America Needs Big, Beautiful Tariffs

Jonah Goldberg writes that President Trump supports tariffs because he is “truly ignorant of some of the most basic” economic principles—or he is “deceiving the public” to push a hidden agenda.

Let’s not mince words: Goldberg’s implication is that Trump is either stupid or evil for promoting tariffs.

Goldberg is not alone. Economists like Steve Hanke routinely accuse Trump of economic illiteracy. Meanwhile, sophists such as Ben Shapiro assert that tariffs are fundamentally immoral—Shapiro once accused me of favoring “total state control of the economy” like the mass murderer/hair-care aficionado Joseph Stalin. For what crime? Wanting fair, reciprocal trade with China.

Since the “free trade brigade” tolerates charges of ignorance, let’s look at what is truly ignorant. Just how ignorant? Buckle up.

Worshipping Mephistopheles

Goldberg begins with the claim that trade deficits don’t matter. After all, “I have a trade deficit with my cigar shop, barbershop, supermarket, and liquor store. They get my money and I get goods and services in return.” Win-win.

The same is true of international trade: China gets our money, America gets their goods. Furthermore, the money we pay to China eventually returns to us, since American money must be spent on American stuff. In reality, there is no such thing as a deficit, just a balance of payments.

This analogy is duplicitous.

America does not run a trade deficit with just China. We run a global trade deficit. Returning to Goldberg’s analogy: this would be akin to having a deficit with the cigar shop, barber shop, supermarket, and liquor store, while at the same time being unemployed.

Now imagine this situation persisting for 60 years.

How would Goldberg pay for his cigars and liquor? He would either need to sell his prized collection of old National Review articles (assets) or max-out his shiny new credit cards (debt). In either case, Goldberg eventually would run out of money and need to reduce his consumption—or increase his income.

This is exactly what’s happening to America: we’re financing our trade deficit by selling assets and debt.

As for the assets: foreign investors, flush with American cash, now own 20 percent of all American equities. This is up from just 12 percent in 2007. Likewise, foreigners buy up more than $100 billion in American real estate every year—everything from New York penthouses to Oklahoma ranches. Essentially, we’re selling our country to China in exchange for robotic Ooga-Chaka Dancing Babies and other junk.

As for debt: China and friends loan us money so that we can buy their goods. This is reflected in America’s growing debt load. For example, foreigners now own 44 percent of America’s national public debt, worth over $6.3 trillion. They also own large amounts of our private debt, including 29 percent of all U.S. corporate bonds.

Needless to say, selling debt is an especially bad idea because we must repay both the principle and the interest. This will cost taxpayers trillions over the next few decades.

We are in the midst of history’s greatest consumption bubble. When it bursts—and it is a mathematical certainty that it will burst—the resulting economic collapse will shake the very foundations of our society.

We are selling our inheritance and shackling our children with debt to pay for our copious consumption. Trade deficits are economically illiterate and immoral. In other words, they are both stupid and evil.

Lessons from “The Brave Little Toaster”

Goldberg mocks Trump for suggesting “China and other trading partners pay tariffs instead of American consumers.” I believe this is because Goldberg doesn’t really know how tariffs work. Allow me to explain.

Most Americans assume that tariffs are just another sales tax. Thus, a 10 percent tariff on a product would increase the product’s price by 10 percent. Not so.

Tariffs are not applied to a product’s retail price, nor are they applied to the wholesale price. In fact, they’re often not even levied on the entire import price. Instead, tariffs are levied on the first sale price—the price paid to foreign vendors by American companies or their middlemen.

This method of calculation reduces the tax burden on American consumers, but preserves the tariff’s punitive effect on foreign producers.

For example, suppose President Trump imposes a 10 percent tariff on all Chinese toasters.

Black & Decker makes toasters in China. These toasters retail for $60 in American stores. Are tariffs imposed on retail prices? No. This means that the price of toasters will not rise by 10 percent—$66 toasters are a sophistic myth.

So just how much would this hypothetical tariff increase the price of toasters?

American stores buy their toasters from Chinese manufacturers. But because of China’s (intentionally) convoluted regulatory framework, our retailers often buy them via middlemen located in Hong Kong, Singapore, or Taiwan. These middlemen charge somewhere in the neighborhood of $14 per toaster.

And, of course, these middlemen don’t work for free: they buy the toasters directly from Chinese factories for $7 per toaster. This is the first sale price, and tariffs are calculated on this figure. Thus, the tariff charged on a Black & Decker toaster that retails for $60 works out to just 70 cents.

American consumers don’t pay 10 percent more for toasters—they pay just 1.15 percent more. And that’s assuming Black & Decker doesn’t simply source its toasters from one of China’s competitors, in which case consumers would not see any price increases at all.

This is the main purpose of Trump’s tariffs: to punish China without costing American consumers the kitchen sink.

All this being said, Goldberg should know that tariffs are a completely avoidable tax. Don’t want to pay? Buy American. It’s that simple. (Don’t you wish the same could be said of the income tax?)

Banana Republics Export . . . Bananas!

Goldberg’s next criticism is tied to the former: tariffs raise prices. How could it be otherwise? After all, “if the government taxes cheap washing machines from abroad, the price of washing machines will go up” almost as a matter of course. Conversely, free trade reduces prices by allowing countries to specialize their production.

Goldberg’s logic is clearly based upon David Ricardo’s theory of comparative advantage, which suggests that countries are enriched when they specialize their production in things they are relatively good at making, and trade the surplus for things they are relatively bad at making. Put simply, free trade enriches countries by allowing them to divide labor more efficiently.

The problem is that comparative advantage is domain-specific—it only works when certain preconditions are satisfied. For example, Ricardo himself writes that capital must be immobile for the theory to apply. But capital is highly mobile in today’s economy. Thus, only a fool or a charlatan would justify free trade with the theory of comparative advantage—which is exactly what Goldberg is doing.

Even if we assume that comparative advantage applies, the logic is still problematic. The theory suggests that the key to getting rich is to specialize in production, regardless of what you produce. That is, a country with a comparative advantage in pasteurizing milk should focus on pasteurizing more milk, while a country with a comparative advantage in manufacturing airplanes should focus on manufacturing more airplanes.

Basically, wealth is correlated with the degree of specialization, not the subject of specialization. This is objectively wrong.

For example, a 2006 paper titled “What You Export Matters” found that the sophistication of a nation’s exports is highly correlated with that nation’s wealth and growth potential. Essentially, countries exporting cars and computers were richer and grew faster, than countries exporting bananas and iron ore. Not all industries are created equal: some have high growth potential, others have very little.

Given this obvious fact, it makes sense to use tariffs to prevent high-value industries from relocating from America to cheaper countries, like China. In the end, the benefits of this long-term economic growth will greatly outweigh the immediate cost of our tariffs.

It’s clear that Jonah Goldberg—not President Trump—is “truly ignorant of some of the most basic” economic principles.  That, or he is “deceiving the public” to push a hidden agenda. Which is it, I wonder?

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