… is from Scott Sumner’s recent EconLog post “Are tariffs a big threat to China?“:
When Siamese twins get into a knife fight, it’s hard to envision either side winning.
DBx: Scott here refers to the reality that, over the past few decades, we Americans and the Chinese people have become more economically integrated with each other. We rely upon the Chinese for consumer goods and inputs; they rely upon us similarly. Despite all the many market distortions introduced over the years by governments on both sides of the Pacific, this economic integration overwhelmingly reflects comparative advantages, both ‘natural’ and ‘contrived.’ (Note that a ‘contrived’ comparative advantage is no less a comparative advantage because of it being contrived. My eye-surgeon’s comparative advantage at performing surgery on human eyes was contrived by her choosing several years ago to spend many years to acquire this skill. Yet her comparative advantage at performing eye surgery is no less real, and certainly no more objectionable, than it would be had she, by some miracle, been conceived in her mother’s womb with all the skill and knowledge necessary to be an excellent eye surgeon.)
Economically uninformed people tend to assume that much, perhaps most, of what happens economically occurs largely either by design or by happenstance. If today’s intricate pattern of mutual dependence for raw materials, intermediate goods, specialized skills, and consumer goods and services wasn’t designed by anyone (and it emphatically was not), then – the economically uninformed person unthinkingly concludes – this pattern is more or less random. Shake it up, disturb it, change it, so what?: any source of supplies of raw materials, intermediate goods, specialized skills, and consumer goods and services is likely as good as any other.
But the truth is that the economic arrangements that we Americans and the Chinese people have developed with each other over the years and that prevail today are not random; these arrangements largely reflect the lowest-cost – the “optimal” – possibilities available to Americans and to the Chinese. Sever, block, or obstruct these supply channels with trade restrictions and you harm parties on both sides of the Pacific.
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To take Scott’s Siamese-twins analogy one step further – or, perhaps, to modify it inappropriately – let’s ask how twin Sam should respond when his Siamese-twin brother Song engages in self-immolation. Song’s self-destructive action will, of course, harm Sam. And it’s possible that if Sam “retaliates” by engaging in his own self-immolation he will convince Song to stop immolating himself.
But what motivates Song to immolate himself to begin with? Will Sam’s “retaliatory” self-immolatation rid Song of those motivations? And what if, rather than stop his self-immolation, Song himself “retaliates” against Sam’s “retaliation” with intensified self-immolation? Here I think the Siamese-twins analogy with trade breaks down. Sam is economically attached not only to Song but to many other brothers and sisters – to Nigel, to Patricia, to Mario, to Juliette, to Juan, to Elsa, to Ludwig, to Neera, to Akihiro.
While Sam suffers when Song self-immolates, Sam must ask, first, if it is best that he do nothing in response. Perhaps his own body contains sufficient resources to ensure that, while he suffers from Song’s foolish self-destructive actions, he – Sam – would make himself even worse off from any retaliation. Sam must ask also how his connections with his other brothers and sisters affect the situation. If Sam “retaliates” against Song’s self-immolation with his own self-immolation, does Sam thereby lose the opportunity to cut his losses to a minimum by relying more heavily upon his other brothers and sisters? And, more generally, given the intricacies of the connections among all these multiple Siamese-twins, just how does Sam’s “retaliation” affect his other brothers and sisters – and how do these effects, in turn, affect Sam?
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The Siamese-twins analogy breaks down even further when it is recognized that neither Sam nor Song is, in fact, an individual in the way that a Siamese twin is an individual. In reality, the entity that implements trade policy is the state; Sam is not Americans and only in the most naive view is seen as faithfully reflecting the ‘will’ or even the interests of the American people. Ditto for Song and the Chinese people. The “Sam” that implements trade policy often has interests directly hostile to the body-politic that Sam presents himself as representing and protecting. Again, ditto for Song.
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I remain pleased with my little attempt of seven years ago to deal with the question of the appropriateness of one government “retaliating” against the economic interventions of other governments. (Although addressed to the question of foreign-government subsidies, the logic of my argument applies also to foreign-government tariffs and import quotas.)
