Matthew Cunningham-Cook: Five Reasons Tariffs Are Great

Yves here. We are running the risk of getting ourselves exiled from the group of non-economists that economists occasionally deign to talk to by running this post. Advocating tariffs is seen as quackery.

However, in reality, the naive economic view that “more open trade is every and always better” is unsound. It’s based on the faulty premise that moving closer to an unattainable ideal state is preferable. But that notion was debunked over 60 years ago, in the Lipsey-Lancaser theorem, in their paper, “The Theory of the Second Best”. It found that moving closer to that unachievable position could make matters worse, not better, and (gasp!) economist and policymakers needed to assess tradeoffs, and not rely on simple-minded beliefs. And the example Lipsey and Lancaster used was in trade, a specific example where the country liberalizing trade would wind up worse off.

In fact, economists are now willing to make more nuanced arguments around trade restrictions. For instance, many development economists argue, contrary to the conventional wisdom of 15 years ago, that developing countries do better to restrict imports to promote the development of key sectors, as well as the growth of a more balanced economy (as in having the consumer sector grow in tandem with the export sector, as opposed to being strongly export led).

But how is this argument relevant to the US? Some parts of America have more of a third-world quality than our cosseted coastal elites realize, and it’s not hard to see that they would benefit from protection, particularly if the US had a national policy to promote certain industries. But the US only does industrial policy by default, and some of the current winners, like the financial services, healthcare, and the military-surveillance complex, are not about to cede their privileged position.

Mind you, I don’t agree with all the arguments made in this post. But it’s still useful to provoke debate on what comes close to a taboo in economics.

By Matthew Cunningham-Cook, who has written for the International Business Times, The New Republic, Jacobin, Aljazeera, and The Nation and has been a labor activist

In the debate surrounding the TPP and free trade generally, the emphasis placed by critics tends to be on the clearly counter-democratic nature of the deals–investor state dispute settlement, and regulatory cohesion that lowers standards across the board, to the benefit of large multinationals.

Less discussed is the argument deployed most frequently by free trade advocates: the advantages of tariff and entry/exit barrier elimination.

And interestingly–it’s quite rare for progressives to advance tariffs as legitimate ways to stop deindustrialization, limit the power of the financial sector, and raise revenue. But there’s a reason why Wall Street hates tariffs so much. The Economist, the pied piper of the owner class, is obsessed with tariffs, always fearful of a return of Smoot-Hawley, the famous 1930 tariff that is a consistent bogeyman of right-wing economists of the Milton Friedman variety. Indeed, in a 2008 article, they quote Thomas Lamont, then a partner at JP Morgan, as saying “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff.”

The decision by progressives to focus exclusively on income and corporate taxation and not tariffs and export taxes is a mistake. Here’s why:

1) Tariffs and export taxes slow down the speed of capital.

As I wrote in November, what Wall Street has always desired is capital that can move at the speed of light. Critical to Wall Street’s success in the last 25 years is its ability to externalize–moving capital that prior was reinvested in Europe and the United States to tax shelters and to (partially) industrialize places like Mexico and Vietnam.

That’s exactly why Wall Street hates tariffs and export taxes. Because they limit the ability to move capital and goods around at will to maximize profitability.

In a way, tariffs perform a similar function to a financial transactions (Tobin) tax: it places sand on the gears of international capital, limiting the ability of banks and hedge funds to manipulate international commodity and capital markets.

2) Tariffs and export taxes promote industrialization.

Let’s list some great industrial powers–the UK, the US, Japan, and China. How did such industrialization come about? Very, very high tariffs. By isolating the domestic economy from countries with a higher level of industrialization, it allows for the internal means of production to develop without the specter of commodity-dumping from more advanced nations.

There’s a reason why Britain engineered the infamous War of the Triple Alliance against Paraguay in the mid-nineteenth century–Paraguay’s decision to move towards autarky (basically no foreign trade whatsoever) would inevitably lead to it becoming an industrial powerhouse with the capability to challenge–at the time–Britain’s unquestioning dominance of South America.

3) Tariffs and export taxes promote food stability and local supply chains.

