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The protectionist ratchet effect – and lack of political anger about it

The recent decision by President Biden to slap tariffs on a range of Chinese imports, including electric vehicles, has gone through with relatively little political noise and pushback. There was a time a while ago when certain figures in the Republican Party and part of the mainstream media would have been alarmed by this, given how widely free trade was accepted as a default position, with caveats about protecting sectors deemed vital for security, or because of things such as blatant abuse of intellectual property. Nowadays, it appears that mercantilism, and special interest lobbying power that drives it, is as strong as ever.

The Wall Street Journal writes ($):

The way to defeat Beijing economically is by making America more competitive. This means playing to traditional strengths of innovation, low taxes and regulation, and trade alliances. Mr. Biden has done the opposite. His Administration has blocked critical mineral mining projects. It has attacked domestic fossil-fuel production and petrochemicals, which contributes to pharmaceutical production.

Of course, the question is who is being “defeated”, if at all, by hammering the economy of China? Will it be the Chinese Communist Party, which in many ways is more or less a sort of Mafia, or the regular Chinese people? Let’s not forget that tens of millions of Chinese citizens have been lifted to a standard of living that would have been a shock to those familiar with the terrible Mao-induced catastophes/crimes of the Great Leap Forward in the 50s and the Cultural Revolution of the mid-60s.

While I suppose that deliberately impoverishing China – which is what some people might want to see – is the goal, regardless of the human costs – I see it as right to pursue two broad courses – encourage prosperity around the world and resist the most egregious abuses. It is also a fact worth considering that it is not, in general, prosperous countries that attack other rich ones. It usually tends to be countries that are in decline for various reasons – often self-induced – that lash out against their real or presumed opponents. A China that wants to conquer Taiwan, for example, or mess with the West in various ways, is in my view motivated by a sort of nagging insecurity as much as anything else. China has done far more to harm itself by its clampdowns under Xi than anything that Biden, Trump or whoever is likely to do. And protectionism is, as I explain below, a very blunt instrument that causes widespread collateral damage and self-harm.

The newspaper notes that one bad policy begets another, as politicians try to offset the bad effects of their previous policy:

The Biden tariffs are a classic example of how bad industrial policy is compounded by another bad policy in the name of fixing the first mistake. Thus Mr. Biden wants to use tariffs to raise the price of EVs that he wants everyone to buy. It’s bananas.

It is. The long-term negative consequences of rising protectionism will be complacency, sloth, special pleading, shoddier products, and the rest. This may take years to manifest itself. It is not even as if the tariffs being imposed by the Biden administration are to be offset by large tax cuts domestically. In the late 19th Century, the various administrations after the US Civil War did impose tariffs, but domestic taxes were puny compared with what we have now.

In any event, arguments that protectionism “protects” seem to be as weak as they ever have been. And there are the downstream impacts to consider: by making imports of solar panels, cars, cooking oil or whatever more expensive, it increases costs not just to consumers, but also to intermediate manufacturers who use these things. Import tariffs on steel drive up the cost of everthing made with steel, to give one simple example.

There is also the corrupting effect that protectionism has, as explained by Phillip W Magness:

In economic terms, tariffs deliver a “rent” by transferring a portion of the consumer surplus from exchange to beneficiary producers who no longer face import competition. The collective action advantages of concentrated interest groups enable lobbying efforts to coalesce around tariff-benefitting industries, which then divert resources away from productive economic activities and into seeking favors through the political system. On net, the concentrated benefits received by politically savvy industries are dwarfed by the combination of deadweight losses on consumers and political losses due to rent-seeking to obtain more tariffs.

Magness also notes another myth about tariffs that modern-day protectionists like to lean on:

As Douglas Irwin has shown, the claimed correlations between late nineteenth-century American industrialization and protectionism are both exaggerated and spurious. Economic growth in sectors that did not face heavy import-competition—think of transportation, communication, and utilities—generally outpaced the tariff-beneficiaries of industrial manufacturing. The United States also had the unique advantage of a large, geographically diverse internal commercial base in this period. Nor were tariffs the unambiguous benefit to industry that Cass claims. They raised the prices on imported capital goods like heavy machinery, which likely impaired many of the same industries that benefited from tariffs on their own goods.

