John Locke Update / Research Brief

When it Comes to Trade, Two “Unfairs” Don’t Make a “Fair”

posted on in Economic Growth & Development, Fiscal Insight, Spending & Taxes
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Is it unfair that some of our trading partners impose import restrictions like tariffs and quotas on American-made products or subsidies to industries that export to the U.S. The answer is, of course, yes. (We’ll get to who is treated unfairly below.) Is that unfairness in any way remedied when our government, in retaliation, imposes import restrictions on their products or is it simply compounded?

Who are protectionist measures unfair to?

Let’s imagine that China has tariffs in place on imported automobiles made in the United States. First, this clearly is unfair to those U.S. automakers that are prevented from offering the cars that they make to potential customers in China, that is, to people in China who, absent the added costs associated with the tariff which artificially raise the price of the cars in China, would want to purchase them. But obviously, these tariffs are also unfair to the China’s automobile consumers. They deny China’s consumers the opportunity to make purchases that they believe would make them better off. And we are not just referring to the American made cars. Because competition in the auto market in China is reduced overall, the price of all cars is higher than they otherwise would be. So, in instituting such tariffs, the Chinese government is not only deciding to give domestic automakers an unfair advantage in the marketplace, but they are also treating their own consumers of automobile unfairly in the process. They are coercively transferring wealth from China’s automobile consumers to Chinese automobile makers.

Does retaliation remedy the unfairness?

So, as a response to this, in an attempt to “level the playing field” or in pursuit of “fair trade,” the U.S. government decides to levy tariffs on steel that is made in China and exported for sale in the in the U.S. It is difficult to see how “fairness” is enhanced by doing this. Does it help American steel manufacturers? Of course. But it is not clear why the fact that China is giving their auto industry and unfair advantage by treating their consumers of automobiles in their country (and our producers of automobiles) unfairly is a problem that is somehow fixed by the U.S. doing the same thing in response, except with respect to American steel manufacturers and American consumers of steel.

Putting tariffs on Chinese steel unfairly advantages American steel producers by punishing not only Chinese producers but American consumers. These are mostly industries that use steel as an input into their production processes, which includes, at some level, nearly all products and industries, including automobiles. This means that American consumers in all segments of the U.S. market pay the price for China’s restrictions on automobile imports. A policy like this simply layers injustice upon injustice.

What if the excuse for tariffs on imported steel from China is not that China is putting tariffs on the U.S. made cars but is subsidizing the price of steel sold in the United States, giving Chinese steel an “unfair” advantage? First let’s be clear, while they are subsidizing the export of steel they are once again treating their own consumers unfairly. This drives up the price of steel in their own country which, as with the case in the United States, drives up the cost of production and therefore prices of steel using products, including automobiles, in their own country.

In other words, the subsidy for steel actually acts, from the Chinese consumers perspective, the same as a tariff on imported steel would. Furthermore, assuming the subsidies for exported steel in China are coming from tax money, they are actually taxing their own people to subsidize American consumers. This is because the subsidized steel is actually making the production of goods made from steel in the United States cheaper than they otherwise would be. It also means that resources that would otherwise have to go into the production of steel in the United States, i.e., labor and capital, are freed up to expand the production of other things. Furthermore, consumers have more money in their pockets to spend on products that they would otherwise not be able to afford. A Chinese export subsidy on steel, or anything else for that matter, actually ends of helping those countries that can take advantage of the subsidy, while hurting not only their own consumers but their economy more generally.

The point is that this tit-for-tat, from an economics perspective, is not beneficial to the United States and certainly doesn’t make trade any fairer. The distinction between free trade and fair trade is a phony one promulgated by those industries that stand to benefit from protectionism. When it comes to international trade, the fairest policy is one that allows Americans to purchase whatever products they want from whomever they want at whatever freely negotiated price they can settle on.

In the end, to promote “fair trade” our government should pursue unilateral free trade. It should get rid of all artificial barriers to consumer sovereignty by abolishing all import quotas, tariffs, and export subsidies.  Our government should not use the fact that other countries treat their consumers and industries unfairly as a reason to do the same thing to ours.

Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He also holds the title of Lecturer at… ...

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