It’s the great, barely-told story of the 1990s–the massive migration of Mexican farmers displaced by the dumping of heavily subsidized American grain on the Mexican market. NAFTA’s mandate that Mexico abandon tariffs on grain forced millions of Mexicans off of the land they had tilled for generations.

In another example, as a condition of allowing Jean-Bertrand Aristide to return to power in Haiti, the US mandated that Haiti lower its rice tariff to 5%–completely displacing Haitian rice farmers who could not compete with the grain-dumping from the United States.

For all the talk about local economies, few–if any–advocates have actually argued for the types of policies that allow localized economies to flourish: barriers to entry and exit. Local economies cannot compete with exogenous pricing structures, so the only way to make them sustainable is to separate them via tariffs and export taxes.

4) Tariffs and export taxes are ecologically sound.

Let’s be clear: the international commodity distribution system is the driver of the climate crisis. Transporting massive amounts of goods around the world constantly requires a huge amount of energy and creates an absurd amount of toxic waste. And then there’s artificial deflation of the actual cost of products because they are produced in countries with little environmental regulation–the radio example that Annie Leonard discusses in the must-watch Story of Stuff.

Were the United States–the world’s largest consumer–to drastically decrease the amount of imports, the result would be an ecological boon. A huge amount of US imports are socially unnecessary, involving a colossal degree of waste that is not internalized into the price.

A similar story exists with exports from the US–a massive reduction could only be a good thing for homo sapiens, a species beset with multiple and converging ecological crises. The top ten list of US exports has oil clocking in at No.3, aircraft and spacecraft at No.5, and plastics at No.8. All three industries need to be significantly reduced in size for humanity to have any chance of surviving the climate crisis.

5) Tariffs stabilize employment and communities.

You can tell that there’s really no intellectual justification for finance capitalism when the best they can come up with is that it engages in “creative destruction.” Who in their right mind would want their system for resource allocation to be based off of “destruction”? Alfred Nobel and other associated war profiteers, but really nobody else.

Drive through the Rust Belt–or take a stroll through the South Bronx–and you’ll see what “creative destruction” looks like.

But because tariffs limit the ability for Wall Street to offshore capital and manipulate the commodities market, high tariff environments mean that unionized plants stay open and people continue to have stable, living wage jobs and community.

All five reasons, combined, demonstrate that any Bernie Sanders-style discussion of reducing inequality and raising revenue must include discussion of significantly increasing tariffs and export taxes.

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  1. Stephen Gowan

    Except for the fact that your idea kills whole sectors of the economy that can’t exist without exports like pretty much ALL of Agriculture.

    1. Norb

      An agriculture focused more on building strong local networks seems like a good idea. Better investment all around and in the long run more efficient and resilient in crisis situations.

      It seems US agricultural policy the last 70 years has been to convert from self sufficiency to export dependency.
      Good for the large agribusinesses not so good for small holders and citizens in general.

      Yes, lots of cheep food is made available, but at what longterm cost? We are feeling the negative effects of this export policy by the growing poverty all around us.

    2. craazyboy

      I see this must be the economics joke thread. Sure, with no demand for food in the US, we MUST export all our food. And if it takes corporate welfare for BIG AG to stay solvent from one growing season to the next, then so be it.

      Also too, Smoot -Hawley. 1930s America, the only industrialized country in the world after WW1, pissed off our trading partners with import duties. So they did retaliatory import duties. To this day, economists implore us not to repeat that mistake, and in fact, NO IMPORT TARRIFS is Commandment #1 chiseled in stone in the Neo-Liberal 10 Commandments handed down to us mere mortals by Moses Friedman. Tho there is some dispute over the historical origin. Could have been Moses Mises or Moses Hayek.

      1. Vatch

        At the time of Smoot Hawley, the U.S. was a net exporter. Retaliation against the U.S. tariff really did have an effect. Today, the U.S. is a net importer (big time). If some foreign governments choose to retaliate against U.S. tariffs, so what? The U.S. will still benefit from the tariffs.

