Introduction: Net Benefit for Public Purpose
I look at tariffs as instances of foreign and trade policy, and policy more generally. I also think that all policies, domestic and foreign, should be evaluated in relation to (1) the standard of net benefit for public purpose and (2) alternative policies that compete with the particular policy being evaluated.
I’ve provided a detailed specification of the concept of net benefit for public purpose in my kindle e-book. But that specification isn’t needed to say a few things indicating that the net benefit for public purpose of tariffs is likely to be negative for a monetarily sovereign nation, or at least always inferior to other alternatives.
Objectives
President Trump says his primary objectives in using tariffs are 4:
(a) to prevent other nations from “ripping off America”;
(b) to provide an incentive for multi-national corporations to move their manufacturing to the United States;
(c) to protect American businesses that choose to invest in areas of industry in which it is important for the United States to be a world leader;
(d) To raise revenue for US Government spending’
To these we can perhaps add a Fifth:
(e) Decoupling from China
Let’s look at how Trump’s actions on tariffs thus far relate to each of these objectives. As I write this Trump has paused his so-called “reciprocal” tariffs for 90 days to allow time for negotiations between the US and other nations. But he has retained a 10% tariff for everyone during the 90 days, except China which he has honored with a special 145% tariff, and which they have responded to by levying a 125% tariff on US goods.
Ending “Ripping off the US” by Balancing Trade
The President notes the many years of current deficits the US has with other nations and concludes that the nations having current surpluses with us are “ripping us off” because they end up with more of our dollars due to trade than we do. But he’s overlooking a number of important facts which suggest that either no one is getting ripped off, or that it is we who are ripping off other nations.
“Exports are real costs; imports are real benefits”
President Trump’s “ripping off” position assumes that “Exports are benefits and imports are costs” because when the US exports it gets USD and when the US imports it pays USD to foreign exporters. So, from his point of view US traders are losing USD (money) from trade in the aggregate as shown by the current account deficit, and, he thinks, this is bad in the long run, because from a business person’s point of view, our aggregate trade involves a net loss in USD, and that, from a business point of view is unsustainable in the long run.
However, from a real wealth point of view the US annual current deficit doesn’t mean the US is getting “ripped off” but, instead indicates that it is getting more real benefits from its imports each year than it is losing from its exports. So, from a real wealth point of view someone may think it is we who are “ripping off” the rest of the world rather than the rest of the world “ripping us off.”
But, rather than looking at US trade with other nations as either side ripping off the other, we can look at the process as one of individuals and corporations making numerous deals with one another that are mutually beneficial from the point of view of both buyers and sellers and that involve the trade of real goods and services for USD. When viewed from the aggregate point of view, these exchanges over the years amounted to a loss of USD (money) in both the long and short runs, but also amounted to a great gain of real wealth.
So, the issue comes down to this, what is the significance of this loss of money to the United States? Does the loss of money in the long run necessitate that the US seek the balanced trade condition that would end what President Trump believes is a rip-off?
Monetary Sovereignty
Whether a nation needs balanced trade depends on its circumstances. Continuous trade deficits deliver net real benefits to a nation, but can only be sustainable if a nation is a monetary sovereign. If a nation has full monetary sovereignty, which means 1) that it issues its own non-convertible currency and reserves, 2) allows its currency to float in international exchange markets; and 3) incurs no debts in currencies it cannot issue; then it cannot be forced into insolvency by the reactions of markets to “excessive debts” it incurs in its own currency.
So, a monetary sovereign like The US, the UK, Australia, New Zealand, Canada, and Japan, doesn’t need balanced trade, so long as other nations are willing to export more to it than they are willing to buy from it, even if it runs budget deficits and funds these through unnecessary and foolish debt issuance. It is fully capable of running continuous deficits for many years, even decades, until its trading partners no longer want to accumulate its currency/reserves as foreign exchange, or buy its bonds as an investment, and so end the conditions that favor the US current account deficit.
Qualifications
If balanced trade isn’t a problem for nations like the United States, then it follows that its current account deficits are net benefits to the United States and President Trump should give up his across the board tariffs because they won’t end a “rip-off” that doesn’t exist in the first place.
But is there any qualification to the idea that “Exports are real costs; and imports are real benefits.” The answer to this question is yes. There are important qualifications.
They arise from the observation, that immediate benefits from trade deals may have long run opportunity costs for a nation. Using one’s currency to fulfill a real short-term need may result in a nation’s failure to fulfill its need for necessary goods or services through developing the capability to produce those goods and services domestically, or through damaging its own capability in the future to produce those goods and services domestically. That’s a real cost that may threaten one’s national security or one’s ability to ensure economic competitiveness in the future, or one’s ability to provide full employment in the future.
In assessing net benefit for public purpose both short and longer-term needs of the nation must be taken into account. Short-term benefits from imports may be outweighed by longer term costs resulting from continuing and future lack of capability to produce benefits domestically. So, do these qualifications negate the conclusion that Donald Trump’s across the board tariffs don’t make any sense because generalized balanced trade policy makes no sense for a monetary sovereign?
No! But they don’t eliminate the possibility that tariffs on certain goods and services may be useful in bilateral trade relationships if they support longer term objectives in a way that outweighs the immediate benefit of trades in certain products or services. This brings us to the other objectives Trump mentions for his tariffs. But before we go there I note that none of the other Trump objectives is served by his across the board tariffs.
