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Seven Implications of Protectionism

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In a speech on the campaign trail in 2016, then-Republican presidential candidate Donald Trump said about Hillary Clinton and trade,

Hillary Clinton unleashed a trade war against the American worker when she supported one terrible deal after another, from NAFTA, to China to South Korea. It doesn’t matter. No matter where she went, the American worker was hurt and you’ll be hurt worse than ever before if she becomes president of the United States. That I can tell you.

He then promised that a Trump administration would “end that war by getting a fair deal for the American people and the American worker.” “The era of economic surrender will finally be over,” he said. “You’re not going to see it anymore.”

Donald Trump has now done what he accused Hillary Clinton of doing: He has unleashed a trade war.

Trump on trade

On March 8, Trump signed a proclamation imposing a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum. The administration exempted Canada, Mexico, the European Union, Australia, Argentina, Brazil, and South Korea. “Trade wars are good, and easy to win,” declared Trump after announcing the tariffs. The CEO of United States Steel, said, predictably, “This feels like the beginning of a renaissance for us.” On March 22, Trump signed a proclamation imposing tariffs on as much as $60 billion worth of Chinese goods to combat what he perceives as the rising threat from “an economic enemy.” After China announced retaliatory measures, Trump directed the U.S. trade representative “to determine whether tariffs on an additional $100 billion in goods were warranted” because of China’s “unfair retaliation.” Almost forgotten in all of this are the steep tariffs on imported washing machines and solar panels that Trump imposed back in January.

None of that should come as any surprise. Trump’s economic nationalism, his protectionist mindset, and his ignorance and incoherence on trade were well known during his presidential campaign. If there was one issue that candidate Trump was outspoken about, it was U.S. trade policy.

According to Trump, trade results in winners and losers: “Our country is in serious trouble. We don’t win anymore. We don’t beat China in trade. We don’t beat Japan, with their millions and millions of cars coming into this country, in trade. We can’t beat Mexico, at the border or in trade.” He believes that other countries are taking advantage of the United States: “You only have to look at our trade deficit to see that we are being taken to the cleaners by our trading partners.” Free trade is beneficial only when it is fair trade: “For free trade to bring prosperity to America, it must also be fair trade.” Free trade is good only when it is negotiated: “The problem with free trade is you need really talented people to negotiate for you. If you don’t have people that know business, not just a political hack that got the job because he made a contribution to a campaign, free trade is terrible.” Trump’s vision of free trade is for the U.S. government to “negotiate fair trade deals that create American jobs, increase American wages, and reduce America’s trade deficit.” Although Trump says that “we need tougher negotiations, not protectionist walls around America,” he supported the imposition of protectionist tariffs even before he began running for president. In his book Time to Get Tough: Making America #1 Again (2011), Trump included “a 20 percent tax for importing goods” as part of his five-part tax policy. As a candidate, Trump proposed that every car and car part manufactured in a Mexican plant “that comes across the border” be subject to a 35 percent tariff. In one of the Republican primary debates, he proposed a 45 percent tariff on all imported goods from China “if they don’t behave.”

Some of the most ridiculous things that Trump has ever said (and he has said a lot of ridiculous things) relate to trade. He claims, “When Ford moves their massive plants to Mexico, we get nothing. I want them to stay in Michigan.” Actually, we do get something — cheaper cars. When any company relocates a plant across the border or overseas, it is because it believes that it is too expensive to produce the item in the United States; that is, consumers will not pay what they would have to charge to make a profit. Manufacturing jobs need to be brought “back home where they belong,” says Trump. U.S. companies “should make their products in America.” Since when do manufacturing jobs “belong” in America? And why “should” U.S. companies make their products in America? In a free market — which Trump professes to believe in — jobs “should” “belong” wherever the provider of the jobs wants to put them.

For someone who prides himself on being “really smart,” “very intelligent,” and “a very stable genius,” Trump is very confused about tariffs. Regarding Mexico, he has said, “Let me give you the example of Mexico. They have a VAT tax. We’re on a different system. When we sell into Mexico, there’s a tax. When they sell in — automatic, 16 percent, approximately. When they sell into us, there’s no tax. It’s a defective agreement.” Although a VAT and a tariff are both taxes, a VAT is levied on both domestic and imported goods and should never be compared with a tariff. Countries that have a VAT can also impose tariffs. And just look at what Trump is saying is bad: Mexicans get gouged by their government and Americans don’t. Trump has also said this about tariffs and the Constitution: “Our original Constitution did not even have an income tax. Instead, it had tariffs emphasizing taxation of foreign, not domestic, production.” Article I, Section 8, Paragraph 1 of the Constitution reads, “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” But that does not mean that the Constitution had tariffs. The Tariff Act of 1789 is what instituted the first tariffs in the United States “for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures,” not the Constitution itself.