In any event, while they are different in many ways, it appears that both Mr Biden and Mr Trump are in agreement that tariffs are great. Whatever other qualities, or the lack thereof, may distinguish these men from each other and may persuade voters to jump one way or the other, or abstain, or just despair, it appears that on protectionism, we are back in an age as if Adam Smith and David Ricardo never existed.

12 comments to The protectionist ratchet effect – and lack of political anger about it

  • Marius

    Why should US car manufacturers be expected to ‘compete’ with Chinese firms operating under labour laws which would be illegal in the US? How can manufacturers of all sorts be expected to compete with China’s coal-fired manufacturing industries? Do you think Chinese EV firms look too hard at how their materials are mined?

    The West has very stupidly moved into a situation where it is enriching an enemy and furthermore has allowed that enemy to join global systems and then cheat its arse off. Getting out of this situation isn’t easy but big tariffs on big ticket items from China is a start.

  • Paul Marks

    All Chinese enterprises, without state owned or “privately” owned, serve the political cause of the People’s Republic of China – its political project of global dominance.

    This is nothing to do with Sir Dudley North, Adam Smith or the other free trade economists.

    However, just ending “trade” with China (to the horror of the Economist magazine [or the Wall Street Journal – which is about as committed to really opposing the PRC as it is to honest elections – in reality it would let both the flood of imports and the flood of fake votes continue] – which claims to oppose the PRC Dictatorship but declares it is “free trade” to carry on enabling it) is not enough.

    The matters that Marius raises would still be relevant even if the People’s Republic of China did not exist – the United States, and the rest of the West, can not carry on with “Collective Bargaining” (which is enabled by the state – as W.H. Hutt explained) “labour laws” (which are NOT the cause of improved wages or conditions of work over time), “Net Zero” and all the other absurdities.

    Obviously the policy of “trade with China” created by President Nixon is utterly insane and had led to a nightmare (apart for the Corporate manager traitors who sold out American manufacturing towns and cities – so they could retire and buy themselves big houses in fashionable areas) – but ending this terrible policy is, again, not enough. The policies have undermined manufacturing competitiveness must be ended.

    Yes including the deluded policy of the U.S. Dollar as “the world reserve currency” – a policy that makes American exports uncompetitive and floods in imports (remember Adam Smith was writing when gold was the currency – he did have to deal with this situation).

    “But ending this policy will massively reduce the American standard of living” – for SOME people yes, but this “standard of living” is artificial – the United States (and Britain) must get back to having a real economy.

  • Roué le Jour

    What Marius said. See also loading your own livestock farmers up to the gills with animal welfare regulations and then importing from countries that don’t have those rules.

    There are countless other examples. Environmental regulations prevent silicon chips being made in the west. Similar regulations inhibit coal, oil and gas extraction.

    To return to a hobby horse of mine, the west has everything needed to create a happy and prosperous society but government refuses to do it.

  • Paul Marks

    Trade with the People’s Republic of China is sometimes compared to trade with National Socialist Germany in the 1930s – back then Corporate managers defended themselves by saying they were not trading with the Nazi state, but with “private companies” – ignoring the basic fact that the “private companies” of 1930s Germany were under state direction and serving the Nazi goal of world power – just as the “private companies” of the People’s Republic of China do today.

    But there is a vast difference – Nazi Germany was a relatively (relatively) small country – it had no real chance of dominating the world, so (it could be argued) the British and American Corporate managers who traded with it were just profiting from its delusions – although World War II was rather nasty-to-put-the-matter-mildly.

