Economic Warfare is Still Warfare

And historically, it has led to kinetic conflicts. The Trump Administration should be careful about how it architects economic policy at home and abroad.

War is the health of the state.
—Randolph Bourne

If soldiers are not to cross international boundaries on missions of war, goods must cross them on missions of peace.
—Otto T. Mallery

Economic warfare is preferable to kinetic warfare, but economic warfare is still warfare. President Trump, full of characteristic bluster and bombast, is threatening war on multiple fronts. Tariff threats seem to be the only weapon in the arsenal. But when you couple such with all of Biden’s sanctions and seizures, adding trade wars threatens to push America into autarky.

“The thing about trade wars,” writes economist Donald Boudreaux, “is that they're wars where governments inflict damage on their own citizens in the hope of persuading the other government to stop inflicting damage on its citizens.”

A bizarre war, indeed.

Yet much of the world gets quietly conscripted into it. Trump is just loud and bellicose in his willingness to enter the fray. But how bellicose?

Now, I’m what you call a freedom maximalist. I am skeptical of government officials and their motives, whether those motives favor crony capitalists or some errant ideology. I suspect today’s populist protectionism is a mix of both.

But such policies have a checkered history.

Authorities ought to have damn good reasons to interfere with you or me transacting with other humans over borders—fundamentally, because our rights and sovereign choices ought to count for something. I’m no illusions about where rights really come from, though: It’s what power permits, not so much what our Creator grants. Wishing it were otherwise changes nothing. The Trump Administration, advised by the likes of Peter Navarro, is playing God.

We demand that the law require the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull's-eyes, deadlights, and blinds — that is, all openings, holes, chinks, and fissures through which the light of the sun may penetrate into houses, to the detriment of the fair industries with which we are blessed, which compete with that of the sun. —Frederic Bastiat

From a tradeoffs standpoint, it’s never immediately clear why shooting oneself in the foot—e.g. taxing our own citizens more for buying foreign goods—is good strategy in principle. That’s what we call a negative-sum game. The mercantilist notion is that tariffs and subsidies prop up local industries, because price distortions encourage people to buy national. So more people will by the crappy car from Detroit instead of the quality car from Dongtan.

Being the pragmatic sort, though, I understand there might be good reasons for targeted tariffs and/or domestic subsidies. But let’s give them careful evaluation.

1. Allies and Adversaries. Countries with export-led growth policies, such as China and South Korea, are tariff and subsidy countries. One of these is more an ally while the other is more an adversary. Money spent on Chinese goods goes to the Chinese government, with its military and imperial ambitions. (Isn’t this also true for the US?) Perhaps targeted tariffs would deny adversaries some revenue. But what about our allies who are in the same region as the adversaries? China’s economy is large enough that they will simply trade more with other partners, who will benefit from the lower prices where we do not. We need to continue trading with South Korea.

2. Balance of Trade. Another unfortunate idea that has been resurrected is the idea of the “balance of trade.” The idea is that if the US buys $1 trillion worth of goods from Canada, then Canada ought to buy $1 trillion in goods from the US. Of course, this confuses wealth with money, but nevermind. You almost certainly have a trade imbalance with your supermarket. Yet it is not “imbalanced” in the fundamental sense of, you know, economics. That is, you get milk, bread, and eggs, which you wanted more than the money you gave for those items. Trade is about mutual benefit, not balance, where benefit is determined by the transacting parties. If US entrepreneurs want Canadians to buy more stuff, US entrepreneurs will have to make stuff better, faster, and cheaper for Canadians and stop being protectionist p*ssies.

3. Tariffs Instead of Taxes. Tariffs are just taxes. But if tariffs are being used in a manner that helps keep things “revenue neutral” in an era marked by unprecedented debts, it could increase efficiency to distribute the tax burden away from, say, income taxes to foreign products taxes (tariffs). One of my favorite economists,

   Peter St Onge
   , doesn’t like taxes. But he rightly assumes we are going to need tax revenues to avert catastrophe and/or sovereign default. He’s been keeping his eyes on the coming shitstorm for a long time. To move tax burdens away from personal income and domestic corporations—onto tariffs—might offer some relief in areas that need relief while acknowleging that an inter-decadal debt paydown is in order. The idea of spreading taxation over different collection vectors is not completely insane, but interfering with trade is rarely a magic bullet.

4. Tim’s Tariffs. Podcaster Tim Pool recently went on a tirade about the fact that his chosen state of incorporation, West Virginia, has passed a bunch of worker *protections* that are an affront to labor-market flexibility and free contracting in the gig economy. Pool went nuclear, announcing he’s leaving WV to greener, but ironically less protectionist, pastures.

