The Editorial Board of the Wall Street Journal reports on “a tariff lesson at the Nucor steel mill.” Here’s the Board’s conclusion:
This is how it goes with tariffs: Many industries want protection. Nobody wants to be hurt by the other guy’s protection. And then everyone hopes consumers won’t notice.
The answers have more to say about politics and human nature than about tariffs’ economic benefits.
One of the political answers is an old story, found time and time again in politics. Government gives out blatant favors to a favored few and ignores costs dispersed among the many. Economists call this concentrated benefits and diffused costs.
David Henderson understandably rejects “Michael Pettis’s unpersuasive case for industry subsidies.” A slice:
Pettis claims that letting “other countries take the lead in manufacturing harms the American economy.” How so? He writes:
The U.S. accommodates other countries’ successful industrial policies by absorbing their negative consequences—namely, by absorbing global savings imbalances, running trade deficits and offshoring manufacturing.
He’s way off. Let’s look at each of the three. “Absorbing global savings imbalances” means simply that people in other countries invest more here (not just savings in the form of buying U.S. government bonds but also actual investments in land, plant and equipment, and stocks) than we invest there. He doesn’t say why that’s bad. Second, he thinks that running trade deficits is bad. But trade deficits are the mirror image of capital surpluses, which is the more-neutral term for “global savings imbalances.” So he’s simply restating his first point. Third, if a government doesn’t subsidize manufacturing, it will have less manufacturing, meaning that some (not all and not close to all) manufacturing will be offshore. The question is why that’s bad. You can’t just assume it, especially in an op/ed where you’re trying to make the case for subsidies.
Pettis states that the U.S. government’s failure to play tit for tat with its own subsidies to manufacturing has bad consequences:
America’s decision not to encourage manufacturing has hollowed out industrial ecosystems and left key supply chains vulnerable. It has slowed productivity growth and weakened wage gains, especially for the bottom half of wage earners. And it has hindered America’s ability to respond flexibly to global shocks, from pandemics to geopolitical crises.
There’s so much to unpack in those three sentences.
The first sentence is incredibly vague. Which “ecosystems” have been hollowed out? Which key supply chains are vulnerable? He doesn’t say.
Pettis’s second sentence is almost certainly wrong. If we avoid subsidizing particular sectors, then we have a more efficient economy, which means that overall productivity is higher than otherwise.
His third sentence is too vague also. How has not subsidizing industries hindered America’s ability to respond flexibly to global shocks? A few years ago, I gave a talk to an Osher Lifelong Learning Institute (OLLI) audience in which I made the case for free trade. A member of the audience argued for having government favor domestic manufacturing. He said that if we had had more domestic production of masks during the Covid pandemic, we would not have been as vulnerable as we were because, at the time, we depended on imports from China. I agreed with him. I then asked him whether he had advocated more domestic production of masks before Covid came along. He admitted that he hadn’t. He saw my point. How does a government decide which industries to favor if it’s worried about global shocks. It can’t know what the shocks will be. It’s so easy to look back and say that you wish you had done X, when in fact, you would have had to choose between X and all the other letters of the alphabet, not knowing which one will be relevant.
Moreover, Pettis doesn’t the address the combined donkey and elephant in the room: the fact that politicians in the Democratic and Republican parties will try to push for their favored industries to be subsidized, independent of the merits of the issue.
Outrageous claims are the gasoline that makes Donald Trump’s political career go. Without a steady flow of shocking statements the motor would stall. But engines also require air. If you get the mixture wrong, the engine floods and the car won’t start.
Mr. Trump got the mixture wrong last week. “Maybe the children will have two dolls instead of 30 dolls,” he said Wednesday in response to a question about the effects of his tariffs. “And maybe the two dolls will cost a couple of bucks more than they would normally.” The Chinese ships that deliver cheap goods to American ports are “loaded up with stuff, much of which—not all of it—but much of which we don’t need.” On Sunday he made the point again in an interview with NBC News: “They don’t need to have 250 pencils. They can have five.”
Two dolls? Five pencils? Stuff we don’t need? It’s time to get out and start pushing the car.
Mr. Trump delivered this message in that hushed, casual style he uses when he’s being serious about something for a minute. No big-mouth bombast. Perhaps you are inclined to take it seriously, not literally. But this is huge, something new under the American sun. Past presidents have urged voters to tighten their belts because of war, pestilence, natural calamity, economic contagion or their predecessors’ mistakes. Mr. Trump is the first to do so because of his own policy decisions and his stubborn insistence on sticking with them. In Mr. Trump’s America you get two dolls only, you pay more, and you be sure to thank the man in the handmade silk tie on the way out.
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MAGA world will no doubt find a way to spin Mr. Trump’s austerity agenda as the antidote to American carnage. There isn’t a city, town or burg in this great nation that wouldn’t scrimp and save in the event of a real emergency. But this isn’t a real emergency. It’s a manufactured one. Mr. Trump flooded the engine. Let him get out and push.
Ford Motor Co. became the latest big name to warn that President Donald Trump’s trade war is about to do significant damage at home. Ford Motor Co. became the latest big name to warn that President Donald Trump’s trade war is about to do significant damage at home.The iconic US company said it suspended its full-year financial guidance, pinning the blame in part on auto tariffs. Ford said it expects Trump’s levies to reduce 2025 adjusted earnings before interest and taxes by about $1.5 billion on a net basis this year.
Several automakers have warned of the steep costs they expect to pay due to Trump’s chaotic tariff campaign and subsequent retaliation by other nations. Trump has argued that the 25% tariffs he’s imposed on imported vehicles and parts are needed to bring more production and jobs to the US. But most economists predict the opposite will be achieved, while a growing number of lawsuits contend Trump’s entire tariff initiative is illegal under US law.
Tad DeHaven tells of how protectionism breeds cronyism as it often bites the very people who clamor for it. Two slices:
The Trump administration’s ham-fisted trade wars mean higher input prices and reduced American farmers’ access to export markets. Agricultural interests and their lobbyists have been petitioning the White House for relief, including exemptions on imported fertilizers, expanded regulatory privileges, and good old-fashioned cash handouts.
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Agriculture Secretary Brooke Rollins recently reiterated that the White House is preparing for another bailout. This time, the price tag stands to be considerably larger. As one sorghum and cotton farmer told the Wall Street Journal, “We hope there will be a bailout .… If we don’t get something, it will be quite a disaster.”
Amir Iraji makes clear that “tariffs kill knowledge and leave us in the dark.”
In a recent article in The Financial Times Nat Dyer argues that economists misunderstand tariffs. He points out that tariffs have political and moral dimensions not captured by standard economic reasoning. We therefore take economists’ widespread advocacy of free trade at our peril: “too few economic theorists have interrogated the actual, messy history of trade.” He concludes that we need “a new, genuinely progressive economics with its eyes focused on the real world and its history, rather than abstract models built on unreality.”
Economists have long been accused of paying too little attention to reality and too much to models. The accusation is sometimes just. But critics are often guilty of an equally harmful sin: neglecting the truths of economic thought.
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One might conclude that there are good reasons for protectionism (I don’t). But arguments for protectionism or a “genuinely progressive economics,” to be serious, have to take the principle of comparative advantage seriously, just as they have to take arithmetic seriously. That means admitting that there will absolutely be clear costs—material benefits forgone—by restricting trade. Historical and political complexities change that fact no more than they change the fact that water runs downhill.
