The Trade War Endgame
Once again, over at the Independent Institute, Scott Burns and I tackle the recent trade goings-on.
This time, we focus on the contradictory rationales that have been offered for the administration's trade policies.
A snippet:
Governments need to raise revenue. They also need to buttress their economy and engage in diplomacy. Why not kill three birds with one stone?
In tandem, however, this tripartite argument for tariffs is riddled with flaws and contradictions.
The most glaring problem is that they are incompatible. If tariffs are meant to protect domestic firms, then they can’t be relied on to raise tax revenue. The reason is obvious for anyone familiar with the Laffer Curve. To raise revenue, tariff rates need to be low and stable enough to encourage a steady flow of imports. However, the high tariff rates required to protect domestic firms would effectively staunch the flow of imports, thus preventing them from being a reliable source of revenue.
The revenue rationale also undercuts strategy. Strong-arm diplomacy requires the threat of high and variable tariffs—a toxic recipe for raising tax revenue. To the extent tariff threats work, they’d never go into effect, meaning they’d offer neither revenue nor protection.
The strategy and protection rationales are also at odds with one another. For tariffs to be an effective bargaining chip in diplomacy, you have to be willing to cut them to reach a deal. But if you slash tariffs, you can’t use them to shield domestic industries from foreign competition.
No matter how you slice it, you can’t have all three of these rationales in your protectionist playbook. You have to pick one and stick to it, accepting that the other two must necessarily be sacrificed.
Alas, the administration can’t bring itself to admit this. Over the last month, they’ve played a game of bait-and-switch with their tariff rationales, constantly shifting their position like a cornered dodgeball player to make their true endgame harder to pin down and attack. These evasive maneuvers may be necessary for defensive purposes; a moving target is, after all, harder to hit. It’s a bold strategy, but it doesn’t exactly inspire market confidence.
Read the rest here.