The One Subject Where Biden and Trump Are Equally Horrible
And their horribleness on this one subject could prove disastrous to the U.S. economy.
Does anyone remember Adam Smith? Or has he been “unpersoned” and no one has informed me?
I ask because the economics taught today appear to have purged the great Scottish philosopher/economist from existence, and no more so when we vet the two presidential candidates’ stances on trade. This Dynamic Duo are only too eager to impose tariffs on imports: and with the one, the zeal of a rabid convert. Their economic advisors offer little resistance; on the contrary, only their endorsement.
Smith, for those precious few who might care, is best known for his observational metaphor of the invisible hand: “He intends only his own gain,” Smith wrote two-hundred-fifty years ago in The Wealth of Nations, referring to the merchant, “and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” To paraphrase: The merchant benefits society when he pursues commerce intended to benefit himself.
Smith’s insights on trade were more insightful, if not more profound. Smith was the ultimate anti-mercantilist. He recognized the evils in protectionism pursued by limiting trade through quotas, prohibitions, and tariffs.
(Sidebar: Mercantilism is a nationalist economic policy designed to maximize exports and minimize imports. The mercantilist wishes to accumulate resources within his country and use these resources for one-sided trade – it all goes out and the money comes in. The mercantilist believes exports create wealth and that positive trade balances – the money balances – are proof of wealth. The country that receives the money is better off than the country that gets the goods.)
Smith understood, perhaps not explicitly, Frédéric Bastiat’s concept of the “unseen.” (The understanding would have to be implicit. Bastiat was born 10 years after Smith’s death.) We can see the benefits that accrue to the organized, concentrated minority. We fail to see the costs borne by the diffuse, unorganized majority.
Business and industry are the concentrated, organized minority. They are the seen. They seek protection and privilege through lobbying government. Tariffs bestow protection and privilege. They protect domestic industry from foreign competition with the privilege of artificially high prices. The diffused consuming public foots the bill with higher prices, which reduces spending and investing elsewhere. Because tariffs are absorbed over a wide base, the cost per tariff is negligible to any individual consumer, so it’s to no one’s self-interest to protest a particular tariff. But when they accumulate, tariffs lead to death by a thousand nicks.
Let’s consider steel.
The United States imposes a 25% tariff on imported steel (with a few exceptions) under Section 232 of the Trade Expansion Act of 1962. This steel tariff was first imposed in March 2018 by President Trump putatively to protect national security interests related to the American steel industry.
The tariffs have increased the average price of imported steel by 22.7% and the average domestic price by 0.7%. Domestic production has increased by 1.9% due to the haven from competition the tariffs provide. U.S. steel production was $1.3 billion higher in 2021 because of the new tariffs.
A steel tariff benefits the U.S. steel industry, if I may belabor the obvious. A tariff moats the industry’s rice bowl. All in the tightly knitted community are readily seen, organized, and counted. They are featured in the news. We can commiserate with their smiling faces.
The steel industry is protected, as for the rest of us, not so much. If IBISWorld data are correct, the steel industry employs 90,100 directly. (We can assume that a few hundred thousand more realize at least some employment directly or indirectly supporting the industry.) The tariffs cost an estimated $650,000 per steel job saved. Meanwhile, downstream industries that use steel experienced an annual $3.4 billion loss in production from 2018-2021, according to a study by the Tax Foundation. Increased costs. Steel-dependent manufacturers are estimated to have reduced direct employment by 75,000.
(Sidebar: I am using economics studies to fortify my thesis, though I’ll confess that nearly all economic studies are wrong. They might be right on trends and direction, but they will always be wrong on empirical specifics. Economics is not a science, as many believe. It is a branch of logic. When the studies are mostly correct is when they adhere to a priori knowledge. Things that require no empirical evidence: e.g., a bachelor is a single man or two plus two make four. We know that minimum wage laws will reduce low-end-job formation and new worker opportunities. We just can’t know to what extent. Always remember that economics can’t measure or predict with accuracy; it can only explain.)
