Home Economic Trends Protectionism Sows the Seeds of Its Own Destruction – Max Gulker (10/08/2019)

Protectionism Sows the Seeds of Its Own Destruction – Max Gulker (10/08/2019)

You’ll forgive me for my title paraphrasing Karl Marx, that lightning rod of 19th- and unfortunately 20th-century economic thinking. After all, the excitement around here in the runup to our release of the brilliantly funny and informative Marx vs. Mises rap video is palpable. But while Marx predicted inevitable doom for a system built on the decisions of billions of individuals, we know today that trying to control and plan those decisions is where leaders truly make an economic deal with the devil.

It’s all right there in the recent headline “Importers scramble to stockpile European cheeses before Trump’s tariffs kick in.” The latest strike in Trump’s global trade war, in retaliation for some EU aircraft subsidies, attacks a laundry list of goods we associate with various European cultures with tariffs up to 25 percent: wine, whiskey, cheese, even English wool. 

Some will see this transatlantic middle finger as a rallying cry for a base the President has stoked by playing to xenophobic scapegoating. But the more he tries to pull individual economic levers and decide how much he thinks European cheese, for example, should cost relative to other goods, the closer he lurches to a political and economic disaster that is difficult to avoid if not inevitable.

Read His Lips, If You Dare

For well over a year, economic observers including AIER Research Fellow Peter C. Earle and myself have tried to wrap our heads around President Trump’s trade war by comparing it to other instances of tax policy. By our measure Trump has basically eclipsed any good he did with his 2017 income tax cuts–in combination the two can be viewed as a revenue-neutral globalism tax, attempting to push U.S. buyers toward products that fit an imagined narrative of national greatness rather than international cooperation.

A CNBC article this spring painted the Trump tariffs in a different but just as illuminating manner. In isolation, they are the largest tax increase since 1993, or over 25 years.

Back in the “read my lips days” politicians learned that large tax increases were a path from which few Presidents returned. Some would suggest that Trump has hidden his tax increase behind a jingoistic and xenophobic mentality embraced by his base. I’d suggest there’s something more pervasive happening.

Writing last year I laid out the classic fallacy of concentrated benefits and diffused costs as follows:

If an American steel plant shuts its doors because of cheap imports from China, people see lost jobs. It’s easy for people to emotionally connect with the idea of lost jobs. It’s much harder to see the lower prices for intermediate and final goods, the extra purchasing power, and the way these factors reverberate through the market and lead to growth and jobs. Many of the people suffering the diffused costs are themselves more aware of the concentrated benefits of others.

The good news is that it’s not a distrust of foreigners that’s primarily shielded the President for over a year. The bad news is that it’s a pervasive problem at the intersection of politics and voters’ understanding of the economy that has plagued advocates of free markets for decades or more. But where does that road lead?

The Cheese Never Stands Alone

Back to that headline about U.S. importers of European cheese. U.S. cheese importer Phil Marfuggi began stockpiling an extra $15 million of Italian cheese back in July when EU cheeses were first included on one of those proscription lists that announce which imported goods could soon find themselves among the walking dead.

What interested me about this little slice of trade-war Americana is that it screams “Unintended Consequences.” However misguided, Trump’s latest tariffs on cheese and other EU flagship products could cause more Americans to “buy American,” could bring about concessions from other nations, or could amount to pure political cynicism. I doubt causing Italian cheesemonger-barons operating in Jersey to make multibillion-dollar bets on the timing of inventory and consumption was on the President’s list.

Mafuggi’s high-stakes bet appears benign, but realize that for every product, every tariff, there’s at least one and likely more Phil Marfuggis out there changing their economic behavior to a degree that influences protis and jobs. And these moves are not the result of learning and discovery, as happens in a healthy Hayekian price system. They dependably allocate resources, no matter how subtly, from better uses to worse ones constrained by the President’s whims.

More than half of global commerce directly flows across borders, and anyone who understands that pulling a string here or there doesn’t end up multiplying and reverberating across the system is someone so unfit to sign the economic deal with the devil noted above that the devil ought to be ashamed of himself. It won’t last–there’s only one direction this string of interventions inevitably leads. If faced with a recession clearly tied to the trade war, President Trump’s time will be up. The devil collects, but the rest of us inevitably lose.