Tariff Benefits Will Exceed Costs When National Goals Are Met

Journal of Political Risk, Vol. 7, No. 3, March 2019 

By William R. Hawkins

US President Donald Trump, with US Congressman Sean Duffy (L), holds a tariff table as he speaks in the Cabinet Room of the White House on January 24, 2019. Trump spoke about the unfair trade practices of China. Credit: MANDEL NGAN/AFP/Getty

A discussion paper published last weekend by the Centre for Economic Policy Research in the UK claimed that the tariffs President Donald Trump has imposed on Chinese products are “causing the diversion of $165 billion a year in trade leading to significant costs for companies having to reorganize supply chains.” The paper was authored by Princeton and Federal Reserve economists, and calls this a “cost” on the U.S. economy. But the basis of their analysis is much too narrow. They do not understand that the “diversion” of trade is a sign that the President’s policy is working. We need to reduce the ties between American companies and an increasingly threatening China. And I have no sympathy if those who sought to profit by helping Beijing’s rise (even if “experts” told them it was a good thing for the world) now suffer transition costs. Trump’s actions were prompted by national security concerns.

The question now is whether Trump will continue to direct policy so as to weaken China and maintain our economic-technological advantage upon which the balance of power rests; or will he settle for the lesser goal of trying to open China’s markets and get a better deal for nominally American companies. Settling for that would not achieve the vital strategic goal of the first course of action. I believe he knows the problem, but is under intense pressure to accept less.

 In the old days of international relations studies, trade was considered “low politics” compared to the “high politics” of national security and alliances. The growth of transnational business has blurred this difference in two ways. First, it has elevated the shift in wealth and capabilities as issues, since disparities in growth have always been a key element in the balance of power. But it has also increased the influence of Big Business in government policy in ways that undermine the priority or even the concept of national interest. Indeed, the term “international economics” has been nearly abandoned in favor of a “globalization” that reflects a fundamental change in perspective.

The prominent economist Harry Johnson stated that the only thing all economists agree on is “free trade.” And that seemed to be true during the post-Cold War euphoria. The roots, however, go back to the school of classical liberalism which sought to replace traditional international politics (with its focus on conflict) with peaceful commerce. Jeremy Bentham wanted to replace “offensive and defensive treaties of alliance” with “treaties of commerce and amity.” Thomas Paine, finding that “war is the system of Government on the old construc­tion….Man is not the enemy of Man.” listed among his revolutionary proposals that all warships be converted into merchant vessels. The French economist J.B. Say called for an end to the diplomatic corps, arguing that “it is not necessary to have ambassadors. This is one of the ancient stupidit­ies which time will do away with.” They should be replaced by consuls whose function would be to promote free trade. The most infamous of these claims came from the British Radical Richard Cobden, who argued that commerce was “the grand panacea” and that under its influence “the motive for large and mighty empires, for gigantic armies and great fleets would die away.”

These silly notions were not left behind in the 19th century. During the era of appeasement between the wars, British businessmen thought they could do a better job of running foreign affairs than national leaders — and leaders like Neville Chamberlain tended to agree. But it was the end of the Cold War that really opened the door to this view in the U.S., though there were earlier trends. At the end of WW II a host of organizations were set up to regulate the trade rivalries thought (falsely) to have provoked the two world wars. This effort morphed into trade as a way to tie allies closer together while leaving the Soviet Bloc in isolation. President Ronald Reagan insured that Moscow lost that trade war.  

But there were also institutions created that embodied pure liberalism. The U.S. Trade Representative (USTR) was created in 1962 to take negotiations and regulations out of the State Department where it might be influenced by larger policies regarding allies and adversaries. Business does not want to have their deals interfered with (and which theory says will always yield the most efficient use of resources). This followed the creation of the Arms Control and Disarmament Agency (ACDA) in 1961. In both cases, the causes of trade and disarmament were deemed too important to be constrained by traditional diplomacy. Both would make the world better and should be pursued as ends in themselves. How often do we still see the goal “to expand trade” cited without reference to content or direction (let alone balance)? ACDA was folded back into State in 1999. USTR should follow so trade can be integrated within national security policy in a dangerous world.

There is little consideration given to the fact that trade is itself competitive. Current economic theory emphasizes the common interest between buyer and seller. But the real issue is who wins the struggle between sellers (producers) and how that affects the capabilities of the nations within which their production facilities are located. Economics cannot and should not be set off in a “private sector” box where the national security consequences are ignored.

William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former Republican staff member on the U.S. House Foreign Affairs Committee. JPR Status: Opinion.