        1. craazyboy

          That was exactly the case then, especially after Europe leveled itself during WW1. Of course the case now has changed. Except today one would have to conclude that Neo-Libs don’t want the US (in it’s entirety) to benefit from tariffs. They have a better place for the free trader money to go. Plus complain about all the lazy Americans that just want handouts rather than starting up their own company (Horatio Alger did it!), have the wrong job skills, want more or any pay, would like to know what their weekly work schedule and location is in advance, don’t pay income taxes, etc, etc, etc…

      2. TG

        One is reminded that in the 1930’s America was an autarky. Foreign trade in total was perhaps 5% of GNP (which used to be essentially the same as GDP). The Smoot-Hawley tariff first of all could not have caused the great depression, because it occurred afterwards. It also could not have made it worse, because the magnitude of foreign trade was trivial. It’s as if today we banned imports from the planet Mars: so what?

    3. Uahsenaa

      If there’s any sector of the US economy that could shrink by half, it’s ag. Setting aside how American agribusiness has basically obliterated heirloom seed stocks in East Africa, the US overproduces agricultural products by a staggering amount. And how is this groaf miracle achieved? Why, by pumping ground water day in and day out onto otherwise arid California land. This, in turn, requires the increased use of fossil fuels to power the enterprise as well as BOTH transport the overproduced junk to market AND transport it to the dump, because supply overwhelms demand by an order of magnitude.

      Here in Iowa, corn is so completely overproduced that we turn it into sugar (HFCS, which is in almost every sweetened drink) and fuel.

    4. Pespi

      A non export focused ag sector would be great for sustainability. If I was appointed Bernie Sanders secretary of agriculture, I’d increase inspectors hundred fold and promote sustainable land use. We’re consuming mycotoxins and pesticides like smithfield pigs, and we’re depleting our soils. We’re going to need all the topsoil that we have as the climate gets worse. There’s also going to be a zero point for cheap phosphorus that we need to plan for.

    5. Synoia

      like pretty much ALL of Agriculture

      Oh, the oil dependent, topsoil depleting industrial mono-crop, methane producing (cow fart) business?

      And do what, revert it back to growing health food?

    6. different clue

      How much agri-commodities are imported into the US? How much agri-commodities are exported out of the US? If agri-imports were banned, would American farmers who are now forced to export through the deprivation of their domestic market be able to produce for the domestic market those things which were banned from being imported?

      Also, how much agri-bulk commodities for export involve waste and destruction in growing them? How much of the Gulf of Mexico dead zone is due to the growing of exported corn and soybeans? How many lives did subsidized Midwest corn destroy in Mexico after NAFTA?

  2. Vatch

    in reality, the naive economic view that “more open trade is every and always better” is unsound.

    Indeed. The University of Cambridge economist Ha-Joon Chang has written favorably about tariffs.

    1. Jack Heape

      I have read several of Ha-Joon Changs books. He makes a persuasive argument regarding the need for tariffs, particularly in an immature economy.

      1. oho

        Unfortunately for Professor Chang, in the world of hollywood-style TED talks, you need to be a rock star stage presence, native English speaking skills and a copious amount of black turtlenecks for your ideas to go viral among the intelligensia.

    2. PlutoniumKun

      Yes, he pointed out that (just as with most industrialised countries in Europe and the US), tariffs were absolutely fundamental to the highly successful industrial lift-off of South Korea, and Japan before that. But of course they have to be part of a focused industrial policy aimed at developing strategic industries.

      He seems to deplore the recent changes in South Korean policy to a more western based open system, but it seems to me this is a natural progression – once you’ve achieved a certain industrial lead and economies of scale, then you are more likely to benefit from open trade at the expensive of less advanced countries.

      1. different clue

        But if your investors invest their money in shutting down the industrial economy-of-scale lead industries in your country, and relocate those whole entire industries to The Peoples’ Republic of Slave Laborstan, do you still benefit?

    3. TheCatSaid

      Thanks for mentioning this outstanding economist. His communication skills are superb–both in interviews and in his books. He’s not afraid to point out the many naked emperors/economists running around these days.

      One concept that was novel for me (as a non-economist) was that different economic theories were appropriate depending on the specific situation, and that it was a fundamental erroneous tendency for economists to tend to be most familiar with one and thus promote one at the expense of all the others. He advocated for economists from differing schools of thought working together more often, to broaden their perspective.