   Within a matter of days, however, he went batshit on a free-trade guest named Brad Polumbo who has seen a lot of the data on international comparative advantage, aka the “gains from trade.” Pool, who is usually patient and respectful to guests used decade-old anectdotes about Foxconn’s treatment of workers in China to argue that this was “slavery” and that any trade policy that would indirectly cause anyone to want to commit suicide is bad trade policy. (Oh, and that anyone who advocates it is “evil.”)

   So, bikes, TVs, weight benches, android phones, and any of the millions of things we are able to enjoy at lower costs—in a time of inflation—are evil if they’re made in an eeeeeevil Chinese sweatshop. I haven’t heard this argument since college. Pool thinks all such goods should disappear from these shores after a total Trump-induced decoupling of trade with China. When sensational anecdotes meet moral rectitude, you don’t get careful analysis. You get more fodder for overly simplistic—and crudely moralistic—*America First* economics. (Pool has not picked up on the problem that US protectionism—which he loves—is not much better than WV worker protectionism—which he hates. I’d like to see how he squares that circle. The reality is, there might be good reasons to put tariffs on Chinese goods, but a couple of sweatshop anecdotes ain’t one of them. (See also Ben Powell’s Out of Poverty, in which he argues—with reems of evidence—that sweatshops are almost always a developing country rising out of even worse alternatives.)

5. Revitalizing the Rustbelt. Some argue the rustbelt is rusty because too many greedy CEOs have decided to offshore their businesses, building factories or incorporating in jurisdictions that have resulted in American middle class job losses. And this certainly a factor. But there are myriad reasons to offshore your business that have less to do with cheap foreign labor and everything to do with:

   1. High taxes. Corporate taxation in the US was the second-highest among developing nations until tax cuts when into effect in 2018.

   2. Heavy regulations. Onerous regulations continue to dog companies who might otherwise remain patriated.

   3. Heavy unionization. Unions are a labor cartel. Their raison d’etre is to use various means to make worker pay artificially high in certain industries.

   4. High uncertainty. The great political economist Robert Higgs cautions us that activists governments create uncertainty and risk that causes investors and entrepreneurs to pull back in their activities until stability returns. Higgs calls this “regime uncertainty.”
      
      While it’s certainly true that entrepreneurs can be jurisdictional arbitrageurs, that fact is not just due to cheap labor. There are myriad factors that go into business decisions such as where to locate.

6. Tariffs are Good Foreign Policy. They can be, but usually only in the short term. And we should never forget that many protectionist measures caused enough frictions in the tenderboxes of World War I and World War II to make economic warfare a factor in the lead up to both Great Wars.

   
   The late 19th and early 20th centuries saw a rise in tariff wars, with Germany, France, and the Austro-Hungarian Empire enacting high tariffs to protect their industries. And the Great Depression of the 1930s saw a surge in protectionism, most notably through the U.S. Smoot-Hawley Tariff Act (1930), which raised import tariffs on thousands of goods that worsened conditions in both Germany and Japan.

7. Zero-sum Thinking. While international trade can affect certain domestic industries, it is not zero-sum on aggregate. The gains from trade affect nations, too, and developing nations that can specialize and form new industries are less likely to lose population to migration. In short, if you allow the natural processes of production and trade, you will have to spend fewer resources on border control and deportations.

The main thing about tarriffs and protectionism is that they involve serious tradeoffs. If we default to free trade with friends but make targeted adjustments in specific contexts, it might be possible to socially engineer the global economy in America’s favor.

But it might not.

Whether you think the Trump Administration is playing three-D chess or simply saying “Hulk Smash!” the US needs to remember the benefits of global trade, not only for the unprecedented increases in global prosperity since the fall of the Berlin Wall, but also for a general secessation in warfare among the trading nations of the world.

Think of autarky (radical protectionism) as a policy goal. If there were so much magic to it, India would have risen to become an economic might in the Neru era. But India’s terrible economic policies kept most of that nation in penury till the 90s. Indeed, if we were to take protectionism to its logical conclusion, SC should have import duties on products from NC, and SD should have import duties on products from ND. Happily, we don’t. The US Constitution formed a free-trade bloc that has benefitted Americans since 1790. It’s not crazy to think that we ought to extend that bloc northward or southward, and perhaps we should encourage our higher-tariff neighbors like Canada to pull down barriers, not erect them.

Remember, globalization is not globalism.

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This chart illustrates how comparative advantage works between two countries. Each country produces two products (A and B).

• Country 1 is better at producing Product A (10 vs. 20 units).

• Country 2 is better at producing Product B (20 vs. 10 units).

By specializing in the product they produce more efficiently, both countries can trade to mutual benefit.

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