HEAVY TARIFFS WILL NOT MAKE AMERICA GREAT AGAIN
President Trump is about to announce a 25% tariff on steel and 10% on aluminum. This is an effort to promote the America first agenda and have more products and companies that are American centric.
I respect the president and understand what he’s trying to do, but he is wrong.
The fact is, we gain far more from importing and exporting with the lowest amount of restrictions possible. Importing means getting products for more affordable prices and exporting means increased economic activity for American companies.
Or, as the late Milton Friedman once said:
“In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports, and if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad, we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, with automobiles we can drive, with all sorts of nice things for us to use.
The gain from foreign trade is what we import. What we export is a cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things so that we get as large a volume of imports as possible, for as small a volume of exports as possible.
This carries over to the terminology we use. When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of our well-being, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance, when you have to send out more goods to get fewer coming in. It’s favorable when you can get more by sending out less.”
In other words, trade deficits do not exist. All trade without restrictions is fair, because it means both sides agreed to beneficial exchange.
It all goes back to the concept of comparative advantage. If I am an auto mechanic and am highly proficient fixing cars and you repair computers for a living, if your car breaks down and my computer doesn’t work, we can both try to fix the problem ourselves. Or, we can understand that somebody else is far better at doing it, save the tremendous amount of time it would take each other to wonder out of our respective expertise, and have me fix his car and he fix my computer.
That’s precisely the reason we don’t do every single job ourselves. We don’t have the knowledge or the time to invest to get everything done at the highest level.
This is a basic concept, but it still holds as true today as it ever did.
Countries who punitively try to chase off business from other countries not only deprive their own country of specialized products for less money, they invite retaliation. So, countries that place tariffs on goods essentially wind up making numerous products far more expensive for their own citizens, which is the exact opposite of what they are intending to do.
President Trump is wrong about this issue and needs to listen to the advisors in his administration who understand that and have urged him not to do this. Other countries are already threatening to strike back, and odds are strong that if the president follows through with this, it is going to backfire spectacularly.
The president became the successful real estate mogul that he was by making smart deals. This is not a smart deal at all.
Sometimes in business, you need to know when to walk away from the table, clear your head, and listen to reason.
This is one of those times.
I just hope the president realizes it before it is too late.
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