  3. Paul Tioxon

    The current practical reason for support of import tariffs is solar photo voltaic panels, PV Solar panels placed on roof tops and in fields as large scale solar farms. In 2010, in response to the brutal, deadly air pollution generated by the rapid industrialization of China, the CCP decided it had to start a commitment to initiate a power production from non-polluting, meaning mostly non-coal burning power plants. A $45Bil investment in the construction of PV factories launched a world wide drop in price of solar power and placed many non-Chinese competitors into bankruptcy. The most famous in the USA being Solyndra. What was the worst for American based manufacturing was the destruction of Solyndra before it could really make an impact on the public, it certainly made an impact on not only solar companies, but observers in hope of some life signs for a return of American manufacturing in the 21st Century.

    The Solyndra factory was the largest and most advanced state of the art facility, the envy of other PV makers. If it could succeed, more capital would be attracted to the industry at the scale needed to drive down costs for every square inch of the USA, making PV power equal to or cheaper than coal fired power plants. As we know, Solyndra was put out of business. In response to this disaster, the US government has started and repeatedly upheld anti-dumping tariffs.

    The U.S. International Trade Commission (ITC) has voted to uphold earlier findings that Chinese and Taiwanese photovoltaic manufacturers have been saturating their market with low-cost photovoltaic (PV) panels.

    The ruling follows a similar one last month by the Department of Commerce (DOC), which also found the two nations were saturating the market with low-priced PVs and should be penalized. The ITC has the power to impose tariffs or outright ban the importation of goods to the U.S. that infringe on fair trade.

    In line with DOC’s ruling in December, Chinese PV modules will be “severely punished” with minimum tariff rates starting at 70%; the rates for Taiwanese PV manufacturers will range from 11.45% to 27.55%.”

    The above link has a discussion of world wide anti-dumping tariffs against China over solar PV. The US, Europe, Canada, Australia and even India for a period all investigated and most even imposed tariffs to protect domestic industries. The 2nd link discusses mostly Australia, but goes into some of the common sense details of protectionist policies why in practice it is important for nations to protect their internal capacity to develop new, critical industries, such as solar. No one wants a repeat of the Arab Oil embargo in the future coming from the Asia solar industry against the rest of the world. No strategic national policy wants that mistake to be repeated. Hence, anti-dumping right now in in the EU, The US and Canada.

    1. Jim Haygood

      ‘Chinese PV modules will be “severely punished” with minimum tariff rates starting at 70%; the rates for Taiwanese PV manufacturers will range from 11.45% to 27.55%.’

      Rock-bottom oil prices severely undermine the economics of alternative energy technologies, including PV solar panels.

      ‘Punishing’ Chinese and Taiwanese PV panel makers is an excellent way for the US to shoot off its own feet. Off to tank up the monster truck and crush some rocks!

      1. MyLessThanPrimeBeef

        Anti-dumping because they are dumping here and wiping out that domestic industry.

        Dumping leads lower prices for the consumers.

        Save the planet? Protect a domestic industry?

        Which one to choose?

        Well, how about 1> impose tariffs AND 2> corresponding amounts of rebate to buyers?

        Who is the winner under that proposal? Buyers and Nature.

        1. Paul Tioxon

          Maybe China should be using all of their solar PV output to offset coal plants coming on line in their own nation where the smog kills over a million people a year. And maybe they can even close down some coal plants with their output.

  4. Jim Haygood

    ‘Paraguay’s decision to move towards autarky (basically no foreign trade whatsoever) would inevitably lead to it becoming an industrial powerhouse.’

    Ha ha ha ha … followed, no doubt, by Zambia and Cambodia. These ‘industrial powerhouses’ would’ve beat us to the moon in ’69 … and then where would we be?

    Today, behind its autarkic walls, North Korea is developing the breakthrough technologies that will propel it to industrial powerhouse status. Go, Comrade Kim!

    1. MyLessThanPrimeBeef

      Is the US big enough to be an autarky?

      I think we can be, in the same way Earth can be an autarky, even if we stop importing from Mars.

      Some people might say, oh, no, we need Mars and Jupiter

      And some might say, oh, no, American can’t go alone, just like Earth can’t.