    However, the People’s Republic of China is huge (for example it has ten times the population of Japan) and its manufacturing strength is already twice that of the United States. The PRC plans for world power are not delusional at all – they are credible, they may NOT succeed, but they have a reasonable chance of success – especially facing the collapsing DEI and SEG (or whatever the name is this week) Corporate State West.

    So there is no excuse for those who trade with it (the “we are not trading with the Chinese state, we are trading with private companies” line, is a sick joke).

    Although economically depressed the societies (societies) of Western nations such as Britain and the United States were strong in the 1930s (families were strong, churches and secular associations were strong, and so on) – today the societies of these nations are in a state of radical decay, perhaps collapse.

    There is a actually far less of an excuse for what Corporate managers are now doing in relation to China, than there was for the Corporate managers of the 1930s in relation to Germany – although these 1930s Corporate managers are so often condemned today.

  • Paul Marks

    My apologies for missing out the word “not” – of course Adam Smith and the other free trade economists did NOT have to deal with a situation of a fiat currency and a Credit Bubble financial system.

    Their theories were written when gold (or silver) was the currency (no “world reserve” fiat currency) and where finance still had some connection to Real Savings (the actual sacrifice of consumption – enabling the saving of Cash Money), rather than being a politically supported Credit Bubble as it is today. And, no, Credit Money expansion is NOT “saving – as real as any other form” (one of the delusions of the late Lord Keynes).

    If one goes back far enough even “The City” in Britain and “Wall Street” (after which the Wall Street Journal is named) in the United States, were part of a real economy, and a real society.

    Whether we can get back to that, or whether collapse is inevitable now, remains to be seen.

  • Johnathan Pearce (London)

    Paul Marks: “Obviously the policy of “trade with China” created by President Nixon is utterly insane and had led to a nightmare (apart for the Corporate manager traitors who sold out American manufacturing towns and cities – so they could retire and buy themselves big houses in fashionable areas) – but ending this terrible policy is, again, not enough. The policies have undermined manufacturing competitiveness must be ended.”

    The word “obviously” is doing a lot of work here. When Nixon embarked on trying to change relations with Beijing in the early 1970s, he did so in part because he and Kissenger figured it as a way to use a lever against the Soviet Union, and they could see how Asia was rising in broad terms economically, not just because of external US trade policy (although it was a factor re Japan, S. Korea, Taiwan, Singapore, Philippines, etc) but because the people in these various countries had had enough of Communism. China had experienced the nightmare of Mao, and while not being able to make a clean admission of this (Chinese culture attaches much importance to “face”), the post-Deng reforms went some way towards that.

    The question I have for you, Paul, and others is this: If the only trade allowable under your approach is between completely free countries, then that’s a pretty emphatic case of letting perfection being the enemy of the good. The Economist, WSJ or whatever other publications haunt your mind aren’t naive about China (the WSJ has had journalists jailed in China, and whole desks of reporters covering China have been affected), but they can smell protectionist rubbish a mile away.

    You are correct that even without the China angle, much of the damage done is domestically driven (fiat currency, interventionism, massive spending, debt, taxes, ant-enterprise culture and so on), but let’s not make problems worse. Bear in mind that a lot of the tariffs now affect the broadly free countries of Western Europe and certain other jurisdictions. Remember also that Democrat and Republican politicians like Dick Gephardt and Patrick Buchanan etc were bashing free trade, often by reference to absurd zero-sum economics, 40 years ago, in relation to Japan and West Germany.

    There are specific ways to curb trade with particular Chinese businesses that don’t go in for the equivalent of RAF area bombing.

  • Paul Marks

    Sorry about the delay – I just had a computer failure.

    As you know, from reading such works as “Mao: The Untold Story”, the idea that the People’s Republic of China could, in some way, be politically helpful to the United States was one of the worst delusions of President Nixon and Henry Kissinger.

