E Two Crucial Issues In Foreign Trade

Let us talk of two crucial issues in foreign trade. They are not examined because they do not exist in modern economic theory. The concern is about hoarding and ownership of wealth. They are hidden in plain sight. Until they are settled, all conversations about foreign trade create heat but not much light.

Much of the conversation about foreign trade is concentrated on three controversial points: Who pays the tariffs? Who benefits from foreign trade imbalances? Who cheats?

The last question is most fascinating, but least relevant.

Apart from concerns about hoarding and ownership, not much new can be added to the fourth traditional question, “Who benefits from foreign trade?” In ideal, textbook conditions, if two nations engage in trade, they both benefit. Empirically, it is even possible to determine whether both nations benefit equally.

Who Pays for the Tariffs?

It is the citizens of the nation that imposes tariffs who pay the tariffs. It is they who are penalized. The goods they buy are more expensive than they would otherwise be.

Who Benefits?

Who benefits from tariffs? Once one goes beyond the simple fact that the government that imposes tariffs benefits, at least in the short run, the answer is complicated.

If national producers of goods imported are capable of exploiting the rise in prices of foreign products and are capable of producing goods of the same quality as imported goods, that nation clearly benefits, because tariffs create income and growth opportunities for locals.  Yet, there are qualifications. If newly employed resources could be more effectively engaged producing different things, the advantage turns out to be illusory.

The damage inflicted upon the foreign country depends on the importance that foreign trade has in that nation. It also depends on their assumed inability to produce at lower cost, so to nullify the benefit to local nationals of the country imposing tariffs.

Long Run Issues

Long run consequences are hard to identify, because they depend on sets of movable parts. If tariffs on our products are imposed in retaliation, who among our exporters is penalized? Do we grant an incentive to our foreign competitors to leap-frog current technology—so they might be encouraged to create entirely new technologies fit for the next stage of development?

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Disclosure: Carmine Gorga is president of The Somist Institute and a former Fulbright Scholar.

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Gary Anderson 2 years ago Contributor's comment

This is where trust comes in. As an emerging nation, China has lower tariffs then when we emerged. We have no choice but to trust the largest nation on the planet unless we decide not to do business with them. That mistake would quickly manifest.