The Incentive for multi-national corporations to re-locate manufacturing to the United States
President Trump says that tariffs will provide incentives for multi-national companies to re-locate to the US. But, relocation is a very big and expensive investment and what happens if the next president ends the tariffs supporting the incentive to relocate?
Siemens, of course, has relocated some manufacturing to the United States, but that relocation was probably motivated by increased energy costs for the company in Germany due to US destruction of the Nordstream 2 pipeline, rather than Trump’s tariffs. In any event, to create incentives for multi-nationals to move here the Trump administration would have to design specific tariffs aimed at particular companies to provide the incentives to move. Currently there is no sign of any careful and specific design of such tariffs by the administration. So, Trump’s objective of getting multi-national corporations to move here in order to escape tariffs is very unlikely to be achieved.
Furthermore, are tariffs really the right instrument to attract multi-nationals? An alternative to tariffs for this purpose is government subsidies for companies the US wants to attract. Subsidies, as opposed to tariffs, are a much better instrument of industrial policy for use by a monetary sovereign, since such nations can spend as much money as it takes to get the desired companies to make an investment in their nation. Subsidies cost more in dollars than tariffs. But, they don’t require any loss in real wealth by the monetarily sovereign country. So, I can’t think of why they wouldn’t always be preferred to using tariffs.
In any event, my conclusion, is that if Trump wants to incentivize companies to relocate to the US, then subsidies would always deliver more net benefit for public purpose than tariffs. So, targeted subsidies, rather than tariffs should be Trump’s choice.
Protecting American businesses that choose to invest in areas of industry in which it is important for the United States to be a world leader
Tariffs, of course, are the traditional solution of nations to the problem of protecting their new and products from competition provided by older established industries and products of other nations. There’s no question that tariffs can provide such protection. But at what cost?
Tariffs provoke retaliation from those nations that are tariffed, and the cost of using them is often just to greatly reduce or in extreme cases even to end trade between two nations. Right now, the US has across the board tariffs of 145% on Chinese products while China has retaliated with 125% tariffs on US goods. Generally, the tariffed products from both countries won’t be able to sell in either countries.
So, trade between China and the US will be brought to a standstill if the tariffs remain. Which nation will suffer more? Probably the United States, since it stands in critical need of certain rare earths that China now supplies. Of course, the objective of protecting our industries from Chinese competition may still be accomplished, so we face a trade-off. But is the trade-off necessary, or can we impose other policies that will protect our industries?
Again, Trump can use subsidies, rather than tariffs to protect our industries. China, of course, can answer with their own subsidies. But (1) they are usually already providing those to their companies and (2) as a monetary sovereign, we are in a much better position to use subsidies than to levy tariffs.
Raising Revenue
In order to raise revenue from tariffs, other nations must be willing to continue to trade with you, so that they will pay your tariffs. But if your tariffs are too high, their goods just won’t sell in your country, and reciprocal trade will stop. Trump’s expectations about the revenue to be raised from tariffs appear much too high, and seem to rest on an assumption that we can force other nations to trade with us.
Even more importantly, if you’re a monetary sovereign like the United States, why would you need the USD accumulated by other nations? The answer is you don’t need it. So again, the raising revenue objective supporting tariffs is of no consequence from a net benefit for public purpose point of view.
Decoupling China
Was Trump’s primary objective in the past few weeks of tariff policy maneuvering to largely end trade with China and so de-couple the US economy from China’s economy altogether? Mike Whitney makes the case in this recent post:
“China is being targeted because China’s meteoric rise and explosive growth has made it a threat to America’s global hegemony. That is why China has entered Washington’s crosshairs. By imposing prohibitive 125% tariffs on Chinese exports, Trump is indicating that the era of integrated markets in a globalized system is over. The world is being redivided into warring blocs by wealthy Capitalists in the West who cannot compete with China’s government-led model that controls the nation’s critical industries and recycles massive profits back into vital infrastructure, education, R&D and technology. The West’s highly financialized model—that increasingly depends on skimming the cream off toxic securities and stock buybacks—cannot remake itself into a manufacturing powerhouse willing to compete with China on a level playing field. Instead, it must use its waning influence to jolt the system with some unexpected fireworks display (the tariffs) that sends shockwaves through the system and panic across the markets. These contrived spectacles, that border on economic terrorism, are all part of Uncle Sam’s repertoire that are used to subdue the opposition and maintain Washington’s tenuous grip on power. “
Assuming Mike Whitney is right, the de-coupling objective raises the question of whether tariffs for de-coupling provides a positive net benefit for public purpose or a negative one? It strikes me that the path set by de-coupling of dividing the world once again into two hostile blocs is overwhelmingly negative. It promises a future of decreasing prosperity for the United States as well as increasing risk of nuclear war, since the integration of the US and Chinese economies has been a main bulwark against the out break of war in recent years.
There’s evidence that the long term objective of the Trump administration is to fight a hegemonic war against China, once he achieves peace in Ukraine, and a settlement in West Asia that frees him to focus entirely on China. His tariff war may be a first step in his clearing the way for the eventual hegemonic war. In any event, de-coupling the economies of the US and China amounts to a negative net benefit for purpose, and so is not a policy that ought to be pursued by the Trump Administration.