During his election campaign, US President-elect Donald Trump has touted tariffs as a way of protecting American jobs. But the has also announced that once in office he will impose tariffs on products coming from Mexico, Canada and China unless those countries assist him on two entirely separate policy points, assistance in stopping illegal immigration and helping to stop the flood of Fentanyl into the US.
At the same time, Christine Lagarde, the head of the IMF, has voiced concern about the tariffs, pointing out that a widespread use of tariffs will hurt global economic growth.
Theory and practice points to the fact that free trade increases economic welfare, measure as economic growth. Tariffs will make some imports more expensive. Domestic producers of competing products will increase the prices, once the imports get more expensive. And if a set of tariffs is met with a near-equal set of tariffs from other countries, exports will fall.
So a situation is created where domestic consumers will pay more for imported products and their competing domestic products. That may create some jobs domestically, but this effect will probably be balance out by job losses in the exporting sector. The net effect is that likely there will be no jobs created, but domestic consumers will pay more for the same products.
That is a loss of economic welfare, pure and simple. No economists with a grasp of history will dispute this.
However, since China was accepted as a member of WTO, the country has engaged in a number of practices that go directly against the free trade gospel. For one, the country has purely and simply extorted foreign companies to deliver technological secrets to the Chinese government against obtaining a license to operate in China.
China has also engaged in massive subvention of export companies to gain market share in certain sectors – EVs and batteries is a clear example of this practice. The Chinese government has not been particularly shy about its intentions: It is a question of geopolitical power to be a major player in certain sectors. It has also helped lifting millions of Chinese out of poverty. And in the West, we have got tons of cheap electronics. Globalisation has had the intended positive effects, but these results are increasingly tainted by the Chinese power play.
We in the West are no angels in this context, but we have largely stayed away from massive government subsidies aimed at certain export markets. Subventions have been used more narrowly.
The Covid pandemic was a wake-up call in more ways than one. Once the production of vaccines was to be ramped up, it appeared that many of the essential ingredients were mainly produced in – China. Current National Security Adviser to US President Biden, Jake Sullivan, famously stated that a superpower has to be able to produce all necessary strategical products domestically – otherwise it is not a superpower. In the case of vaccine ingredients, the domestic production was quickly increased.
Sullivans concerns moved the issue of tariffs to the top of the agenda: Globalisation has increased economic welfare. But it has had a price, namely that is has allowed China to strengthen its international position to a point where it threatens Western interests.
And this is exactly where economic theories end and geopolitical realities begin.
Tariffs for sure is poison for economic welfare, measured in terms of the production and consumption of goods. But if free trade allows players like China to begin threatening domestic security interests, globalisation has taken on a security dimension that economic theory simply cannot cover.
So if you think that the debate over tariffs is developing into a bit of a shouting match, try to understand it in the following way: The economic theory is correct when pointing out that tariffs reduce economic welfare. But welfare is not just to be able to maximise consumption. It is also about safety, democracy and freedom.
So it appears we are facing a stark choice when deciding whether to use tariffs or not: Welfare against security.There is, however, one thing that both economic theory and geopolitical security arguments agree: Using tariffs to pursue a host of conflicting goals will not work.
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