Better Than Tariffs, Better Than Sanctions, Better Than Sex On The Beach

By on February 16, 2018

By John W. Tulac

OK, so two out of three isn’t bad.  Let’s talk about free trade.  Real free trade.  Not protectionism, not mercantilism, not fair trade, not a level playing field, but real open borders to foreign goods and capital.  Let’s remember basic economics.

Last week, trade data showed our biggest trade deficit with China ever and people are needlessly worried over this very minor (and flawed) economic statistic.  The Trump Administration just imposed retaliatory tariffs against China on solar panels and certain aluminum products.  You may very well be thinking that this is just what China deserves.  And you would be right, except that it doesn’t work the way you think it does.

You think this will hurt the Chinese manufacturers that are unfairly subsidized by the Chinese government. This is true; the higher prices will cost these companies sales in the United States.  However, the cost to the United States is even higher and the cost is directly borne by the U.S. consumers.

Here is how tariffs really work:  “Hey China! We don’t like what you’re doing.  We really so don’t like what you’re doing that we hit you with tariffs, so that our citizens have to pay higher prices, whether they buy from our producers or yours.  So there!”

Guess what happens next? Demand goes down.

Moreover, there is a second serious cost to the United States with respect to the solar panels. Retaliation against solar panels will not benefit U.S. solar panel producers, but could cost U.S. solar panel installers a lot of business that relied on lower solar panel costs.  The collateral damage would then be the loss of thousands of installer jobs.  Oops.

Protectionism fails every single time.  The most notorious example is the Smoot-Hawley tariffs of 1930.  These protectionist tariffs supposedly designed to protect U.S. companies resulted in retaliatory and punitive tariffs worldwide that destroyed U.S. exports (remember the United States had become the worlds’ biggest exporting country by then) and put many U.S. companies out of business.   Smoot-Hawley ensured the Great Depression would indeed be great and long lasting. We spent our way out of depression by going to war twelve years later. We know what that cost.

Classical economics teaches us that protectionism is justified only for reasons of national security and health and safety.  Historically, these justifications were narrowly construed.  However, it is easy to broadly define a need to “protect” under the guise of national security or health and safety.  Today, economists also recognize that environmental concerns can justify some protectionism, such as banning sales of ivory or protecting endangered species.

So how would real free trade work in the real modern world, instead of in a dry overpriced economic textbook collecting dust on a bookshelf? And how would we implement it?  Let’s start with the second question.

The United States should offer a bilateral free trade agreement to every friendly and neutral country.  The offer is simple: The United States will completely eliminate all trade barriers to doing business with the United States, except for essential areas of national security, health and safety and environment, sensibly defined, provided the other country does the same thing.

For most countries of the world, sh*thole or otherwise, this is a dramatic boost to their ability to compete without having much impact on the U.S. at all.  However, imagine the dramatic growth for U.S. companies doing business with or in a free-trade India or Brazil, if their notorious trade barriers were removed.

For some countries like China, they would have to seriously change the way they do business in order to be free trade.  No more benefits to State-owned enterprises.  No more unfair subsidies or sweetheart “loans” to businesses.  No more theft of foreign intellectual property. And on and on it would go.  If China, er, the foreign country doesn’t change, it doesn’t get the free trade agreement.  That business will migrate over time to the countries that follow the new rules. That will hurt.

It will hurt our enemies even more.  Not only are they subject to sanctions, but the free-trade countries would have less incentive to do business with them compared to what can be gained by trading with the U.S.  Over not a lot of time, sanctioned countries would become even more isolated.  Could an Axis of Evil survive on its own? Yes, but the countries in the axis would not thrive.

So, Yo President Trump! Put me in charge of international trade negotiations.  I’ll deliver.  I double-dog dare you! While I’m waiting for your call, I’m going to reread Economics in One Lesson and pour another nice tall cold glass of Sex on the Beach.

Wait.  What did you think I meant?

John Tulac

John W. Tulac is an international business attorney practicing in Claremont, adjunct professor of law at University of La Verne College of Law (retired), and Lecturer Emeritus (retired) at Cal Poly Pomona.  He is peer recognized as preeminent in international business law and holds the highest ratings for competence and ethics from the Martindale Hubbell National Law Directory.