Q&A Wednesday – Tax Cuts, Trade Wars, Etc.

Two of my most loyal readers, Megan and Frederick (I highly recommend the latter’s corporate history blog, CorporateHistory.International), both chimed in via Facebook about Monday’s post on tax cuts.  Frederick pointed out a potential downside to corporate tax cuts—what’s to stop large multinationals from investing that money in physical plants and employees overseas, notably in China?  Megan asked me to elaborate further on tariffs in relation to that very question.

Being a conservative, I like to conserve things—traditions, morals, civil society, working institutions, etc.—but most especially effort.  I’m a strong believer in the dictum, “Work smarter, not harder” (although you need a healthy dose of the latter, too).  As such, I’m adapting my Facebook response to them here.

I think the question of tariffs and trade wars is hugely interesting, and needn’t be bogged down in tedious charts and numbers.  What I do believe is that President Trump has ripped the façade from the bipartisan push for globalism, and particularly demonstrated the real, human cost of unbridled free trade.

I used to be 99% a free trader, with 1% reserved for mild tariffs on national security-related goods, like steel.

Now I’m probably more 85% free trade, 15% tariffs. A tariff is a tax, yes, and it’s borne not just by foreign nations exporting goods to the US, but also by American consumers, who have to pay more for goods that are protected (and, thus, more expensive and potentially of a lesser quality than they would be in a competitive, free market).  That disclaimer aside, it seems like paying a few more bucks for your washing machine is a good way to keep Americans employed and earning a decent wage.

If you take that reasoning too far you fall into the dilemma of minimum wage increases, which increase unemployment (especially for unskilled, young, and minority workers) and raise costs, so that any increased wages enjoyed by the beneficiaries are eaten away by the increased costs of consumer goods—all served up with a side of higher unemployment.

That said, judicious tariffs—I’m not arguing for the high, blanket tariffs of the late nineteenth century, which wouldn’t work well in our modern, interconnected economy—especially related to key industries like steel, could keep a lot of Americans working, and would allow blue-collar workers to earn a wage that wouldn’t require years of expensive schooling.

Also, I think targeted tariffs against unequal trading partners—I’m thinking primarily of China—would level the playing field, and prevent some of the outsourcing and capital flight that might occur with a corporate tax cut (or, more likely, increase). It’s unreasonable to expect American workers—with all their labor protections, etc.—to compete with near-slave wage Chinese workers. China’s currency manipulation to make its exports artificially cheaper, as well its rampant intellectual property theft, needs to be combated, and if it means getting our cheap plastic Happy Meal toys from Vietnam (or the USA!) instead of China, so be it.

The current “trade war” with China sees Americans in a much better position than the Chinese. China needs those exports, but the USA can stand to experience some minor drag to its GDP growth given the massive growth we’re seeing with the tax cuts (not just the corporate tax cut, but also the 20% deduction for small business pass-through earnings, which is YUGE for small business growth—a key driver of employment in our country). I see it as a trade-off—pay a little more for some consumer goods, but create imbalance in the Chinese economy and force them to play ball on par with the Western world and Japan.

My only real concern with this approach is there is no limiting principle (although that’s true for any type of tax, and we have to have some of them), which makes me wary as a limited-government Jeffersonian, but the Hamiltonian commercialist in me sees this moment in history as one in which we can uniquely leverage our economic clout to improve our own economy and our position internationally, and we can afford to go through a trade war longer than China (or Mexico, or Europe).

Everyone loses if a trade war lasts too long, but I think the Chinese will blink first. American workers will be the ones to benefit.

One additional thought, which will require more elegant development in a future post:  even with the inefficiencies and deadweight loss that would occur from overly-high tariffs, wouldn’t protecting domestic jobs be a more effective and fulfilling way to provide a living for blue-collar workers than the current welfare system?  Instead of a massive, government-run bureaucracy administering a complex and redundant system of bennies, society could bear the cost through paying a bit more for consumer goods.  Such a system would create more semi-skilled positions in some industries, and I’d rather we subsidize people through work than to subsidize them not to work.  Again, that’s a very rough sketch, but some food for thought.

Regardless, tariffs are not an unalloyed evil, nor is free trade an unalloyed good.  There’s room for both.  Economics suggests that the balance should favor the latter more heavily than the former, but we can temper the massive social disruption that unbridled globalization unleashes.

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6 thoughts on “Q&A Wednesday – Tax Cuts, Trade Wars, Etc.

  1. Good morning Tyler! Your blog has become my first reading of the morning. It goes very well with my first cup of tea. You have presented a cogent explanation of the issues. Well done!

    Liked by 1 person

    • Glad you’re enjoying the blog, Lynn, and have made it a part of your morning ritual. That’s exactly what I’m hoping to achieve—readers waking up to a fresh post, M-F. Once school starts back I might have to throttle back that level of output a bit, but I’m hoping to keep it up.

      Thanks for reading, and please feel free to share any posts you enjoy with your friends via e-mail, on Facebook, etc.

      Like

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