copying degree certificates given the proclivities and aptitude of your average student Chinaman. or the Chinese invest in the U.S., buying… Read more »
So the sellers (universities) love the business, so too the buyers, obviously, though they might be riff-raff, but “Americans in general” do not? This is exactly the problem: the collective, or politicians claiming to speak for us, or you, proposing to impede trade that the traders both think is in their interest. Hordes of foreign students all speak English better than when they first arrived, or would speak it if they never arrived, or than their countrymen who do not study in America. Cheating and the threat to high standards harm only individual universities and are properly dealt with by… Read more »
This is exactly the problem: the collective, or politicians claiming to speak for us, or you, proposing to impede trade that the traders both think is in their interest Sure. It’s a philosophical question: is America the home of the American people, or is it a strip mall with an airport and a diploma mill attached? Ebay: the country? Given how assertively universities suckle the public teat, the American public does have a legitimate interest in what their colleges are up to. Personally, I wouldn’t be happy if it was my kids being crowded out by the Chinee. Also, I… Read more »
As you are countering my economics with tug-at-the-heartstring Americana, we are not going to get far. Fraud at an ITT Technical Institute does not tarnish Hillsdale College, because of branding. Your cheating “Chinamen” are nowhere near deprecating the entire Bachelor of Arts, though other factors may be. Sure, Academe is in bed with government, and has active quotas that are satisfied by admitting foreigners. However, in “I wouldn’t be happy if it was my kids being crowded out by the Chinese,” please change crowded out to out-competed, as even foreign students have to satisfy admissions criteria. You are that assembler… Read more »
They only have to buy the congress.
As they often say about Afghani tribesmen advising the U.S. military: You can’t buy them, you can only rent them.
‘if Yanks don’t want their universities’ – the universities are not theirs. They belong to some combination of foundations, entrepreneurs, individuals and corporations. The USA thankfully has a system of private property rights. ‘What if Americans don’t want their country to be owned by China’ – the country does not belong them. The people selling the shares and land have the protection of the law, and they can sell to whoever they like without some arbiter of the State coming in and saying ‘no you don’t’. If you would like the State to be able to dictate these things then… Read more »
“if Chinese ownership combined with geopolitics ever advanced to a national security threat, it would be trivial to convince Congress to expropriate their shares”
Not if, just to snatch a possibility (however unthinkable) from the air, congress creatures were influenced more by sources of financial emolument than by what Joe Sixpack thinks or by a putative security threat which could easily be dismissed.
Our posts crossed, but I dealt with this at the end of my post of 4:58 pm. Yes, any time one deals with Congress, there is the conflict between doing their job and appearing to do their job while actually feathering their own nests. We have no better alternative, and “ethics” legislation did not do anything except create yet another partisan battleground (and build databases on individual contributors).
Trump now tweets, “When you’re already $500 Billion DOWN, you can’t lose!” Supposing $10,500 billion from China comes through U.S. Customs, and $10,000 billion goes out to China, unbridled escalation of this trade war risks $20,500 billion; not minus $500 billion. That flow of goods is a lot of people’s jobs. The loss won’t be complete, as the people who lose their jobs will find other jobs and, as the USTR programmers believe, those unable to buy Chinese goods will find substitutes elsewhere. But it is a huge effort adapting to unnecessary obstacles placed by government, and locating the second-best… Read more »
Yes I am shocked that China was so stupid as to retaliate. It’s that old kindergarten game of “bet you can’t hit my hand” and snatching your hand away at the last moment, only you’re holding your hand in front of your face.
Paving over the Pacific? That’s ambitious considering how deep it is. Last I checked they were paving over the South China Sea which is barely slightly more than paddling depth.
Isn’t it rather simplistic to look at a US/China tariff war as if both nations had undifferentiated populations? Trump is retaliating to China’s government’s disregard of IP rights, which damages US businesses. So he wishes to cause problems for the Chinese government. US tariffs on Chinese goods are not going to hit US food or energy prices. The nature of Chinese exports is that much of it are discretionary purchases. Electronics, cheap consumer goods… Yanks are going to be paying a bit more for bling & buying less bling. Over in China, that’s going to have a destabilising effect on… Read more »
Sure. It’s a philosophical question: is America the home of the American people, or is it a strip mall with an airport and a diploma mill attached? Ebay: the country?
That is indeed a good question.
Thank you Tim.
I may just be getting dimmer in my old age, but
(at least my fingers are still clumsy) but… I reckon there’s more to life than maximising economic efficiency. I’m still terribly impressed with Milton Friedman and co, criticism of tariffs, etc. is legitimate, the State certainly remains a “fearful master”, but… Spike says You are that assembler of potato parers asking for the government to bar people who do it better/cheaper. Well, what if I am? Do we really want to make the free movement of goods, capital, and people our highest value? At any cost? Including becoming an offshore asset of China, Inc.? Including our homelands transforming into something… Read more »
I reckon there’s more to life than maximising economic efficiency. Indeed, I’m fast coming around to that way of thinking too, especially as much of the additional wealth gets spent on welfare programmes in the form of bureaucratic non-jobs for the middle classes. What is the economy for? Is it possible that adding another 0.1% to GDP at the expense of England being England, or America being American, is actually a bad deal? Indeed. The American economy has been torn from the heartlands of the US and shipped to China for the benefit of people living on the coast who… Read more »
No such thing. The American government is not at the beck and call of the Chinese (with which Trump is now playing hardball) but, if anything, of the disbursors of public benefits (about which Trump has been able to do nothing, not even enforce laws against welfare flowing to border-jumpers). There is more to life than measurement, but that does not call for doing away with measurement. But we each do our own measurement, and we measure against our own values. Buyer and Chinese seller each concluded that a transaction was in their interest. Arguing against this means imposing your… Read more »
Buyer and Chinese seller each concluded that a transaction was in their interest
In many, possibly even most, cases yes. But in other cases, possibly even most, this conclusion only comes about because the American government has distorted the market with excessive regulations and taxes.