Tag Archives: trade

The argument for free trade is half sound

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In 1900, the average tariff on imported goods was 27.4% and there was no income tax. Import tariffs provided all the money to run the US government and there was no minimum wage law. The high tariffs kept wage rates from falling to match those in the 3rd world. Currently, the average tariff is near-zero: 1.3%. There is a sizable income tax and a government income deficit; minimum wage laws are used to prop up salaries. Most economists claim we are doing things right now, and that the protective tariffs of the past were a mistake. Donald Trump claimed otherwise in his 2016 campaign. Academic economists are appalled, and generally claim he’s a fool, or worse. The argument they use to support low tariffs was made originally by Adam Smith (1776): “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry.” As a family benefits from low cost products, a country must too. How stupid would you have to be to think otherwise?

A cartoon from Puck 1911. Do you cut tariffs, and if so how much. High tariffs provide high wages and expensive prices for the consumer. Low tariffs lead to cheap products and low wages. Uncle Sam is confused.

A cartoon from Puck, 1911. Should tariffs be cut, and if so, how much. High tariffs provide high prices and high wages. Low tariffs lead to low prices for the consumer, but low wages. Uncle Sam is confused.

Of course, a country is not a family, and there are certain benefits in keeping manufacturing and employment here, in not exporting jobs and expertise. It is clear that some people benefit from a flood of cheap, imported products, while some folks suffer. Consumers and importers benefit, while employees generally do not. They are displaced from work, or find they must compete with employees in very low wage countries, and often with child labor or slave labor. The cartoon at right shows the conundrum. Uncle Sam holds a knife labeled “Tariff Revision” trying to decide where to cut. Any cut that helps consumers hurts producers just as much. Despite the cartoon, it seems to me there is likely an optimal, non-zero tariff rate that allows productive trade, but also provides revenue and protects American jobs.

A job-protecting tariff was part of the Republican platform from Lincoln’s time, well into the 20th century, and part of the Whig platform before that. Democrats, especially in the south, preferred low tariffs, certainly no more than needed to provide money for government operation. That led to a diminution of US tariffs, beginning in the mid- 1800s, first for US trade with developed countries, and eventually with third world as well. By the 1930s, we got almost no government income from tariffs, and almost all from an ever-larger income tax. After WWII low tariff reductions became a way to promote world stability too: our way of helping the poor abroad get on their feet again. In the 2016 campaign, candidate Donald Trump challenged this motivation and the whole low-tariff approach as anti- American (amor anti America-first). He threatened to put a 35% tariff on cars imported from Mexico as a way to keep jobs here, and likely to pay for the wall he claimed he would build as president. Blue-collar workers loved this threat, whether they believed it or not, and they voted Republican to an extent not seen in decades. Educated, white collar folks were uniformly appalled at Trump’s America-first insensitivity, and perhaps (likely) by the thought that they might have to pay more for imported goods. As president, Trump re-adjusted his threat to 20%, an interesting choice, and (I suspect) a good one.

The effect of a 20% tariff can be seen better, I think, by considering a barter-economy between two countries, one developed, one not: Mexico and the US, say with an without a 20% tax. Assume these two countries trade only in suits and food. In the poor country, the average worker can make either 4 suits per month or 200 lbs of food. In the developed country, workers produce either 10 suits or 1000 lbs of food. Because it’s a barter economy with a difference in production, we expect that, in the poor country, a suit costs 50 lbs of food; in the rich country, 100 lbs of food. There is room here to profit by trade.

The current state of tariffs world-wide. Quite a few countries have tariffs much higher than ours. Among those, Mexico.

Tariffs world-wide. We put no tax on most imported products while much of the world taxes our products heavily.

With no tariff, totally free trade, an importer will find he can make a profit bringing 100 lbs of US food to Mexico to trade for 2 suits. He can return two suits to the US having gotten his two suits at the price of one, less the cost of transport, lawyers, and middlemen (relatively low). Some US suit-makers will suffer, but the importer benefits immediately, and eventually US consumers and Mexican suit workers will benefit too. Eventually, US suit prices will go down, and Mexican wages up, We will have cheaper suits and will shift production to what we make best —  food.