      I think it all depends on one’s perspective. We have enough on Earth.

      1. Paul Tioxon

        The Political Economy of Planets is being earnestly examined in the Syfy channels latest offering, THE EXPANSE. Mars, Earth and the off world asteroid belt people who supply raw materials, including ice, are all caught up a tangled web. Clearly no autarky in that fable.

    2. Brett

      Seriously. There’s this annoying tendency in development policy discussions to focus on a handful of case examples that succeed rather than looking at the many areas where policy failed. So you end up with folks like Ha-Joon Chang bragging about how tariffs made industry in South Korea and the US, while most of the countries that tried out Import Substitution Industrialization had a couple of good years (often after currency devaluation), followed by stagnation and ever rising inflation. I’m not just talking about Latin America, either – many of the countries in southeast Asia tried out ISI-style policies in the mid-twentieth century, and they had the same pattern.

      1. Synoia

        Local Manufacture and Import substitution was the conventional wisdom up until the ’80s.

        It built local industries, and employed local people.

        And was not considered socialist.

      2. Matthew Cunningham-Cook

        Yeah, everybody considers Peronist and post-Peronist Argentina–1945 to 1975–to be an economic disaster!!!

        It’s worth noting that inflation is exactly the type of “exogenous pricing structure” I was referring to. It’s a man made phenomena, subject to decisions made by knowing agents. Am I the only one here who’s heard of John Kenneth Galbraith?

        1. Brett

          Call it whatever you want. Either way, it had a perpetual tendency to erode Latin American economies, and still does.

          Yeah, everybody considers Peronist and post-Peronist Argentina–1945 to 1975–to be an economic disaster!!!

          You mean that period of comparatively slow economic growth in the 1950s and 1960s compared to other Latin American countries, followed by stronger growth in the late 1960s and early 1970s when they privatized many national industries and invited in stronger growth?

          I’ll give you this – they did have a boom in domestic industry after heavy protectionism, and that led to higher productivity and wages simply because a factory worker usually has higher productivity than a landless tenant farmer. Of course, it also undermines your arguments – if Argentina had several decades of heavy protection for its “infant industries” to thrive, then why is it that they still stagnated and weakened once the protection was lifted? I guess the infants never grew up.

      3. Kaleberg

        So, is there actually a country that managed to industrialize without a tariff wall? There really aren’t any on this planet.

    3. Pespi

      I would call that a case of overblown rhetoric. However, the count of states that have been able to become ‘competitive’ and ‘industrialized’ without protective tariffs is low.

      If paraguay had become the leading manufacturing state of South America (not incredibly likely, but it’s possible that they could have created something Swiss in nature) or at least among them, things would be quite different.

      In the end, free trade favors floating international capital, tariffs favor holders of existing material capital. Neither are my good friends, but had I the choice at the time, I would have taken the second over the first. Now they’re largely indistinguishable and we’d need co-operatives or something of that nature.

      I don’t know if tariffs could be used to force floating capital to ‘settle’ in the way that european conquerers got their nomadic raiding cousins to settle down and become feudal lords.

      1. Brett

        If paraguay had become the leading manufacturing state of South America (not incredibly likely, but it’s possible that they could have created something Swiss in nature) or at least among them, things would be quite different.

        This. The Latin American countries under ISI had several decades of heavy protectionism, coupled with plenty of state support and importation of technology – and the same goes for the Southeast Asian countries that tried it out, like Malaysia and Thailand. So why is it that the “infant” industries never grew up, unlike in Japan and South Korea? There are some Mexican corporate giants, although it’s worth noting that they still depend on what is often very uncompetitive markets in their core businesses back home.

    4. Matthew Cunningham-Cook

      It’s worth noting that

      (1) North Korea has developed nuclear technology, by far the smallest and least industrialized state to do so without immense help from foreign powers. (Pakistan is, for your reference, over 800% larger population-wise than North Korea, and Israel’s program benefited from an astonishing level of help from the US.

      (2) North Korea, Zambia and Cambodia were autarkies only briefly. The UK was an autarky for 300 years.

      Your comment was devoid of any type of fair historical analysis. Letting our ideology get in the way, are we?

