The Occasional Observer

By many ardent free-traders, there is a presumption that tariffs are universally inappropriate. I think the burden of proof for such a position would fall on those who would stand by such a universal statement, especially when there are many examples that run counter to the idea (countries that have seen their economies grow sharply despite the use of tariffs).

But I think it’s helpful to state a positive, and not just attempt to negate the other’s guys argument, so I opted to spend some time doing just that when blackhedd on RedState asked me the following question: "For what objectives do you think tariffs are a good idea"?

One of the primary distinctions drawn in the 19th century arguments over tariffs was between “revenue” tariffs and “punitive”/protectionist tariffs. Common sense dictated that at a certain level, foreign companies would still be willing to sell goods to the American consumer, even if they had to pay the US government for the privilege of doing so. I agree with this in principle: why should a company owned by Americans and employing Americans have to pay a (double) income tax to shoulder the cost of government, but not foreigners who seek to gain advantage by selling to our markets? Do not foreign exporters also gain some benefit from US government expenditures, such as on infrastructure, market regulation and law enforcement (allowing for a more efficient, less corrupt marketplace), and even to some degree, military readiness (global stability is probably a net positive for international trade).

Of course, there is the question of the connection between tariffs and higher prices to the American consumer. The answer to this question is usually given as a "yes" by the universally-anti-tariff crowd, without much further explanation. The "yes" is usually closely followed by the catch phrase, "tariffs are a tax on the consumer." In reality, it's a bit more complicated than that. It will have a lot to do with the goods in question, and price elasticity in the marketplace. In some situations, depending on the level of competition and the power of consumers in the market for a particular good or service, foreign producers will be able to pass on much of the cost, while at other times they will not.

Even where more of the tariff's costs are being passed on to consumers, the “tax” is twice as effective as opposed to traditional income tax. Not only does the indirect “tax” associated with tariffs put revenue in our government's pocket, but raises the price of certain goods, making it more likely that domestic producers will be able to competitively enter the marketplace, or improve the financial situation of existing domestic firms.

In those situations where price elasticity prohibits the foreign firms from raising prices, they will be forced to determine if they can still satisfy their investors' cost of capital requirements at lower prices, and either accept a reduced profit or leave the marketplace to domestic firms. Much like with the income tax, setting an appropriate revenue tariff level is more art than science. Lower rates are usually better than higher rates, and Congress has to figure out how to get a little wool without killing the sheep.

Protective tariffs, in the 30-50% range, serve another purpose altogether. At this point, you're pretty much telling the foreign manufacturer to pack up and leave. I think these types of tariffs are extremely counterproductive, and the only reason to even consider them is if another nation has already enacted an aggressive policy towards the US first. Even then, the goal is not to stop doing business with that country, but to help them see that a one-way street will cost them in the long run.

In the Cold War, Reagan's maxim "peace through strength" worked out: we never had to fight the Soviets (directly) because they knew we had the will and ability to win. If China knew that we had the will and ability to level the playing field with them, and mirror their practices (export subsidies, import tariffs, and I'll leave currency aside for the moment), my guess is their trading laws would become more liberal very quickly. Getting us to the place where, I think most Americans agree, we want to get to: trade with less government intervention than exists now.

-----------------------------
As an aside, it seems that any time the issue of trade and tariffs comes up, the words "Hawley-Smoot" come out. I offered this thought on the comment board at RedState:

The great apart about invoking "Hawley-Smoot" is that you don't have to say how the tariff was related to the Depression: people make the link and that is enough. My main problem with the way Hawley-Smoot gets thrown around is that it: (1) is seen as a proxy for all tariffs, and (2) is assigned a disproportionate share of the blame for the events of the 1930's.