Thoughts on Trump’s tariffs – toward an anti-fragile world?

What should we think about Trump’s tariffs? As Trump is quite unclear, maybe an exploration of the area could be useful

There are many aspects to free trade, more aspects than either most proponents or opponents seem to consider.

Ricardo’s Law of Comparative Advantages

The insights into the advantages of free trade are rooted in David Ricardo’s Law of Comparative Advantage. According to economist Paul Samuelson, it is the only law in all of social science that is both true and non-trivial. Whether it is indeed the only one, I cannot say. Mathematically speaking, it is certainly true, and it is definitely not trivial. It seems as if the human mind is inherently designed not to understand it.

The law of comparative advantages states that if two countries, A and B, both make goods, chairs, and tables, for example, and A is better than B at making both chairs and tables, and B is very poor at making chairs and better at making tables, but still worse than A, it is advantageous for A to concentrate on making chairs and B on making tables and for the two countries to trade with one another.

The instinctive reaction is that A will make both chairs and tables, and B will be unable to make anything and sell anything. Politicians in B will howl, “Close the border. Otherwise, all our jobs will go to A” (for example, Mexico, China, or Japan). What these politicians forget (or their electorate forgets) is that resources are scarce everywhere. In particular, time is limited. If we do one thing, this prevents us from doing another. If A wants to make tables as well as chairs, it will have to make fewer chairs. A, therefore, has a comparative advantage in chair making, and B has a comparative advantage in table making, in spite of the fact that B is worse at making both products.

This seems to be where, most of the time, the discussion ends. Those who do not understand the logic of this law call those who do “dogmatic free traders” and the like. Those who understand it refer to those who oppose it as ignorant.

Creative Destruction

Also, for good reason, those who favor free trade suspect those who oppose it of wanting to protect their own interests at the expense of the interests of consumers in their own countries. Economic progress depends on what Schumpeter called creative destruction. That is, to a large degree, on companies going under to be replaced by competitors, often emerging ones. The faster this takes place, the more rapid the economic and technological progress will be. Creative destruction will not make for a calm, sedate life, but it will contribute to a society bubbling with creative spirits and excitement.

The Divisions of Labor and Knowledge

There are two other aspects of free trade that everyone should keep in mind: the division of labor and the division of knowledge. As Adam Smith illustrated with his famous example of a pin factory, specializing in one or a few tasks can make a person or a company twice, ten times, a million times, or infinitely more productive in producing that item or those items. The term ‘infinitely’ is relevant because, in some cases, if people or companies are forced to be jacks of all trades, they simply cannot produce certain items at all.

Centers of excellence will therefore exist, such as Japan for high-end cameras, Hollywood and Bollywood for movies, and Oxford, Cambridge, MIT, and Caltech for certain sciences. Today, regardless of how much effort the continent of Africa puts in, it is unlikely to surpass Sony, Canon, and Nikon in producing DSLRs. While such items stand out, there are thousands of other examples that remain unnoticed.

Through free trade and the division of labor, specialization may be driven to its extreme limit, or rather, as a free market is a Complex Adaptive System that no one controls, through the nature of things, specialization may drive itself to its extreme limit.

This limit is determined by the size of the world population, what different people know, and what they can do. If such specialization is permitted, hundreds of thousands of companies will be able to specialize in different niches, and it is a mathematical certainty that we will all be better for it. Therefore, those who favor free trade point out that if there is free trade between all countries, ideally with no customs barriers at all, we will all become much wealthier.

The Fragility of Free Trade

However, the proponents of unrestricted free trade make at least two unwarranted assumptions. First, they assume that there are no local or regional calamities, such as natural disasters. Second, they suppose all people and all countries are rational and peaceful; everyone, everywhere, views economic prosperity as the paramount goal. Here, I speculate somewhat, but it seems that some of their argument is based on an old observation: commerce makes people polite and peaceful. These proponents then assume that, in short order, such politeness and peacefulness will apply to all.

Also, again somewhat speculating, it appears that many proponents of unrestricted free trade marry the mathematical certainty of Ricardo’s law with an intense aversion to the state, often questioning the very existence of the state, which makes them somewhat dogmatic in their opinions.

Such dogmatism is mirrored by the righteous indignation of those on the other side of the fence who “want to protect jobs”, such as labor unions and companies that cannot compete.

However, as previously mentioned, there are other options than unfettered free trade versus protectionism, and there are other factors to consider. First, natural disasters could wipe out, say, Taiwan or parts of Japan. Then, at present, there would be no more advanced semiconductors or high-end DSLR cameras. Second, we have the fact that real people, regardless of their level of education or purported sophistication, are not particularly rational, at least not in their political behaviors. Lastly, we do have states, and there is no sign that they will disappear.

If we create a pyramid of needs for the state, the foundation is and has always been national defense. National defense is the raison d’être of the state. A country will have an army, its own or that of another country. That is the way it has been for a couple of million years, ever since humans, in the form of Homo erectus, emerged on the scene. Azar Gat’s book War in Human Civilization is recommended for anyone doubting this.

Included in the defense of the nation are foreign policy, embassies, and the like. Far behind in the hierarchy lies the justice system – or perhaps more accurately, a professional justice system. A justice system will always emerge; lives, property, and contracts must be protected; it is a necessary aspect of people living in groups. However, it may not require dedicated professionals.

As a distant third, we might find the police; however, for most of human existence, and until quite recently, most policing was carried out by citizens who would then bring criminals to the courts. Almost everything else the state does falls into the category of potentially nice to have.

