Friday, September 13, 2019

Are Tariffs A Bad Idea? Yes and No.

Image result for vw transporter 1964 pickup

Tariffs could be a way of leveling the playing field, but sadly are so randomly applied that they end up causing harm.

Many people argue that the tariffs enacted by the Hoover administration made the Great Depression even greater.  Others argue that "free trade" - trade without any tariffs whatsoever - will eventually raise the tide for all boats, and every country will benefit.   Which is right?  Well, both are, and neither.

The problem is, ideas that exist in the minds of economists as "thought experiments" have different results in the real-world, when politics and nationalism come into play.

For example, Country A decides to go on a "Free Trade" course of action, and either eliminates or reduces import tariffs on most goods.    They buy a lot of stuff from, let's say, Country C, who has a huge low-cost labor force.   But Country C doesn't return the favor, instead putting high import duties on anything imported from Country A (Much as country J, I, and E do!).

It isn't hard to see what will happen.   Eventually, Country A will import more and more things from Country C (and others) as they are cheaper to buy - which will put domestic producers in Country A out of business.

But it gets even more complicated than that.  County A has laws against dumping toxic waste, against using dangerous chemicals, and against exploiting labor and child labor.   As a result, doing business in Country A is more expensive.   But in Country C, they still burn coal, and people work 12 hours a day without unions interfering, and dumping toxic waste into the ocean is, while technically illegal, often overlooked.

Now, one logical way to enact tariffs in a situation like this, would be to level ecological and labor tariffs on countries, based on their environmental standards and labor-law practices.   This would encourage Country C, for example, to pay its employees more and treat them better, and pollute far less.

But, suppose instead of that, you signed a treaty among Countries A, C, J, I, and E, where they all agreed to reduce pollution, but Countries A, J, and E had to do the most work, and Countries C and I were given a pass entirely because they were "underprivileged"?   That would make even less sense.  When Country A cuts tariffs one-way (in favor of Country C) it only encourages more pollution.  When you sign a treaty exempting Country C from pollution pledges, it only makes things worse.

So how do you fix this?   Well, the wrong way would be to slap tariffs, willy-nilly, on random products - and then to slap retaliatory tariffs on other products, not based on any sort of economic model, but just to balance the dollar amount the "other guy" dinged you for.

That is how the chicken tax came into being.   The Germans slapped a heavy import duty on chickens on the USA back in the mid-1960s, as they felt our low prices (which were the result of our amazing agricultural production) were harming German farmers.   In retaliation, we slapped a 25% import duty on light trucks.   Now, at that time, few light trucks were being imported, other than the VW transporter.   But the dollar amount of damage from the light truck duty was deemed equal to the chicken duty imposed by Germany - and that was the "logic" behind taxing trucks in response to taxing chickens.

This is a shitty way to do tariffs!

But that is why, after 1964, you never saw many VW "transporter" pickups (as shown above) being imported into the United States, even though sales of the beloved VW "bus" continued to thrive.   With the chicken tax, the pickup would cost more than the bus!  And even today, Ford Motor Company imports "Transit" vans from Turkey, with windows and flimsy back seats - to avoid the chicken tax.   At Port-of-Entry Baltimore, the seats are removed and shredded, and the windows taken out and replaced with blank panels.   It's cheaper to do this than to pay the duty.   They even have a name for it - Tariff Engineering.

And the "chicken tax" illustrates a problem with tariffs - once enacted, they are damn hard to get rid of.   It has been decades since our spat with Germany over chickens, yet the tariff remains.

Free trade - fair trade - could work, if every country had similar labor laws and environmental laws.  Otherwise, we are just exporting our pollution problems and labor problems to third world countries, often with disastrous results.   Of course, some countries - such as Country C - aren't about to "level the playing field" as it means they no longer have economic advantage in trade, and as a result, their exports would suffer.

But, there are signs that "Free Trade" may work, at least in part.   As County C industrializes, more and more skilled workers are needed.  Since they are in higher demand, they will demand higher wages, over time (and are).  Eventually, they will unionize and strike.

And as Country C industrializes, they will start to drown in their own pollution, much as Country A did, back in the day, before it enacted pollution control laws and de-industrialized (and exported its "dirty industries" to Country C and Country I).   When people can't breathe the air anymore, government may eventually take action - after all politicians have to breathe, too.

But the science of Free Trade is not an exact science - there is a hysteresis in the system, and as a result, huge inequities can result.   Maybe a scientifically applied tariff system could cure this - but it would have to be administered by a third party - something both Country A and Country C (among others) would revolt against.

Slap-dash tariffs applied randomly?   I am not sure that is making things better.