What if the Chinese steel producers were willing to sell steel to us at half the price of U.S. producers? We know if the steel arrives unencumbered, the United States will no longer produce steel, turning instead to producing an endless reporting of woeful tales. The news headlines would be replete with sob stories of jobs lost and factories closed. It would be so visceral and difficult to discount because the tales would be imbued with the sad-sack individual faces of the afflicted.
But what about the rest of us, the vast happy unseen majority? The benefits would be less apparent as the costs incurred, though the benefits would far outdistance the costs. Where would we find the stories featuring the smiling faces?
Industries that consume steel – appliance and automobile manufacturers and construction – would benefit without doubt. These companies could produce more at a lower cost. They could charge less to customers and be equally profitable. They would grow because demand curves slope downward – the lower the cost, the greater the demand. And with more capital available because consumers pay less for products manufactured with steel, consumers have more money to spend or invest elsewhere, which would stimulate growth and new investment. How it would all play out and to what extent is impossible to know, but because of our a priori knowledge of human behavior, we know it would play out for the better.
What about national security?
It’s a political term, and a silly one. It’s a convenient, utilitarian ploy for the politician to grant privilege. Anything can be filed under “national security” if a politician believes political capital is available for doing so. If we no longer manufacture steel, who will provide us with steel for us to manufacture weapons should China turn hostile?
But why would the Chinese turn hostile? "When goods cross borders, armies don't” is a quote attributed to our beloved Basiat. Whether the attribution is apocryphal or legit, the sentiment is true. Trade promotes rapprochement, at least among those who are engaged in it. The concept is easy to fathom because you experience it daily. Business transactions frequently end with a “thank you” after the exchange of values. Both parties believe they have improved their lot, and they are thankful for it.
We should also look at trade through the exporter’s eyes. He’s not a charity; he is guided by Smith’s invisible hand. He sells to profit, and if he thinks he will profit, what is his motivation to change? Maybe he values a cause (something extreme like jihad) over profits, but among people of commerce, this higher psychic cause is set aside. Besides, causes and profits need not be mutually exclusive, and rarely are. Rational economic behavior dominates individual human behavior. Unfortunately, irrational economic behavior frequently dominates political behavior; the former bears the consequences of his behavior, the latter doesn’t.
Should we counter trade perceived as unfair with tariffs? Perhaps our Chinese steel manufacturers benefit from government subsidies. Surely, this privilege warrants a retaliatory tariff from the other side.
Surely not, because we benefit no less, and suffer no more of a cost. (loss of a domestic steel industry). Whether the advantage is produced by efficiency or subsidy, it’s immaterial to us. If the Chinese advantage arises from a subsidy, the Chinese are the ones bearing a high cost. Resources are confiscated and directed toward favored, less efficient activity. (If the consumer valued subsidized steel, a coercive act of confiscating and proportioning wouldn’t be required.) A subsidized industry by its nature is an inefficient industry and one unsustainable. The Chinese are made poorer by the experience, as we are with our subsidized industries. (I’m looking at you chipmakers Intel et al.)
If someone shoots a hole in his boat, you don’t respond by doing likewise. Tit-for-tat responses always leave you worse for wear.
Let’s get a little conspiratorial: The subsidy could be a product of malevolent intent. What if the Chinese want to ruin the U.S. steel industry with its low-cost steel only to jack up the price once the U.S. steel industry has been vanquished? Predatory pricing now, price gouging later.
(Sidebar: I cannot resist commenting on predatory pricing and price gouging. They are ridiculous terms, because they are fiction. You can sell your primary product at below costs for only a limited time. Perhaps you will gain some market share, but the minute you raise prices to generate to cover your cost and generate a profit, what is gained will soon be lost. Customers always bristle at price increases and are wont to seek substitutes. As for price gouging, no one in private business forces anyone to pay a price he is unwilling to pay. And when a shortage occurs? A hurricane hits New Orleans and gasoline supply is cut off. The few gas stations that have inventory raise the price of gasoline to $12/gallon from $3/gallon. Surely, that’s price gouging? Wrong. The price reflects the new economic reality. It is the rational reaction. The higher price has two salubrious “invisible-hand” attributes: It encourages conservation. Only those who value gas most will pay the higher price. The higher price signals a profit opportunity for suppliers. It motivates them to get additional supply to the market ASAP, thus ensuring prices will fall sooner than later.)