In time, we can expect that an American suit maker will move his entire production to Mexico bringing better equipment and better management. Under his hand, lets assume his Mexican workers make 6 suits per month. The boss can now pay them better, perhaps 100 lbs of food and two suits per month. He still makes a nice profit, more than before: he ships two suits to the US to buy the 200 lbs of food, and retains now two suits as profit. Hillary Clinton believed this process was irreversible. “Those jobs are gone and they’re not coming back,” her campaign told CNN. She claimed she’d train the jobless “for the jobs of the future” and redistribute the wealth of the rich, a standard plank of the democratic platform since 1896. But, for several reasons, industrial voters didn’t trust her to succeed, or even to try. Redistribution of wealth rarely works because, even if a politician has the will, and most don’t, manufacturers can usually keep their profits off-shore, and they do.

A very high tariff would stop all trade, but lets see what would happen with Trump’s 20% tariff. With a 20% tariff, when the first two suits come to the US, we’d extract 0.4 suits in tax revenue. The importer still makes a profit, but it’s now 0.6 suits, the equivalent of 60 lbs of food. He can sell suits for less than the American, but not as much less. If the manufacturer moves to Mexico he makes more money, but not quite as much. Tax is still collected on every suit brought to America — now 20% of the 3 suits per Mexican worker that the Boss must export. The American worker’s wages are depressed but he/she isn’t forced to compete with the Mexican dollar-for-dollar (suit for suit). In barter terms, he isn’t required to make 6 suits for every 100 lbs of food.lincoln-national-bank-internal-improvements-tariffs

We find that, in the above fictional economy, a 50% tariff in the maximum to allow any profitable suit trade: the first two suits might enter the US; but they’d be taxed at one suit, just enough to pay for the 100 lbs of food that he’d have to barter for the 2 suits. At that rate, there would be no profit for the importer, and he/she would stop importing. A 50% tariff is thus counter-productive to the consumer and the US gov’t: we would get no imported goods, and we’d collect no import revenue – a bad situation in general, though good for the manufacturer. Lincoln’s “protective tariffs” of 1861 contributed to Southern succession and the start of the civil war. It seems to me that some modest tariff of 10% to 20% is fair and productive — tariff rates that Trump seems to have intuited, and that many other countries have adopted, see map-chart above. As for the academic economists, I note that they also predicted a stock market crash should Trump be elected; it’s gone nearly straight up since November 8, 2016. I find that most economists are not rich despite claiming to be experts on money.

Robert E. Buxbaum, March 27, 2017. I learned such economics as I have from my one course in economics, plus comic books like the classic “Once upon a dime” produced by the New York Federal Reserve. Among the lessons learned: that money is a distraction, just a more convenient way to carry around a suit, 100 lbs of food, or a month of work. If you want to understand economics, I think it helps to work things out in terms of barter, as above.

The game is rigged and you can always win.

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A few months ago, I wrote a rather depressing essay based on Nobel Laureate, Kenneth Arrow’s work, and the paradox of de Condorcet. It is mathematically shown that you can not make a fair election, even if you wanted to, and no one in power wants to. The game is rigged.

To make up for that insight, I’d like to show from the work of John Forbes Nash (A Beautiful Mind) that you, personally, can win, basically all the time, if you can get someone, anyone to coöperate by trade. Let’s begin with an example in Nash’s first major paper, “The Bargaining Problem,” the one Nash is working on in the movie— read the whole paper here.  Consider two people, each with a few durable good items. Person A has a bat, a ball, a book, a whip, and a box. Person B has a pen, a toy, a knife, and a hat. Since each item is worth a different amount (has a different utility) to the owner and to the other person, there are almost always sets of trades that benefit both. In our world, where there are many people and everyone has many durable items, it is inconceivable that there are not many trades a person can make to benefit him/her while benefiting the trade partner.