Protectionism

The alternative to free trade is some form of protectionism. Although it can take the form of import quotas or restrictions, it usually involves a tariff (a tax) that is placed on some imported goods to “protect” a domestic industry from foreign competition. Although all tariffs provide the government with revenue, a revenue tariff should be distinguished from a protective tariff. If a country levies an identical tariff on all imported goods for the purpose of raising revenue, then it is a revenue tariff. If a country levies an identical tariff on some imported goods, unidentical tariffs on all imported goods, or different tariffs on different goods, then it is a protective tariff even though it still raises revenue for the government. Most tariffs are protective tariffs.

Trump’s actions have led to a resurgence of conservative defenses of protectionism. The New American magazine — normally very “libertarian” on economic issues — maintains that Trump’s tariffs will be good for the economy and will foster economic independence:

If Trump is successful in imposing his tariffs, the price of imported steel and aluminum and items made from those metals will increase, but this will give U.S.-made metal products a competitive advantage. In time, as the U.S. steel and aluminum mills go back into full production, providing thousands of jobs, the U.S. economy will reap the benefits. And this is exactly what Trump promised to do while running for president.

Is obtaining consumer items more cheaply more important than our national security and our national sovereignty? Do we really want to be dependent upon other nations, some of which are hostile and some of which might become hostile in the future, for basic items necessary to our ability to provide a national defense — such as the steel industry? Is trade with other nations, even when this does boost our material wealth, of greater importance than maintaining our nation’s independence?

Protectionism has, of course, always had its defenders. In fact, the United States is very protectionist even though it is often viewed as a bastion of free trade. If in doubt, one look at the massive 3,713-page Harmonized Tariff Schedule of the United States published by the U. S. International Trade Commission’s Office of Tariff Affairs and Trade Agreements should convince you otherwise.

Even if Trump reversed course and completely renounced his protectionism, even if Barack Obama had not imposed tariffs on tires imported from China, and even if George W. Bush had not imposed tariffs on imported steel, protectionism would still have its defenders. But there are a number of implications of protectionism that should be considered.

The implications

The first implication of protectionism is that the president has the authority to unilaterally impose tariffs. One look at the limited powers of the president in Article II of the Constitution says otherwise. Not only does the president have no authority to directly impose tariffs, he has no authority to protect industries, save jobs, create jobs, or punish American businesses who buy products from foreign companies. The Constitution specifically says that “the Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises,” and “regulate Commerce with foreign Nations.” Trump’s new tariffs are justified by section 232 of the Trade Expansion Act of 1962 and the Trade Act of 1974, not the Constitution.

The second implication of protectionism is that the government is capable of calculating the correct amount of a tariff on the right goods. Back in January, when Trump imposed tariffs on imported washing machines and solar panels, he decreed that there would be a 20 percent tariff on the first 1.2 million large residential washers in the first year, which would decline to 16 percent in the third year, and a 50 percent tariff on machines above that number, with a decline to 40 percent in the third year. Solar cells and modules would have a 30 percent tariff in the first year, declining to 15 percent by the fourth year.

But who is to say that there shouldn’t instead be a 22 percent tariff on the first 1.5 million washers for all three years and a 40 percent tariff on machines above that number? And who is to say that there shouldn’t instead be a 16 percent tariff on solar cells for two years that declines to 5 percent in year three and goes away in year four? Calls for protectionism are calls for Soviet-style central planning of the economy by the U.S. government. This is a strange thing to hear coming out of the mouth of a conservative.

All forms and levels of protectionism require central planning. Government economists and bureaucrats must determine which industries to protect, against which countries to impose protectionist measures, which items should be subject to tariffs, how much the tariffs should be, what exemptions should be given, and what the duration of the tariff should be. As Austrian economist Ludwig von Mises showed us, governments have a calculation problem that cannot be overcome.

The third implication of protectionism is that it is the proper role of government to protect domestic industry from foreign competition. In a free society with a limited government, the only possible legitimate functions of government are policing, defense, and judicial activities. As libertarian theorist Doug Casey recently explained,

Since government is institutionalized coercion — a very dangerous thing — it should do nothing but protect people in its bailiwick from physical coercion. What does that imply? It implies a police force to protect you from coercion within its boundaries, an army to protect you from coercion from outsiders, and a court system to allow you to adjudicate disputes without resorting to coercion. If it is the job of government to protect domestic industries from foreign competition, then why is it not also the job of government to protect domestic industries from each other? Why not protect industries in New York from those in New Jersey? Why not protect industries in Dallas from those in Fort Worth? And if it is the proper role of government to protect domestic industries from foreign competition, then why shouldn’t the government just ban all imported goods and end foreign competition once and for all?

