Wednesday, January 18, 2017

Maybe tariffs are not worse than taxes

And all sensible "protectionist fees" in the whole economy are basically tariffs

While I sympathize with most plans of Donald Trump's – and his philosophy about many things – it's likely that the potential worsening of the international trade is something that I have the biggest trouble with. His protectionist measures may hurt those who export to the U.S. They may also lead to more or less symmetric responses so the exporters from the U.S. will be hurt, too, like all consumers.

But is it so bad? Am I really scared or disturbed?

Tariffs are worse than nothing, I thought – for those who trade internationally. But they're also an extra income of the government. If the total income by the government is kept constant, the tariffs may really replace some other sources of the government's income – which is mainly taxes.

When I think about the protectionist matters in this way, in this context, tariffs look much less bad. Tariffs are just another form of taxation, one that is robbing a particular group of people – the foreign exporters or the domestic importers who are in between or the domestic consumers buying the foreign goods. (Which of these three participants in the international transaction really pays is a purely administrative detail that doesn't change anything about the essence and impact of these fees.) Is it better or worse when the money is collected from these groups of people – relatively to the taxation which collects the money from all the domestic folks and companies for their sins known as paid work?

When I ask the questions to myself in this way, I may be inclined to say that "they're equally bad in average" and "tariffs may actually be better than taxes in some contexts". Which contexts? Especially when the country runs trade deficits – and the U.S. has trade deficits around $40 billion a month these days.

(By the way, last year, this topic – whether taxes or tariffs are worse – was discussed on a liberatrian Reddit forum.)

The tariffs are "punishing" the importers (or the foreign exporters) for their "sin" of hurting the domestic job market, increasing the unemployment rate etc., which sounds sensible. They are also exerting pressure that reduces the imports and therefore the trade deficit, too. It makes sense in the U.S. case given the fact that America has these trade deficits.

There are downsides. The revenue from tariffs may be highly unpredictable. Your living standards may be constant for many years but the percentage of your GDP that you export or import may change rather dramatically. So when you count with tariffs as an important source of income of the government, you may be forced to revise the numbers more frequently. The tariffs are as volatile as the exports and imports. Trump's policies may "succeed" and greatly reduce the imports to the U.S. – but the income from the tariffs will decrease correspondingly.

However, the possibility to lower the taxes because a part of the income was replaced with tariffs sounds great, especially because you may avoid paying tariffs by relying on domestic goods (but a typical person cannot survive without work, i.e. without paying taxes – let's neglect the exceptions and tricks to pay zero, anyway). One might say that the philosophy is that "for an American to work and earn money isn't a sin" because it doesn't hurt anyone in America. However, to import foreign goods "is" a sin because that hurts the American workers and in this sense, the tariffs are a fair compensation. If I have heard those explanations, I would have been more supportive of these Trump policies. I haven't heard them.

I think that the depth of the discussion about these matters – discussion between the Trump critics but also between the Trump fans – isn't quite satisfactory. I have collided with several Trump voters who really sound like hardcore commies or people believing bizarre myths that just don't add up.

Yesterday, I had an exchange with a Twitter user who was a big fan of the protectionist policies in the U.S. There were several things that struck me as odd. At the end, he offered the ideas that "one third of the Americans are out of force". You know, deceptive communist propaganda of this sort is well beyond my red lines. One may inflate the perceived unemployment rate by counting kids or pensioners or people who just have enough savings and don't really need or want to work more as "unemployed" but that demagogue may also deserve to be moved to a concentration camp.

The unemployment in the U.S. is at 4.7 percent or so, nearly the 40-year lows, and this figure is quantified according to some sound and standard methodology – basically counting those who actively search for work, and therefore indicate that they would prefer their status to change – which may be compared with other moments of time and with other countries. (Czechia has the lowest unemployment rate in Europe oscillating around 5% but it's actually below 4% according to some European methodology – I don't know the details but you could find them easily.)

So the problems with the unemployment in the U.S. are surely not "catastrophic" or "unprecedentedly bad". The unemployment rate is fairly low and one could argue that this low rate poses problems for many companies that need to find employees of a certain kind – that's surely the case in Czechia. The only reason why someone would promote nonsensical statements such as "one-third of the Americans are unemployed" is that he is a member of the fanatical Leninist-Stalinist lumpenproletariat that wants to place losers such as himself at the top. I am terrified by these people and I am convinced that a functional society needs to kick into these losers to be sure that they don't become pathologically – and unjustifiably – self-confident. Numbers make it clear that these people are not a majority of Trump's voters, either.