Figure 3, from Nash’s, “The bargaining problem.” U1 and U2 are the utilities of the items to the two people, and O is the current state. You can improve by barter so long as your current state is not on the boundary. The parallel lines are places one could reach if money trades as well.

Good trades are even more likely when money is involved or non-durables. A person may trade his or her time for money, that is work, and any half-normal person will have enough skill to be of some value to someone. If one trades some money for durables, particularly tools, one can become rich (slowly). If one trades this work for items to make them happy (food, entertainment) they can become happier. There are just two key skills: knowing what something is worth to you, and being willing to trade. It’s not that easy for most folks to figure out what their old sofa means to them, but it’s gotten easier with garage sales and eBay.

Let us now move to the problem of elections, e.g. in this year 2016. There are few people who find the person of their dreams running for president this year. The system has fundamental flaws, and has delivered two thoroughly disliked individuals. But you can vote for a generally positive result by splitting your ticket. American society generally elects a mix of Democrats and Republicans. This mix either delivers the outcome we want, or we vote out some of the bums. Americans are generally happy with the result.

A Stamp act stamp. The British used these to tax every transaction, making it impossible for the ordinary person to benefit by small trade.

A Stamp act stamp,. Used to tax every transaction, the British made it impossible for ordinary people to benefit by small trades.

The mix does not have to involve different people, it can involve different periods of time. One can elect a Democrat president this year, and an Republican four years later. Or take the problem of time management for college students. If a student had to make a one time choice, they’d discover that you can’t have good grades, good friends, and sleep. Instead, most college students figure out you can have everything if you do one or two of these now, and switch when you get bored. And this may be the most important thing they learn.

This is my solution to Israel’s classic identity dilemma. David Ben-Gurion famously noted that Israel had the following three choices: they could be a nation of Jews living in the land of Israel, but not democratic. They could be a democratic nation in the land of Israel, but not Jewish; or they could be Jewish and democratic, but not (for the most part) in Israel. This sounds horrible until you realize that Israel can elect politicians to deliver different pairs of the options, and can have different cities that cater to thee options too. Because Jerusalem does not have to look like Tel Aviv, Israel can achieve a balance that’s better than any pure solution.

Robert E. Buxbaum, July 17-22, 2016. Balance is all, and pure solutions are a doom. I’m running for water commissioner.

In praise of tariffs

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In a previous post I noted that we could reduce global air pollution if we used import taxes (tariffs) to move manufacture to the US from China and other highly polluting countries. It strikes me that import tariffs can have other benefits too, they can keep US jobs in the US, provide needed taxes, and they’re a tool of foreign policy. We buy far more from China and Russia than they buy from us, and we get a fair amount of grief — especially from Russia. An appropriate-sized tariff should reduce US unemployment, help balance the US, and help clean the air while pushing Russia in an alternative to war-talk.

There is certainly such a thing as too high a tariff, but it seems to me we’re nowhere near that. Too high a tariff is only when it severely limits the value of our purchasing dollar. We can’t eat dollars, and want to be able to buy foreign products with them. Currently foreign stuff is so cheap thought, that what we import is most stuff we used to make at home — often stuff we still make to a small extent, like shoes, ties, and steel. An import tax can be bad when it causes other countries to stop buying from us, but that’s already happened. Except for a very few industries, Americans buy far more abroad than we sell. As a result, we have roughly 50% of Americans out of well-paying work, and on some form government assistance. Our government spends far more to care for us, and to police and feed the world than it could possibly take in, in taxes. It’s a financial imbalance that could be largely corrected if we bought more from US manufacturers who employ US workers who’d pay taxes and not draw unemployment. Work also benefits folks by developing, in them, skills and self-confidence.

Cartoon by Daryl Cagle. Now why is Russia a most favorable trade partner?

Cartoon by Daryl Cagle. Trade as foreign policy. Why is Russia a most favorable trade partner?