    Of course, there were border clashes with the Soviet Union and rivalry round the world – but the People’s Republic of China was even more determined to destroy the United States than the Soviet Union was. Mao and the others were astonished by the stupidity of Nixon and Kissinger. And, of course, continued to work to kill Americans (for example in Indo China) and destroy the United States – and the People’s Republic of China continues to work to destroy America and the other Western Powers (of course it does – no one should be surprised by this).

    I AGREE that trade was minor under Nixon – it is such Presidents as Carter and Clinton who really “opened up to China” – but the idea that trade with the PRC is beneficial to America (or Britain) is radically misguided.

    It is not “particular Chinese businesses” – it is all of them, they all serve the political objective, nor is the United States (or the United Kingdom) capable of playing subtle games – our political and judicial systems to now allow for clever games.

    We either trade with the PRC, in which case we will end up controlled by the PRC (which is the objective of the “trade”), or we do not.

  • Paul Marks

    Rour le Jour.

    It is not what Western governments fail to do that is the real problem – it is what they do that is the real problem.

    For example, pushing DEI (EDI in Britain) and Net Zero.

    And endless bank bailouts – mostly hidden, but some out in the open.

    “What should the government do during a bank run?”

    Nothing – as anything the government does will just make things even worse later on.

    This goes back a long way….

    For example, Prime Minister Russell refused to give a bailout to Ireland (where one in three of the population either died or fled the country) but did bailout the London banks – suspending Peel’s Banking Act to do so.

    I may not be a very nice person – but even I have a problem with that sense of priorities.

    “The City” and “Wall Street” do NOT deserve special treatment.

    I have no problem with money lenders – let them be “Shylocks” if that is what they want to be.

    But they must first have the Cash-Money they are lending out, and when they have lent it out, let them admit that they do NOT have the money any more – till when, and if, they are repaid.

    If they play Credit Bubble – the bubble will inevitably burst, and then the people may decide “let-them-hang-from-the-nearest-lamp-post” – I would certainly not condone such violence, but it would be a useful reminder to other people to not play Credit Bubble.

  • Steven R

    There’s little to no pushback for Biden imposing tariffs on electric vehicles because nobody cares about them any longer. They are a concept that didn’t work and was not wanted. Simply put, Americans don’t care if there are tariffs because nobody is buying the bloody things anyway. he could put a 1,000% tariff on e-cars and Americans will still shrug their shoulders. Might as well put the tariffs on authentic Chinese peasant-pulled rickshaws while he’s at it for all the good it does in the ling term.

  • John

    I agree with Steven. Fanciful EV uptake targets* are always a pipe dream with the requisite infrastructure even less achievable in the US than in our own fossil fuel rich island. Limiting affordable supply comes at minimal political cost.

    * mind you having visited Florida a couple of times recently there were an absolute shedload of entry level Tesla Model Ys with their odd little front ends looking like Keanu Reeves after his mouth had been sealed up by Agent Smith.

  • Martin

    through with relatively little political noise and pushback. There was a time a while ago when certain figures in the Republican Party and part of the mainstream media would have been alarmed by this, given how widely free trade was accepted as a default position

    This free trade as default position seems to peak with the 83-15 senate vote in 2000 to extend Permanent Normal Trade Relations with PRC just prior to the latter joining the WTO. Given that legislation hasn’t exactly turned out how it’s proponents claimed it would it’s not entirely surprising there is a protectionist backlash.

    Admittedly generalising but from what I’m aware protectionism was mainstream in the GOP pretty much from Lincoln right through to the 1980s. Pat Buchanan was mainstream in the 80s GOP and was in Reagan’s government. Free trade as a staunchly held GOP position seems more of a blip between the end of the Cold War up until Trump.

  • Snorri Godhi

    The question I have for you, Paul, and others is this: If the only trade allowable under your approach is between completely free countries, then that’s a pretty emphatic case of letting perfection being the enemy of the good.

    Paul did not say that trade should be allowable only between completely free countries: he said — as I understand — that there should be no trade with countries that pose a threat; especially not with countries that pose a global threat.

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