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Some Thoughts on Trade Retaliation

Tweet [1]

Commenting on this post [2], Seekingexports asks:

Why does Mr. Boudreaux give sanction to Chinese officals that erect ever changing non-tariff barriers that are so effective? This is a de-facto manipulation of the beleivers in free trade–I will not buy his party line. The tire issue is pocket lint in comparison to goods and services blocked by Non-Tariff Barriers. Where is the commentary and letters that address these barriers? Are these barriers to complex and nonclassical to warrant even lip service?

Seekingexports’s rationale for protectionism here is centuries old; it has been addressed countless times.  Adam Smith gave some credence to a theoretical case for a “retaliatory tariff” — but not because such a tariff would increase domestic exports but, ultimately, because — by expanding markets and deepening the division of labor — it would increase the ability of domestic citizens to purchase imports.  (Remember, Smith insisted that “consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”  Were Smith to comment here at the Cafe he might use the nom de plume “Seekingimports.”)

John Stuart Mill, Alfred Marshall, and nearly every other serious economist who’s addressed this issue understood that if retaliation by government A against government B’s market-restricting barriers persuades government B to lower those barriers, the economic gain to citizens of A might be positive on net.  But Smith, Mill, Marshall and others understood also that the realities of politics make such retaliation not so much an economic question but a practical, strategic one.  They understood that opening the policy door to allow such retaliation is fraught with dangers.

For example, government B might respond to government A’s retaliation by raising the market-restricting and market-distorting barriers it imposes on citizens of B.  Also, because determining what is and what isn’t an unjustified market-restricting barrier is seldom straightforward (after all, almost anything government does distorts and restricts markets to some degree), government A might misjudge government B — or, more likely, interest groups lobbying government A will attempt to portray as many as possible of government B’s actions as being market-restricting and distorting ones justifying government A’s retaliation.

If Seekingexports is also seeking understanding, he can read my book [3] in which I address this retaliation question in greater depth.

Even better is the excellent discussion of economists’ treatment of this issue in Douglas Irwin’s 1996 book Against the Tide [4].