In a world without taxes or unemployment, and free of self-confidence issues, free trade might be ideal, but taxes and unemployment are a big part of US life. US taxes pay for US roads and provide for education and police. Taxes pay for the US army, and for the (free?) US healthcare. With all these tax burdens, it seems reasonable to me that foreign companies should pay at least 5-10% — the amount an American company would if the products were made here. Tariff rates could be adjusted for political reasons (cartoon), or environmental — to reduce air pollution. Regarding Russia, I find it bizarre that our president just repealed the Jackson Vanik tariff, thus giving Russia most favored trade status. We should (I’d think) reinstate the tax and ramp it up or down if Russia invades again or if they help us with Syria or Iran.

A history of US tariff rates. There is room to put higher tariffs on some products or some countries.

A history of US tariff rates. Higher rates on some products and some countries did not harm the US for most of our history.

For most of US history, the US had much higher tariffs than now, see chart. In 1900 it averaged 27.4% and rose to 50% on dutiable items. Our economy did OK in 1900. By 1960, tariffs had decreased to 7.3% on average (12% on duty-able) and the economy was still doing well. Now our average tariff is 1.3%, and essentially zero for most-favored nations, like Russia. Compare this to the 10% that New York applies to in-state sales, or the 6% Michigan applies, or the 5.5% that Russia applies to goods imported from the US. Why shouldn’t we collect at least as high a tax on products bought from the non-free, polluting world as we collect from US manufacturers.

Some say tariffs caused the Great Depression. Countries with lower tariffs saw the same depression. Besides the Smoot-Hawley was 60%, and I’s suggesting 5-10% like in 1960. Many countries today do fine today with higher tariffs than that.

Robert E. Buxbaum, March 25, 2014. Previous historical posts discussed the poor reviews of Lincoln’s Gettysburg address, and analyzed world war two in terms of mustaches. I’ve also compared military intervention to intervening in a divorce dispute. My previous economic post suggested that Detroit’s very high, living wage hurt the city by fostering unemployment.

Where does industrial CO2 come from? China mostly.

The US is in the process of imposing strict regulations on carbon dioxide as a way to stop global warming and climate change. We have also closed nearly new power plants, replacing them with cleaner options like a 2.2 billion dollar solar-electric generator in lake Ivanpah, and this January our president imposed a ban on lightbulbs of 60 W and higher. But it might help to know that China produced twice as much of the main climate change gas, carbon dioxide (CO2) as the US in 2012, and the ratio seems to be growing. One reason China produces so much CO2 is that China generates electricity from dirty coal using inefficient turbines.

Where the CO2 is coming from: a fair amount from the US and Europe, but mostly from China and India too.

From EDGAR 4.2; As of 2012 twice as much carbon dioxide, CO2 is coming from China as from the US and Europe.

It strikes me that a good approach to reducing the world’s carbon-dioxide emissions is to stop manufacturing so much in China. Our US electric plants use more efficient generating technology and burn lower carbon fuels than China does. We then add scrubbers and pollution reduction equipment that are hardly used in China. US manufacture thus produces not only less carbon dioxide than China, it also avoids other forms of air pollution, like NOx and SOx. Add to this the advantage of having fewer ships carrying products to and from China, and it’s clear that we could significantly reduce the world’s air problems by moving manufacture back to the USA.

I should also note that manufacture in the US helps the economy by keeping jobs and taxes here. A simple way to reduce purchases from China and collect some tax revenue would be to impose an import tariff on Chinese goods based, perhaps on the difference in carbon emissions or other pollution involved in Chinese manufacture and transport. While I have noted a lack of global warming, sixteen years now, that doesn’t mean I like pollution. It’s worthwhile to clean the air, and if we collect tariffs from the Chinese and help the US economy too, all the better.

Robert E. Buxbaum, February 24, 2014. Nuclear power produces no air pollution and uses a lot less land area compared to solar and wind projects.