      1. Brett

        1) So what? That doesn’t mean anything other than that, amidst the broader failure, poorly run countries can muster the resources to have one or two bright spots. The Soviet Union had a top notch space program, too, amidst the economic stagnation and failure 1960s onward.

        2) The UK has never been an autarky.

        1. MRW

          2) The UK has never been an autarky.

          Sure it has. It can denominate its own debts in its own currency. Problem is David Cameron doesn’t understand this.

  5. TarheelDem

    The US textile industry was making these points (except for the one about environment) 50 years ago when the counterargument was that India (it was India then) needed a exporting textile industry in order to develop economically. Footloose textiles, that was the argument. Always footloose and always would ever be.

    Now the TPP, TTIP, and the other trade agreements in the mill seek to make everything footloose with conditionally competitive, constantly-changing, global supply chains — at the very moment that transportation energy is implicated as a major climate change agent.

    And we found out that global trade did not create the interdependency that prevented wars but created the chronic unemployment that aggravated bigotry.

    1. Minnie Mouse

      Everybody manufacturing their own textiles, for example, would maintain diversification of the total global supply chain, avoiding geographic concentrations and interdependency. Interdependency is always a source of contagion in any system and something to be minimized. A bug anywhere in the system can have nasty side effects.

  6. Minnie Mouse

    Economists hate firewalls, containment, and independent redundancy and love concentration of risk, single point failures, contagion across borders and maximum “systemic risk”, and deplore preemption of “too big to fail”. According to economists it always costs too much to build anything right in the first place, but it never costs too much to clean up the mess after the meltdown.

    1. Synoia

      Economist also claim to be able to predict the future with their “models.” Except for the incidence of Chaos, correctly predicted for our economic system — except for the Central Banker’s who claim to be able to “manage” chaos.

      Previously we had another work for those who claimed to predict the future “Charlatans,” and a second word for those who claimed to be able to manage chaos “Idolaters.”

      1. James McFadden

        Steve Keen does a pretty good job of demonstrating the flaws in neoclassical economics in his book “Debunking Economics”

  7. Wade Riddick

    While I don’t take issue with the general premise about international trade flows, the lack of dynamism in the author’s assumptions about technological change lead him to some unfortunate conclusions.

    In the last seven years, the cost effectiveness of utility-scale solar projects has improved dramatically. In just 2015, cost per watt fell 25% and looks to continue this path for quite some time like Moore’s law in semiconductor chips. Solar plants outbid fossil fuel generators in India and Chile recently. It’s only a matter of time before they start doing this in geographies with less sunlight.

    “The top ten list of US exports has oil clocking in at No.3, aircraft and spacecraft at No.5, and plastics at No.8. All three industries need to be significantly reduced in size for humanity to have any chance of surviving the climate crisis”

    This is simply wrong for #5 and #8.

    All-electric, battery-driven aircraft are on their way. If we don’t make and export large numbers of them then we won’t be able to replace any of the older polluting models. Why is it that so many environmentalists do not understand how technology changes and they constantly stumble into that right-wing fallacy of trading growth for health?

    As to the issue of plastics, if electricity costs continue to plunge like this, it will become far more economical at some point to pull plastics and fertilizers out of the carbon in the air instead of the fossil fuels in the ground. You won’t have to drill, pump and ship with elaborate infrastructure. You’ll just set an atmosphere processing plant up wherever there’s air. Cheap power will make that possible. You’ll clean the air by making plastics.

    “You can tell that there’s really no intellectual justification for finance capitalism when the best they can come up with is that it engages in “creative destruction.”?”

    Name a single important patent vital to any technological wave that’s come out of the financial industry in the last forty years.

    If you want something to worry about, consider that all our genes are a public good and we’re about to unless very cheap gene-editing techniques in an environment where financializers routinely confiscate public goods from us so they can substitute shoddy, over-priced private goods. Reducing the diversity of our genes – even the slightly hinky ones – increases the odds of devastating epidemics. Diversity blocks the flow of infectious diseases. It’s why you should never plant row after row of the same flower in your garden. It’s also the complete opposite of how modern agriculture works (and why letting weeds grow on fallow squares of your farm makes it more productive.)

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