Tariffs v Free Market

It was years ago, I remember, during President George W. Bush’s tenure, that I noticed the U.S. trade deficit with China had hit US$100 billion. “Wow! That‘s a lot of money,” I said to myself. Recently, news reports caught my eye to the effect that the U.S. trade deficit with China hit US$419 billion in 2018 with America importing a total of US$539 billion in goods from China and exporting a mere US$120 billion worth to China. I said to myself, “Wow, wow!” How did that happen? To this question, I have a facetious answer: The Chinese read Adam Smith; the Americans don’t.

In his great economics textbook “The Wealth of Nations” (published in 1776), Adam Smith expresses his concern about the imposition of high customs duties (i.e. tariffs) on imported foreign goods and the consequences of such mercantilist measures. But at the same time, he is not opposed to the use of tariffs as a counter-measure upon goods from foreign countries that impose high customs duties on British merchandise, or as “an instrument of revenue” levied at a reasonable rate.

Still, (under ‘Taxes Upon Consumables’) in reference to high import duties encouraging smuggling, he laments, “…. such heavy duties, which never could have been imposed, had not the mercantile system taught us, in many cases, to employ taxation as an instrument, not of revenue, but of monopoly.” By “monopoly” (against consumers in his view), he means the protection of the home market for Great Britain’s domestic manufacturers.

However, he points out (under ‘Employment of Capitals’), “It is of more consequence that the capital of the manufacturer should reside within the country. It necessarily puts into motion a greater quantity of productive labour and adds a greater value to the annual produce of the land and labour of the society.” In today’s economic parlance, ‘the annual produce of the land and labour of the society’ simply means the annual Gross Domestic Product (GDP).

He goes on to say, “The capital employed in the home trade (i.e. the domestic manufacturing industry) of any country will generally give encouragement and support to a greater quantity of productive labour in that country and increase the value of its annual produce (i.e. GDP) more than an equal capital employed in the foreign trade of consumption (i.e. the import business)…. The riches, and so far as power depends upon riches, the power of every country, must always be in proportion to the value of its annual produce (i.e. GDP), the fund from which all taxes must ultimately be paid. But the great object of the political economy of every country is to increase the riches and power of that country. It ought, therefore, to give no preference nor superior encouragement to the foreign trade of consumption (i.e. the import business) above the home trade (i.e. the domestic manufacturing industry)....”

Well, the Chinese certainly pay Adam Smith a great deal of respect in giving “no preference nor superior encouragement to the foreign trade of consumption (i.e. the import business) above the home trade (i.e. their domestic manufacturing industry)”.

Furthermore, the Chinese Communists have thoroughly researched Karl Marx’s theory of Surplus Value of Labour, that is, the difference between the cost of labour and the eventual realized price of a product. So, they know very well that the value of any product depends on the demand of the market. Without the demand of the market, there can be no value, let alone Surplus Value of Labour. It is the demand of the market that provides millions of people with their livelihood. Hence, the importance of protecting their domestic market from the invasion of foreign goods is obvious to them.

What’s more, they are absolutely nobody’s fools. Indeed they are extremely shrewd. If anything, they probably take Americans for fools. In Shanghai, where I was born many years ago, we (that is, my playmates and I) used to say to each other, “Don’t take me for a ‘Yang-Pan’!” What does that mean? It means a Foreign Fool, especially an American fool with money to burn! Don’t think only Americans have a sense of humour.

The Communists know if they allowed the demand of the Chinese domestic market to be satisfied by foreign goods, they would not be able to “increase the riches and power of the country” as fast as they have done over the past 30 years. What about the trade talks? Well, keep talking and keep flying back and forth, but don’t hold your breath.

On the other hand, it seems that Americans (at least, most American business people and The Wall Street Journal editorial authors) believe in the free market and the late economist Milton Friedman. Understandably, they dislike restraints on business operations, because restraints such as tariffs, like sands, hinder the smooth functioning of the cogs and wheels of the global economic juggernaut. As Milton Friedman put it in 1979: Subsidies of foreign producers that lower prices for Americans are a form of philanthropy, why should we complain?

True, cheap foreign products are a form of philanthropy for American consumers. But every coin has two sides, and here the negative side of this “form of philanthropy” is the transformation of the American manufacturing industry into an empty shell, as American manufacturers deploy capital out of the country -- against Adam Smith's teachings -- towards where production costs are much lower and then sell their goods in the American consumer market, resulting in heavy job losses in the manufacturing sector. While the cogs and wheels of business revolve efficiently with American consumers enjoying low-cost foreign products, working-class voters may find their voice in elections. Politicians are caught up in the middle between “philanthropy for consumers” on the one hand and industrial suicide on the other. What to do next? (19th May 2019)

By Robert M. Liu (author of “The Socialist Cuckooland”)