But aside from his lumpenproletariat status, I disagreed with lots of other beliefs of that guy. For example, he was disappointed that Trump wanted to protect the domestic labor market by tariffs – e.g. tariffs on BMW cars imported to the U.S. assuming that those will be produced in a new Mexican plant. I was trying to investigate what was the "better solution" than tariffs and received no answer that made any sense.

Needless to say, the tariffs are the least bad, and in some sense the only possible decent, protectionist policy. You might totally ban imported goods – either all of it or in some ad hoc categories cherry-picked by the "wise government" etc. (or according to some bogus and fabricated environmental and other regulations). I hope that you agree that the barriers shouldn't become insurmountable. For some compensation, you should be always able to import fancy European cars to the U.S., among other things.

So what is the logic – the quantified "sin" – for which the BMW company may be forced to pay to the U.S. government? BMW is a German company and it may build plants in other countries. When it builds a plan in Mexico, it's mainly a contract between some Germans and some Mexicans. The Americans have nothing to do with this contract. They are not a party so they just obviously cannot collect any money from that! (Unless we live in a world where they are the global Übermenschen.) They are only involved once the cars are exported to the U.S. Clearly, if this is considered to be the "sin" or the "interaction with the U.S." that may justify the fees, the fees should better be proportional to the amount of goods imported to the U.S.

And the sanest quantification of the fee is some percentage of the price. The percentage may be chosen differently for different classes of products (or dependent on some features of the companies and their history) but these numbers shouldn't be too non-uniform because the distortions would become too weird. Whether you like it or not, the only sensible way to "punish" the foreign companies that build plants outside the U.S. is tariffs, basically a fixed percentage of the price that the importers to the U.S. have to pay to the U.S. government! Anything totally different would be much weirder. That guy mentioned an "offshoring tax" as such a weird thing. U.S. companies that build plants in foreign countries have to pay a fee.

I think that this is a totally ill-defined rule because the term "U.S. companies" is effectively ill-defined. Indeed, such a fee unrelated to the imports to the U.S. may only be imposed on "U.S. companies" because the U.S. just (hopefully) cannot collect money from random foreign companies doing random things outside the U.S. But a way for the U.S. company to avoid this "offshoring tax" is simply to stop being a U.S. company. When a company is formally not a U.S. company, it just won't pay this fee. So that's the reorganization that many would try to undergo.

So I mentioned the Apple-Foxconn relationships. Foxconn really may be viewed as a Taiwanese limb of Apple – it produces the Apple products physically. Almost all the profit goes to Apple which is why I find it bizarre for Apple – or even Americans or the U.S. government – to complain against this setup. I think that any other setup would almost certainly be worse for the American interests. One may make equally competitive (on third markets) products in the U.S. but the U.S. worker should be satisfied with the same $400 monthly salary as the Taiwanese worker. It won't be $5,000. You can't eat a cake and have it, too. Unless the U.S. government wanted to subsidize the exporters – introducing dumping prices etc. But that could be very costly. It's in no way a win-win policy.

OK, but whether or not the policies would be wise for the U.S., we may still ask whether the "offshoring tax" could be well-defined. My antagonist tried to define what the "offshoring tax" as a tax imposed on any production outside the U.S. of the products that were "largely engineered by the U.S. folks". Now, this is funny. With some type of a definition, you could argue that a large majority of technologies were "engineered in the U.S.". All carmakers in the world are "basically" copying Henry Ford's method of mass production of cars. All makers of smartphones are imitating the iPhone, the first keyboard-free cell phone with a decent operating system.

The things "largely engineered in the U.S." are both way too inclusive as well as way too ill-defined. There have been many contributions done by various people – Americans but also non-Americans – when various products were developed. And you surely don't want to introduce a system in which some government bureaucrats will be reassessing whether every individual product or component on the market was "largely engineered in the U.S.". The bureaucrats couldn't do it well, they could get bribed, and equally importantly: Why should such things matter at all? The intellectual ownership etc. is already taken care of patents, trademarks, and other things.

A similar criticism would apply not only to "largely engineered in the U.S." but also other adjectives that you could pick as a basis of your protectionist policies.

Again, my point is that once you to try to design policies that avoid a monstrous room for corruption, assumption that the government may do a gargantuan pile of decisions well (and without corruption), and that doesn't lead to constant complaints and lawsuits, what you really want to introduce are basically tariffs. There is nothing else. The belief that there exists something "much prettier than tariffs" that has a similar effect as tariffs is a delusion of someone who hasn't thought about these things carefully.

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