For argument's sake, let’s assume it’s true – the Chinese want to cut prices today and rake us over the coals tomorrow. So what? We still benefit from the period of low steel prices, even if they were artificially low. Besides, our accumulated steel-manufacturing knowledge remains. We could always return to steel marketing if the market dictates. The United States has shown a remarkable propensity to ramp up production tout de suite if need be (such as in World War II).
And let’s vet reality: No steel-producing monopolist exists. Japan, South Korea, India, Australia are prodigious steel producers. The world is a complicated, intertwined place populated with self-interest, entrepreneurial people. If a profit can be made, someone (or rather “somones”) will step forward to fill the void and profit. We will always be steel secure.
(Sidebar: Perhaps you have noticed the United States lacks a textile industry. It having joined the dinosaurs more than 50 years ago. Do you suffer from clothing insecurity? Do find it difficult to secure attire?)
How difficult it is to convince the plebs otherwise. Our unfavorable trade balance with China has destroyed our industrial infrastructure, the doomsayers lament and many believe. We no longer have the factories and skilled workers to fight a major war. Really? The United States has sent $175 billion in aid to Ukraine since the start of that country’s war with Russia. Most of if it has been in the form of equipment and armaments – weapons systems, ammunition, drones, protective gear, vehicles – I doubt little of that aid was manufactured in Guangdong Province.
Free trade is fair trade for the importing country. We cannot control what others do. If other countries want to lower their living standards by limiting trade with tariffs, quotas, or prohibitions, let them. It they wish to promote exports with subsidies to favored industries, all the better, the more for us. Just don’t react in kind.
And as for the trade deficit, it’s a nonstarter. We are not losing wealth because dollars flow out while goods and services flow in. The dude across the ocean valued the dollars more than the goods or service he produced, you valued the good or service more than the dollars. Both sides are improved.
Our foreign friend now faces a minor conundrum. He holds dollars, which have no utility in his country. They have value only for exchange, and not exchange within his country’s borders. They can be exchanged for the local currency, but that only regresses the problem to someone else. Our foreign dollar-holding friend really has only two choices: buy a good or service priced in dollars or invest his dollars in the U.S. economy. Both avenues benefit Americans.
What’s more, our foreign friend’s claim, unlike a claim of a creditor on a debtor, is nebulous. No one is contracted to sell and buy. Our foreign friend can buy a product or investment only if the price he’s willing to pay appeals to the seller when both parties engage in another mutually beneficial transaction. Mercantilists believe countries are made wealthier with a positive trade balance — that money is superior to goods and services. But why should exchange value be held in higher regard than use value?
(Sidebar: I refer, like everyone, to trade occurring between countries. It’s misleading. Trade occurs between individuals residing with the borders of particular countries. “Countries” trade nothing.)
What if these exporting mad foreigners set on a buying spree in the United States, a la the Japanese?
In the 1980s, the Japanese kept selling us radios, televisions, automobiles, stereos, and we kept paying with dollars. The Japanese wanted little of what Americans were producing, so they decided to buy America itself. They bought office complexes (most notably Rockefeller Center), golf courses, and hotel. If it was anchored to the ground, they wanted it. The Japanese bid up real estate to bubble proportions, and the bubble did what bubbles do. And by the end of the 1990s, the Americans had the radios, televisions, automobiles, and stereos. We also had the office complexes, golf courses, and hotels… and the money. Go figure.
Here’s something else to consider about our persistent trade deficit. Foreigners’ willingness to accept dollars and invest these dollars are proof of one thing: confidence in the United States. You don’t exchange good and services for paper, unless you believe that paper will holds its value.
Trade is the bedrock of civilization. The more of it, the more civilized the culture, the wealthier the citizenry.
