Having always tended strongly to favor free markets, I struggle with the special problems posed by the risks of international commerce. I think
Oren Cass is talking sense, analogizing Chinese supply lines to subprime loans:
Taking the risk on China paid off handsomely for many years, while businesses avoiding it likely faced higher costs. The dynamic is a common one across industries: taking risks, cutting corners, ignoring resilience is all fun and games while the weather is fair. All the while, companies behaving more responsibly assume the costs without seeing benefits. Paying insurance premiums when catastrophe does not strike can come to feel like a mug’s game.
But when winter comes and only the ant has food, the grasshopper doesn’t get to scream, “arbitrary decision by the government.” Conversely, of course, no one really wants to see the grasshopper starve. This problem is prevalent in public policy. In many insurance markets, it leads to mandates to maintain coverage. In financial markets, it leads to regulations requiring banks to maintain certain levels of capital or limiting the risks they can take. When it comes to international trade, how might we ensure that businesses betting on the low costs of risky supply chains internalize the costs of taking those risks, insofar as we do not want to just point and laugh when the storm comes? How might we ensure that better alternatives are available? One answer might be to impose some sort of tax or fee on the risky imports, reducing the cost advantage. We could call it a tariff.
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That is, however, a very different sort of governance from the free marketeer one. It is a liberal project of using government to meddle with society to try to produce desired outcomes.
In Georgia when I was young, Governor Zell Miller instituted 'the HOPE Scholarship,' which was funded by the newly-introduced Georgia Lottery. It makes sense on the same terms as this proposal:
1) Lotteries are terrible investments, so anyone who invests in one is either incapable of understanding the math or unwilling to let logic affect their behavior;
2) Scholarships go to excellent students who have and maintain high grades.
3) ∴ Taking money from those who wish to give it to lotteries and using that money to grant scholarships is redirecting money/power away from the ignorant and/or irrational towards the hard-working and intelligent.
It's a rational policy as far as it goes, as here. It does change the relationship of government to governed in pernicious ways, I think.
It seems to me, regarding tariffs and international trade, that far too many experts who should know better, have it wrong (and, of course, my august self...).
At bottom, international trade has nothing to do with economics or business and everything to do with foreign policy and persuading, or pushing, other nations to do things we want done and to stop doing things we don't want done.
There isn't "a tariff." Tariffs enacted as foreign policy tools strike me as good or bad depending solely on whether they achieve the foreign policy goal. On the other hand, tariffs enacted as protectionist devices inevitably raise domestic costs while ultimately failing in their claimed purpose of protecting nascent or weak industry. That failure, though, is political rather than economic, in that once the industry no longer is nascent or weak, the protectionist tariff is left in place. See the Chicken Tax, for instance.
Then there's another aspect of tariffs, an aspect that might be achievable via other means, but no attempt of any sort has been tried. There are some items that are critical to our national security and so to our basic ability to remain an independent--uncontrolled by other nations--actor. We have a crying need to create and maintain a core ability to produce those critical items entirely domestically, from ore in the ground to finished product. However that's achieved, it will cost more than were those final products obtained through an internationally done free market. Today, many of those critical items are sourced only from, or through, an enemy nation.
That added cost, though, is just one part of maintaining a viable defense establishment, and the cost should be counted and accounted as such. The added cost of tariffs as foreign policy tools should similarly be counted and accounted as part of the cost of having a viable foreign policy establishment. In the end, after all, defense and foreign policies are two aspect of the same national policy function.
One last thing: during Trump's last term, he offered the G-7 (including the EU) a completely zero-tariff free trade deal. They ignored him. Why would he bother offering it again? The other G-7 members aren't acting like serious economic, much less political, players.
Eric Hines
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