Seven truths about trade

cfoindia August 8, 2022

Beneath all the tariff craziness — the taxes on islands inhabited only by penguins, the pseudo-profound mathematical definition of “reciprocal”, the idea that the settled trade policy of every other country on the planet somehow constitutes an emergency, and enough U-turns to make a ballerina dizzy — it is easy to lose sight of a basic fact: even a modest and predictable tariff is still a modest and predictable act of foolishness.

Let’s start with a simple truth about a complicated world. Everybody has to trade with somebody. Attempting complete self-sufficiency would, in the very best-case scenario, produce a Robinson Crusoe existence in which every waking minute had to be devoted to piercing coconuts or repairing the treehouse roof. The worst-case scenario would be to die simultaneously of starvation, exposure and an infected scratch.

A vivid example of this truth is The Toaster Project, the brainchild of conceptual artist Thomas Thwaites. Two decades ago, Thwaites decided to make a simple toaster from scratch. He found himself thwarted at every turn: iron smelting proved impossible without a microwave oven, starch-based plastic was eaten by hungry snails and nickel could be obtained only by purchasing commemorative coins. “I realised that if you started absolutely from scratch, you could easily spend your life making a toaster,” he told me. His toaster eventually cost about £1,000. It did not work.

The second truth about trade is that it’s beneficial even if you’re trading with someone who is better than you at everything. A classic example: your housemate can cook a meal in 30 minutes or do a load of laundry in 40 minutes. For you, cooking takes 90 minutes and laundry takes an hour. A Trumpian view of this interaction is that you’re doomed: the housemate is better at both cooking and laundry, so will do both while you do neither. A trade deficit! Sad! (Although exactly why this turn of events would be to your disadvantage is unclear.)

But if you offer to do three loads of laundry if your housemate cooks three meals, then both you and your housemate are getting clean clothes and homecooked food for less effort. This, the principle of “comparative advantage”, is that rare idea in economics that is important, true, and far from obvious.

The third truth about trade is that, ultimately, it isn’t about all the stuff you get to sell. It’s about all the stuff you get to buy. Yes, jobs can give us a sense of meaning and purpose, but we do not do them in exchange for gold star stickers. We do them in exchange for money that we can spend on stuff.

The fourth truth about trade is that while deficits might not mean much, bilateral deficits mean nothing at all. The FT has a huge bilateral deficit with me: they send me money every month but they do not complain that I am failing to spend my salary on copies of the FT Weekend. Meanwhile, I have a large bilateral deficit with my local cheese shop, but it would be strange to insist that they bought more copies of my book How To Make The World Add Up. I’m not spending money at the cheese shop in the hope that they will buy my writing in return. I’m spending money in the confident expectation that what I will get in return is cheese.

At this point all the self-proclaimed Tariff Men who are still reading this might complain that I am cheating, because I have been talking about local trade rather than international trade. But economically speaking there is no difference. That is the fifth truth about trade: tariffs are imposed at national borders not for economic reasons but because national borders are an administratively convenient place to do so.

They are also culturally and rhetorically convenient. Politicians who otherwise wouldn’t dream of boasting about increasing taxes are happy to boast about increasing tariffs because tariffs seem to apply to foreigners. (The sixth truth: a tariff is nothing more than a tax.) Tariffs are actually a tax not on foreigners but on people who buy things from foreigners, but nevertheless that is an easier message than — say — taxing people from Birmingham who buy things from Manchester.

This is a question few Tariff Men have asked, let alone answered: if it is such a splendid idea to tax goods coming from Mexico into the US, why isn’t it a good idea for the government of Houston to tax imports from Dallas? Or to tax imports from Central Northwest Houston to East Downtown? In a modern economy something must be taxed, but transaction taxes are needlessly distorting, whether they are levied on a national border or somewhere else.

The seventh truth about trade is that it is often used as a scapegoat. There are many problems that look like they are caused by trade but are actually caused by something else. For example, the decline in US manufacturing jobs feels like it was caused by competition from China, and some of it was. But much of it was caused by competition from robots — which is why many of the jobs have gone but US manufacturing output keeps rising.

There are plenty of problems for which tariffs seem like they might be a solution — from encouraging a homegrown defence industry to discouraging the emission of greenhouse gases — but in almost all cases, there are better, more focused and less wasteful alternatives.

Yes, you may wish to support a homegrown industrial cluster, or to tax carbon dioxide emissions, or to diversify sources of energy. But pursuing complex economic objectives with a trade war is like trying to perform neurosurgery with a hammer. Even a skilled brain surgeon would struggle to produce a positive result — and I’m not sure the current team in the White House have yet earned that distinction.

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