International trade is not a zero-sum game

 

International trade is not a zero-sum game

What are tariffs and what are they for?

Tariffs are a form of entry fee to a country’s domestic market. They are imposed by that country’s government on goods that are exported to it from other countries. They are usually calculated as a percentage of the price of the product – so, for example, Trump has imposed a 25% tariff on all imports of motor cars. When the tariff concerned is a high percentage it is usually passed on to the consumer.

There are three possible reasons for imposing tariffs:

1.      To protect a domestic industry that is in its infancy from foreign firms that have already achieved significant market penetration and have the benefit of economies of scale. A lot of developing countries impose tariffs for this reason, and it is, in my opinion, the only justifiable reason for imposing them, apart from preventing ‘dumping’ – countries exporting surplus production at below cost price.

2.      To protect domestic industries from competition by pricing the imported product out of the market.

3.      To raise significant revenue for the government imposing the tariff.

If we look at points 2 and 3 it is apparent that tariffs can either protect domestic industry, or raise revenue, but it cannot do both. Put simply, if the tariff prices the imported product out of the market, then sales will plummet, and the tariff won’t raise much money. In the alternative, if the tariff doesn’t cause sales to fall, then it will raise revenue but won’t achieve the goal of protecting domestic producers. Curiously, President trump appears to think they will do both.

Liberation Day?

“Liberation Day” is what President Trump called Wednesday — the day he announced sweeping new tariffs on imports to the United States. But despite the label, it was far from a day of liberation. By making imports more expensive, the government is actively increasing the cost of living for American consumers; denying them choice; and distorting investment decisions for the long term.

Trump’s view is that if, say Germany, sells more cars to America than America sells to Germany, then Germany is the winner and America the loser. This is a schoolboy error – the notion that international trade  only benefits a country when it is the exporter could not be further from the truth. One of the greatest benefits of free trade lies with the importing country, where consumers gain access to a wide range of goods—crucially, at lower prices.

Whether it’s clothes, food, medical supplies, or laptops or mobile phones, access to the global market reduces the cost of living and increases consumer choice, often alleviating poverty in the process.

It comes down to a simple principle. No country can produce everything it consumes—nor should it. Attempts to achieve self-sufficiency through protectionism are acts of economic self-harm. Freedom to exchange across borders is a win-win: it allows consumers to access a plethora of goods and services, improving welfare overall.

Tariffs undermine all of this. They are artificial costs that harm consumers. The real-world evidence is pretty clear. In his first term, Trump’s tariffs on Chinese imports alone cost Americans over $800 per household. A 2020 study of 151 countries over five decades found that tariff hikes reduce GDP growth, with effects persisting for years. Output fell by up to 1.5 percent annually in countries with steep tariff increases.

The zero-sum fallacy

Think of it this way: I shop at Asda – have done so for 20 years. I’ve given Asda tens of thousands of pounds over the past 20 years, and they haven’t given me any money at all! So, is Asda the winner, and am I the loser? Well, no, because they gave me something in return for my money – groceries. Trade isn’t zero-sum game.

In short, the zero-sum fallacy is the idea that if one party benefits, another must necessarily lose. Trump’s ‘understanding’ of trade reveals a classic case of a zero-sum mindset: the belief that one country’s gain must come at another’s loss.

The reality is that what is often derided as ‘globalisation’ has seen a huge growth in prosperity for America and other countries around the world. The end of liberal free trade will plunge us back into a pre-capitalist, mercantilist world whereby foreign policy is dominated by economic nationalism. History tells us that trade wars are often the prelude for shooting wars. The development of an integrated world economy based on a rules-based system is now being challenged by the Trump administration.

Trump is putting tariffs on foreign imports of steel – the very steel used by American car makers and others to produce their products. As the chart below illustrates, 53% of American imports are for capital goods and industrial supplies – so if tariffs eliminate foreign imports of cars by pricing them out of the market, they will make American-made cars even more expensive. A cynic may well conclude that this transfer of wealth from the consumer to the corporations is the real purpose of Trump’s tariffs.

Trump’s feral understanding of international trade speaks to a tribalistic mindset – the other tribe/country is out to get us – rip us off! And it is based also on a false promise: that America will be enabled by tariffs to resucitate labour intensive manfacturing. But it won’t. Labour intensive manufacturing will go to those countries where labour is cheapest, and that is never going to be America. The nature of American manufacturing has changed. It has become more high-tech, high-end, and as a consequence what it contributes to the American exonomy has increase, not decreased, at the same time as the number of people it employs has fallen, as illustrated here:

Trump can’t turn the clock back and revive the rust belt by forcing people to buy more expensive American-made goods instead of cheaper alternatives. It is a false promise based ona set of false premises.

We need to move towards free markets, and away from the dangerous economic nationalism of a President whose view of the world is seen through a glass, but darkly.

Paul Chase