Trade enables specialization. We do what we do best, and they do what they do best, and then we trade. This is something we have instinctively done since we ascended to bipedalism (as the materialist believes) or descended to bipedalism (as the creationist believes). We strive to trade because others are enough like us and at the same time sufficiently different to make it profitable for both sides. We produce different goods and services, which we trade to satisfy different wants – and no two people want the same products and services of the same quality in the same proportion. These differences enable profitable trade.
And if one group is superior to another group in producing, one holds an absolute advantage on everything? Trade occurs anyway.
No one holds an absolute advantage on everything. That said, the superior person will trade with the inferior person because of comparative advantage, a concept explicated by David Ricardo two-hundred years ago. I explicate by example:
LeBron James is a renowned basketball star, and we can assume a great athlete. Given his athletic skills, he could paint his house in six hours. By contrast, a local painter could do the same job in ten hours. Why should James hire the painter when he could do the job quicker, save a little cash, and achieve the same result?
Opportunity cost. James might save $1,000 by doing the job himself, but at the cost of forgoing the opportunity to perhaps earn a $50,000 speaking fee that day. Our painter is willing to do the job for $1,000 (we’ll assume netting $500 after cost) because his next best opportunity is to earn $300 for the day driving for Uber. He’ll want the job, and James will want to give it to him. James has an absolute advantage – he can do the job faster and at the same standard – but not a comparative one. He would lose the $50,000 opportunity. Trade is always worthwhile when opportunity costs and comparative advantages are considered.
So, we always want more trade not less – and neither presidential candidate gets it, or perhaps they prefer to prevaricate to their advantage because they know the American people don’t get it. Nothing new under the sun once again.
The Smoot-Hawley Tariff Act of 1930, which applied a 20% tariff to most imports, was a disaster, exacerbating the Great Depression, though less on the United States compared to other global economies. The United States was more of an autarky ninety years ago. Nevertheless, U.S. imports decreased by 66% from $4.4 billion in 1929 to $1.5 billion in 1933, and exports decreased by 61% from $5.4 billion to $2.1 billion. The tariffs' larger significance was perhaps as a symbol of beggar-thy-neighbor policies that worsened the Great Depression.
The United States is less of an autarky today. As of 2022, foreign trade, both exports and imports of goods and services, accounted for 27.4% of the United States' Gross Domestic Product (GDP). This figure represents the sum of all international trade as a share of the overall economic output of the country. The World Bank overview on trade states that "trade has increased incomes by 24% globally and by 50% for the poorest 40% of the population" since 1990.
Trump’s intent to impose a 10% tariff on all imports could prove far more disastrous than the disaster standard-bearer, the Smoot-Hawley Tariff of 1930, given that international trade is far more important to economic well-being today. You can be sure that the countries of trading partners will respond in kind, as they did ninety years ago. Stupid is as stupid does. Welcome to the next recession, if not another depression. (Trump’s desire to apply a 60% tariff to all Chinese imports and a 100% tariff to all foreign cars is criminally insane.)
Biden has been slightly less tariff-stupid than Trump, though he has still been stupid. Biden has maintained Trump’s 2018 tariffs. Biden, like Trump, suffers from China derangement syndrome, having imposed additional tariffs on Chinese steel, EVs, batteries, solar cells, aluminum, and medical equipment. At the same time, Biden has lavished subsidies on U.S. semiconductor manufacturers.
Always, always, always remember this: The costs impeding trade for the unknown many always exceed the benefits that accrue to the privileged few, even when the foreigners manipulate the rules to advantage their exports (while disadvantaging their fellow citizens.) We don’t need economic studies for proof, though many exist. The net benefit trade provides is a priori knowledge like our knowledge of the single bachelor and the four we get when summing two plus two.
We thrive, prosper, and evolve materially on a proven trinity – self-interest, division of labor, and free trade – but always with one goal -consumption. Smith was one of the first to explicate that “consumption is the sole end and purpose of production.” We do not produce to create jobs or to manufacture billionaires. We produce to satisfy consumer demand. That is the end-all, be-all of a capitalist economy.