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Tariffs and the Steel industry

March 17, 2018

In general I agree with all of the theoretical and simplistic arguments free traders advocate for eliminating tariffs.  I’ve read all the arguments of marginal cost and the advantages of specialization.   The Bastiat arguments of both seen and unseen consequences.  Those arguments have basically won the day.  But I still find many unanswered holes in these arguments.  I have great respect for people like Thomas DiLorenzo, Walter Block, Walter Williams, and Thomas Sowell, but not one of them ever deals with the questions which come to my mind.

My first question.  Are tariffs preferable to both income taxes and corporate taxes as the means of raising revenue for funding the operating costs of government.  I argue without a doubt, they are.   For every dollar of revenue lost due to a reduction in income taxes, I have no problem increasing tariffs as a consumption tax to compensate.  The American consumer will still pay the tax, only it will encourage intellectual property, manufacturing,  manufacturing IP, and jobs to remain in the United States, rather than losing it to overseas.  Tariffs can also be used as a tool to prevent us exporting environmental issues abroad.  And note this is really important….once manufacturing moves overseas, it is really hard to get it back.

The second question.  Why is not the “total cost” of free trade ever considered in the marginal cost arguments promulgated by the economists to the general public?  For instance, by trading with China, all we do is offshore our pollution issues.  There is no costs to this?   This, and a permanent loss of manufacturing IP makes the calculus of “free trade” far more complex, and is one of those “unseen” things Walter Williams conveniently ignores.   Also, there are quality issued at hand “e.g. Chinese drywall“.  Manufacuring IP that is lost and/or not advanced.  All of these things are a cost.

This brings me to Trump’s steel tariff threat.  We are assured by many that this has nothing to do with national security.  I do not possibly see how this is not a national security issue.   Walter Block argues we don’t need tariffs to protect the steel industry for national defense:

“But we hardly need an economically unjustified tariff to attain that goal. Instead, the government in its largesse could subsidize this industry. Not to make steel; ……All that would be needed would be a large empty steel mill, sufficient raw materials as inputs, and a very small crew to keep the place well-oiled.”………To picture Block’s argument, imagine the gruberment propping these bad boys up 100 years later.

For an economic argument, I am surprised at how shallow this line of thinking is.  So his answer is to have the government come in and keep a few furnaces well oiled until the day we need to up domestic production for military needs?  How shallow is that?

The argument smacks of an idealist, and someone who is unfamiliar with manufacturing technology and/or manufacturing IP.  By not investing in manufacturing IP, the manufacturing of  steel like any other technology will wither and die on the vine.  Advances in manufacturing IP done by other countries continue to push the price of steel downward.  This “cost” of not competing in this industry is lost in the US.  This is what Walter Block desires? …… His answer, it won’t matter because the next war (nuclear) will be over in 5 minutes?  Please.  For an intellectual, I find his line of thinking very shallow.

I do not want to shutdown trade with our steel trading partners (such as Canada), but I think the business environment needs to be re-arranged so it is more attractive to produce technologies such as steel domestically, and not let industries (energy, food, and steel) wither on the vine and die out.  I am also not a fan of letting politicians make crony capitalists decisions that favor one industry over another.  Tariffs should be flat, and blind on all products as a “fee” to entering the US economy.  I have no problem granting individual nations “friendly” trading status and giving special tariffs reductions to nations that seek peace and to do business honestly…..like holding to the similar environmental standards and quality standards that we have in the US.  Likewise the US can hold nations such as China accountable who subsidize their industries in order to price dump.

I would hasten to add, US tariffs should be measured and rational to encourage discourse.  Not retaliatory and punitive tariffs,….a tit for a tat.  They should be flat and blind for a given nation, and not targeted to any particular industry/business which only encourages cronyism.  I have no problem if the Chinese find they have to operate steel mills inside US borders to avoid paying the tariff so long as we have access to their manufacturing technology….i.e. we can rip off their manufacturing IP.

In summary, I do not like tariffs, but we don’t live in a world of angels and we need some form of government.  Tariffs are the best way to raise operating revenue of that form of government.  It’s a form of a consumption tax the encourages investment in manufacturing inside the US border which means domestic jobs, and discourages price dumping, and outsourcing of environmental issues.

The US taxpayer still foots the bill, but is offset by a reduction of either corporate or personal income taxes or both.

Of course, few neo-classical economist talk of “total cost” in their marginal costs examples, or the benefit of moving revenue raising to tariffs away from corporate and personal income taxes.

And don’t be “scared” by Walter William’s arguments of the extra billions we pay for sugar.  As I said, I only advocate the extra billions are paid via the savings made by a reduction in personal, small business and corporate taxes whose costs are also come from our pocket books.    Arguments such as those fall on deaf ears….will any rational economist tell me why personal income taxes, corporate taxes, and small business taxes are preferred to tariffs?

 

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