Against the Tariffs

National Review Online

Wednesday, January 24, 2018

Signaling that protectionist trade measures remain at the top of his agenda, President Donald Trump imposed punitive duties on imported solar panels and washing machines, a move intended to put pressure on politically connected manufacturers in China, South Korea, and Mexico, and by extension on the governments of those countries. This is a mistake.

Trump’s views on trade have always been and remain foolish — he has been going on about the Asian economic Superman getting ready to eat our lunch since Japan rather than China was the locus of our national trade anxiety. This has led to many unfortunate outcomes, including the abandonment of American leadership on trade-related issues: The U.S. decision to abandon the Trans-Pacific Partnership, for example, has not derailed the project, but simply left it to proceed with Canada rather than the United States taking the lead while also giving China more leverage in its trade negotiations with its neighbors. Trump called TPP “a terrible deal,” but he never explained his objections in any meaningful detail, and his aides have been trying to replicate some of its provisions in new trade deals.

Populists peddle tariffs as a punitive measure enacted on shadowy foreign business interests, but what they are in fact is a sales tax on American consumers. They protect inefficient producers by raising the prices of competitors that consumers would otherwise prefer. Sometimes, that results in the competitor being priced out of the market entirely, but it is just as often the case that domestic producers simply take the opportunity to raise their prices and broaden their profit margin. That’s fine for the CEOs and shareholders of the favored firms, but it is a raw deal for Americans who end up with higher prices and fewer choices.

Tariffs often end up having the opposite of the economic effect desired, as economists have understood for a very long time. If, for example, the United States puts a tariff on Japanese goods, that raises the U.S. price of Japanese goods and hence reduces U.S. demand for Japanese imports. (That is what protective tariffs are supposed to do.) That also reduces U.S. demand for Japanese yen (since U.S. importers will be doing less business with Japanese producers), reducing the value of the yen vis-à-vis the U.S. dollar — and thereby making Japanese imports cheaper in the United States. Which is to say, floating exchange rates essentially make an end run around tariffs, rebalancing in the foreign-exchange markets what politicians distorted with the tariff. What’s worse in this scenario is that the depressed Japanese yen and reduced exports to the United States leave Japanese consumers with less money with which to buy American goods, which are now more expensive to Japanese buyers because of the falling yen. That’s why the most significant development in the markets after Trump’s announcement wasn’t a crash in Chinese washing-machine stocks — investors had been expecting the move for some time — but a steep drop (1 percent in a few hours’ worth of trading) in the value of the Mexican peso.

Protectionist measures always hurt consumers and often end up enlarging rather than reducing trade deficits as consumers abroad buy fewer U.S.-made goods. The president is obsessed with trade deficits, which are not “deficits” in any real sense of the word (there isn’t any ballooning “trade debt” comparable to the national debt) but instead are mere record-keeping expressions that reflect certain economic realities. One of those realities is that people in relatively poor countries — the so-called emerging markets — have higher rates of savings, meaning that they use many of the dollars they earn selling goods in the United States to purchase dollar-denominated financial assets rather than consumer goods. The trade deficit is simply the flipside of the capital surplus. The Koreans are not getting over on us by providing Americans with excellent appliances at low prices. It is pure superstition to think that they are.

Speaking of which: Samsung already manufactures appliances in the United States, as do China’s Qingdao Haier and several other Asian manufacturing giants. Many also operate in Canada and Mexico. Assuming that they find themselves unable to simply pass costs along to consumers, it is possible they could shift some production to the United States, but it is just as likely if not more so that they would shift some production to Mexico, doing most of the manufacturing work in their Asian factories but reserving final assembly to a plant somewhere inside the NAFTA free-trade zone, where they will have a considerably better chance of successfully contesting the tariffs. Again, all tariffs would accomplish in this case would be to distort markets and disrupt supply chains.

One might expect that the solar tariffs would put a little extra jingle in the pockets of Elon Musk, Al Gore, and other investors in solar power. But that isn’t likely to happen, either. About 80 percent of the solar equipment installed in the United States is imported, and the $28 billion–a–year industry complains that it will be handicapped by these measures rather than protected by them. The solar-industry trade association is predicting the loss of 23,000 jobs this year. There are in fact only a few U.S. firms engaged in the business of manufacturing solar panels. Kneecapping an entire industry in the service of a handful of politically favored firms isn’t shrewd economic policy — it’s crony capitalism.

The president shouldn’t be trying to interpose himself between Americans and their washing machines.