The fourth implication of protectionism is that trade results in winners and losers. Trade is not a zero-sum game in which one side gains at the expense of the other. That is not the case when both parties are in different countries any more than when both parties are in the same country. In every exchange, both parties give up something they value less for something they value more. When you buy something at a store, you give up money and get a product in return. You are left with fewer dollars but you end up with something you value more than those dollars. The store is left with fewer products to sell but it has something that it values more: dollars. Each party to a transaction anticipates a gain from the exchange or it wouldn’t engage in commerce with the other party.

The fifth implication of protectionism is that it is essential for national security. The idea is that hostile foreign trading partners will cut off access of the United States to something important such as steel and leave the country unable to produce what it needs to defend itself. But even if there were no steel imports, domestic producers can refuse to sell steel to the government or price it exorbitantly. The only way to really ensure national security is for the government to nationalize the steel industry (which Truman did in 1952 until his action was struck down by the Supreme Court). But why stop with the steel industry? Soldiers have to eat and wear shoes, so why not nationalize the farm and shoe industries?

But if even the U.S. military doesn’t use the national-security argument, then why should anyone else? In a Defense Department memo — issued in response to the president’s tariff proposal and a Commerce Department report pushing for tariffs — the secretary of Defense stated that the tariffs were not necessary: “The US military requirements for steel and aluminum each only represent about three percent of US production. Therefore, DoD does not believe that the finds in the reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.” And of course, if the U.S. military was used strictly for defense instead of offense, it would need even less steel and aluminum. As recently explained by Reagan budget director David Stockman,

If Washington stopped wasting money on aircraft carriers, tanks, amphibious landing ships, TOW missiles, airlift planes and bunker buster bombs, among other weapons of foreign invasion and occupation, the national defense really wouldn’t need much more steel annually than is produced by Denmark (70k tons). In today’s world, in fact, military steel is about empire, not homeland security.

Last year the United States produced an estimated 82 million tons of steel and imported steel from 85 countries. The top source country for steel was Canada. China barely made the top ten.

The sixth implication of protectionism is that tariffs are different from taxes. A tariff is an import tax. A tariff is an indirect tax, since it is not paid directly by the final consumer of the imported goods. A tariff is a hidden tax, since no consumer is aware of the amount of the tax that is embedded in the cost of the imported good he purchases. Any way you look at it, a tariff is a tax. The economic effects of tariffs are all the same regardless of the intentions of the presidential decree or congressional legislation that imposes them: tariffs raise money for the government and raise prices on consumer goods (either directly for imports of consumption goods, or indirectly for imports of intermediate goods). When a president or the Congress imposes tariffs on imported goods, it is important to recognize that these tariffs are actually taxes imposed on Americans who consume the goods, for it is they who will ultimately bear most of the burden of any tariffs, not the exporter or importer.

The seventh implication of protectionism is that trade deficits are important. According to the U.S. Census Bureau, Americans bought $505.6 billion worth of goods from China in 2017, but the Chinese purchased only $130.4 billion worth of goods from the United States — resulting in a trade deficit in goods of $375.2 billion. Trump has rounded that to “at least $500 billion.” (The combined goods and services deficit that the United States has with the whole world is about $566 billion.)

An increase in the trade deficit is not an increase in Americans’ indebtedness to foreigners. The concept of the trade deficit is based on the erroneous idea that trade takes place between nations. Trade — that is, commerce — takes place between individuals, businesses, and other organizations. That the two parties engaged in commerce are not located in the same country has no economic significance whatsoever. No one goes to sleep at night worrying about his trade deficit with Walmart and how he can get Walmart to purchase the same amount from him as he purchases from Walmart. It is just as true now as when Adam Smith wrote in The Wealth of Nations in 1776 that “nothing can be more absurd than the whole doctrine of the balance of trade.”

Our third president, Thomas Jefferson, had it right:

The true theory of our Constitution is surely the wisest and best, that the States are independent as to everything within themselves, and united as to everything respecting foreign affairs. Let the General Government be reduced to foreign concerns only, and let our affairs be disentangled from those of all other nations, except as to commerce, which the merchants will manage the better, the more they are left free to manage for themselves, and our General Government may be reduced to a very simple organization, and a very inexpensive one; a few plain duties to be performed by a few servants.

Let the merchants — not the government — manage commerce.

This article was originally published in the July 2018 edition of Future of Freedom.

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