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.