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Some interesting truths about tariffs and trade intervention


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Neglected to post this when it came out a few weeks ago.  It really makes some astute observations about the complexities of implementing protectionism; it doesn’t really come out for or against it, but just describes its many aspects.

 

A good piece to read if you’re interested in the nuances of our trade war and its possible outcomes.

 

A summary of its major points:

 

  • -Trade deficits and surpluses typically force monetary and other economic changes in the affected countries that tend to eliminate the imbalances. The fact that many large economies have run substantial trade surpluses or deficits year after year, sometimes for decades, violates trade and economic logic; this pattern is evidence that mercantilist policy distortions, either in the surplus countries or in the deficit countries, are preventing trade from adjusting.
  •  
  • -The idea that all countries lose in a trade war is unintelligible. This cannot possibly be true, not just because there is overwhelming historical evidence that countries have benefitted from trade intervention but also because the claim is logically impossible. Whether countries benefit or lose from trade intervention depends on the underlying institutions that mediate trade and capital flows, the extent of existing trade and capital flow imbalances, and the types of intervention employed.
  •  
  • -While tariffs and other forms of trade intervention may indeed raise prices for consumers, this is only one way, and often a minor way, in which these policy tools affect households. Depending on underlying conditions, they may also reduce unemployment, cause wages to rise, and reduce the growth of debt.
  •  
  • -Tariffs and currency devaluation are not the only forms of trade intervention and are not the only ways distortions are introduced into global trade and capital flows. Any policy that alters the relationship between a country's savings and its investment affects that country's trade balance. Tariffs and currency devaluation affect trade balances not by changing the relative prices of tradable goods but rather by shifting income from households to businesses, thus forcing up the savings rate. Because of this, any policy aimed at making an economy more competitive internationally by suppressing wages is effectively a beggar-thy-neighbor policy. Any such policy works in exactly the same way as tariffs and currency devaluation.
  •  
  • -Because the relationship between U.S. investment and U.S. savings is determined externally, by the country's role in absorbing excess global savings, tariffs and other beggar-thy-neighbor policies will not reduce U.S. trade deficits.
  •  
  • -In a globalized economy, it may be extremely difficult for any country to implement policies that protect the bargaining power of workers, that reverse income inequality, that raise minimum wages, that improve the social safety net, or that otherwise make households better off relative to businesses and governments. Implementing any of these policies causes a country's international competitiveness to deteriorate. Consequently, rather than achieving the desired result, these policies cause the trade balance to go into deficit, and either unemployment will rise or debt must rise.
  •  
  • -To put it a little more starkly, a globalized economy must choose to protect its strength in the manufacturing and tradable sectors by lowering relative wages (directly or else indirectly in the form of tariffs, subsidies, or currency devaluation), or it must choose to boost the services and nontradable goods sectors through rapid debt growth.
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A summary of its major points:

 

-Trade deficits and surpluses typically force monetary and other economic changes in the affected countries that tend to eliminate the imbalances. The fact that many large economies have run substantial trade surpluses or deficits year after year, sometimes for decades, violates trade and economic logic; this pattern is evidence that mercantilist policy distortions, either in the surplus countries or in the deficit countries, are preventing trade from adjusting.
 
-The idea that all countries lose in a trade war is unintelligible. This cannot possibly be true, not just because there is overwhelming historical evidence that countries have benefitted from trade intervention but also because the claim is logically impossible. Whether countries benefit or lose from trade intervention depends on the underlying institutions that mediate trade and capital flows, the extent of existing trade and capital flow imbalances, and the types of intervention employed.
 
-While tariffs and other forms of trade intervention may indeed raise prices for consumers, this is only one way, and often a minor way, in which these policy tools affect households. Depending on underlying conditions, they may also reduce unemployment, cause wages to rise, and reduce the growth of debt.
 
-Tariffs and currency devaluation are not the only forms of trade intervention and are not the only ways distortions are introduced into global trade and capital flows. Any policy that alters the relationship between a country's savings and its investment affects that country's trade balance. Tariffs and currency devaluation affect trade balances not by changing the relative prices of tradable goods but rather by shifting income from households to businesses, thus forcing up the savings rate. Because of this, any policy aimed at making an economy more competitive internationally by suppressing wages is effectively a beggar-thy-neighbor policy. Any such policy works in exactly the same way as tariffs and currency devaluation.
 
-Because the relationship between U.S. investment and U.S. savings is determined externally, by the country's role in absorbing excess global savings, tariffs and other beggar-thy-neighbor policies will not reduce U.S. trade deficits.
 
-In a globalized economy, it may be extremely difficult for any country to implement policies that protect the bargaining power of workers, that reverse income inequality, that raise minimum wages, that improve the social safety net, or that otherwise make households better off relative to businesses and governments. Implementing any of these policies causes a country's international competitiveness to deteriorate. Consequently, rather than achieving the desired result, these policies cause the trade balance to go into deficit, and either unemployment will rise or debt must rise.
 
-To put it a little more starkly, a globalized economy must choose to protect its strength in the manufacturing and tradable sectors by lowering relative wages (directly or else indirectly in the form of tariffs, subsidies, or currency devaluation), or it must choose to boost the services and nontradable goods sectors through rapid debt growth.

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