Why China Should Remove All Trade Tariffs

I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in tariffs. MAKE AMERICA RICH AGAIN

@realDonaldTrump tweet 10:04EST, 4 December 2018

It is widely understood by economists of most theoretical persuasions that trade tariffs are a bad idea, but President Trump has laid out his stall. The political class, prodded usually by the vested interests of crony capitalists, always fall for trade protectionism. President Trump’s tariff war is just the latest example that coincidently stretches back to the introduction of central banks. I shall address this coincidence later in this article. 

It also surprising that the Chinese leadership enters a tariff war when it professes to defend free trade. Perhaps it doesn’t fully understand why tariff-free trade matters, and like Trump, thinks that a trade surplus is simply a function of cheaper prices. This misconception confuses how trade balances arise with the profitability from lower costs in foreign jurisdictions. That is a different issue. China would be far better to respond to Trump’s tariffs by removing all theirs, and in effect challenging American corporations to see if they can capture market share in China against local manufacturers and service providers.

What if they can? Well, China’s economy will benefit from obtaining goods and services someone else can provide better, freeing up economic resources for more efficient, appropriate and productive use. The underlying point is tariffs are a tax on both consumption and production inputs which impedes economic development. Tariffs are self-harm. We condemn teenagers self-harming, but not when governments do it.

This article explains why China would benefit enormously from the abolition of its own tariffs, as would any country following tariff-free trade policies. The other side of this coin, escalating tariffs, is the highway to economic ruin. The first step in developing this argument is to remind us of the empirical evidence, the awful damage tariffs did to the global economy following the First World War, and the appalling financial and economic consequences when they culminated in America’s Smoot-Hawley Tariff Act of 1930.

The histories of monetary inflation and tariffs are closely linked

Expansion of both bank credit and the commercial bills market in America in the 1920s were an addition to the monetary and price inflation during the First World War. Despite the cumulative monetary expansion, America managed to adhere to an exchangeable gold standard until 1933. Similarly, other countries that returned to a post-war gold standard (such as the United Kingdom) did so at pre-war rates of convertibility on massively expanded bases of circulating money. All had to eventually devalue. Other European currencies had simply collapsed by 1924.

Money supply in the US increased 73% between 1913-1919, and wholesale prices doubled. In the UK, money supply increased by 144% and wholesale prices rose by 157%.[i] It was from these elevated bases that the expansion of circulating money continued through the 1920s. While we tend to recall the economic advances from the spread of electric power and the manufacture of automobiles, we gloss over the substantial monetary imbalances. Monetary imbalances result in price imbalances, leading to politically unwelcome trade and capital flows. Governments and central banks attempt to smother the symptoms, which was the underlying reason behind the cooperation between Benjamin Strong at the Fed and Montague Norman at the Bank of England during that decade.

In the First World War, production output was commandeered by governments, which had the effect of eliminating foreign competition. As international trade resumed in the post-war years, this was no longer the case, and businessmen were faced with foreign competitors whose cost bases were in rapidly depreciating currencies. Naturally, they agitated for tariffs to ring-fence their domestic markets. This led to the Emergency Tariff Act of 1921 in America, consolidated in the Fordney-McCumber Tariff of 1922. Foreign nations responded by increasing their own tariffs, and the contraction in international trade was a significant factor behind the currency collapses suffered by the beginning of 1924 in Austria, Bulgaria, Germany, Greece, Russia, and Poland. And because the contraction of trade made it virtually impossible for these countries to pay off war debts to America, the supposed benefits of trade protection came at an enormous capital cost to America itself.

In 1922 US import tariffs ranged from 7% to 68%, averaging 38%. While much of Europe was depressed following the War, by 1926 their economies and employment had recovered despite these tariffs, which had become insufficient protection for American businesses. In 1930, the Smoot-Hawley Tariff Act increased import tariffs across the board to an average of 60%.[ii]

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