Adam Smith was aware of such issues, which is why, despite promoting free trade, he accepted the English and later British Navigation Acts that required that for trade to Britain, British ships and predominantly British crews were used. This ensured that in times of war, Britain would have ready access to sailors to man the warships. In 1795, the Royal Navy employed 100,000 people under sail; by 1813, this number had increased to 150,000.

The Problem with China

Free traders are correct, at least from a mathematical point of view, that if some countries, such as China, impose tariffs on certain imports while others do not, it will economically hurt China more than the countries that refrain from implementing tariffs on their imports.

If China imposes high tariffs on shipbuilding and subsidizes its own shipbuilding, it might dominate the industry. However, the United States might grow rich from its services sector while purchasing inexpensive Chinese ships. Economically speaking, the USA comes out ahead.

However, China is not and has never been, a country like others. For over two millennia, China and its leaders, even during times of division, have considered their nation to be the center of the world. Throughout the ages, Chinese leaders have thought nothing of marching, working, or starving millions, or tens of millions, of their citizens to death. Today, China features history’s worst mass murderer, Mao, on its banknotes, and Mao’s Communist Party governs the nation.

Now, if you were China and you were intent on becoming the world’s only superpower, if you saw China as destined to rule the world, and all other countries, if they continued to exist, paying tribute to China, how would you go about it? Even if your ambitions were smaller but still go in this direction, what actions would you take?

First of all, you would see to it that as much hardware production as possible is concentrated in China, including mining, shipbuilding, and the manufacturing of cars, computers, smartphones, and everything else concrete and tangible. You would achieve this through tariffs, subsidies, and regulations.

You would also spend virtually unlimited amounts of money – $100 billion, $500 billion, or $1,000 billion; the sums do not matter – per year in the West to promote, bribe, and extort your way to “Net Zero”, the idea that carbon dioxide will kill us all, that windfarms should be built instead of coal, gas, and nuclear powerplants. You would advocate for as much environmental regulation as possible, as little mining as possible, and as little industry of all kinds as possible. You would, to the best of your abilities, promote the social degeneration of the West through TikTok and the like.

In practice, it appears that China does not need to invest much in these matters. The majority of our Western “elites”, including journalists, politicians, academics, and so-called intellectuals, firmly belong to what Thomas Sowell referred to as “the Anointed”, individuals who look down upon the rest of us – the hoi polloi, the great unwashed. The Anointed wallow in Western Self-Contempt – the title of an excellent book by Benedict Beckeld – and willingly do what they can to bring down our Western civilization.

You would, in conjunction with Russia and Iran, drive millions of so-called refugees to migrate from culturally incompatible MENA countries to Europe – something I suspect happened. You would sponsor propaganda claiming that half-illiterate Afghans from Iran must come to Europe to “save the welfare state. " I know of no proof that this occurred, but it would have been the logical action for them to take.

Then, eventually, although you are poorer, maybe even much poorer than you would have been under free trade, you can hit the rest of the world over the head with hardware while the West can attempt to defend itself through a thriving service industry. Subway sandwiches, Starbucks coffee, and software developers versus ballistic missiles, drones, and bullets.

What we are witnessing today is the Chinese Navigation Act. Not used, as in the case of Britain, mainly for defense but as the means of potential future aggression. The West should accept a lot of financial and other hardships to counter this strategy.

“Ripping off” each other

Most countries have less nefarious motives than China. In particular, the arguments both against and in favor of Trump's tariffs are the most valid among friendly nations. For such countries, imposing tariffs and trade barriers on each other’s goods is economically irrational, which should upset any economist worth his salt.

However, there are valid political reasons for it. Since most people do not understand Ricardo’s law, and because Schumpeter’s creative destruction always threatens industries, it is easy to rally support for import duties on products that loom large in the public perception, such as cars, steel, agricultural products, and the like.

This is achieved both through tariffs and through subtle and quite arbitrary differences in, for example, emission standards that impose large costs on foreign car manufacturers.

There will be wrestling matches between countries. “We want the cars to be produced here!” they shout through various measures. Since World War II, Europe, Japan, and many other countries have imposed much higher duties on certain American products, along with restrictive and, once again, quite arbitrary technical standards. Europe has indeed tried to rip off the US. In doing so, as economists point out, it has harmed its own citizens. However, Europe has also caused harm to the US.

Tariffs for an anti-fragile world?

There are additional considerations related to natural disasters and military aggression. In a world with unrestricted free trade, supply chains span the globe. These are incredibly long and complex. It is nearly impossible to predict what raw materials, intermediate goods, machinery, and end-consumer products will be necessary in the event of a prolonged war, a meteor strike, or a massive volcanic eruption.

Building up stocks of at least food and fuel is one obvious preparatory measure. Our farming ancestors consumed salted meat that was 2–3 years old for this very purpose. Another measure is to protect certain industries, but again, it is nearly impossible to ensure that no essential widget is forgotten that is necessary for the operation of the whole. Attempts in certain, more obvious areas should likely be made. If trade is cut off due to a war or a catastrophe, although there will be immense hardship, at least people will not starve or freeze to death. Until the end of the Cold War, such civil defense measures were obvious to most; now, they seem sadly forgotten.

I do not know if Trump and his team think this way, but one idea that struck me while trying to make sense of it all is that the world should likely be divided into numerous free-trade spheres with some external trade barriers.

One sphere might be the Nordic countries along with the Baltic nations. Another could be Britain and Ireland. A third example might be France and perhaps a few other countries. The USA and Canada would also be a natural fit.

We impose, for example, a 10 percent import duty on all goods, except for agriculture, which is taxed at 20 percent to encourage a degree of food security. These figures are hypothetical and should not be overinterpreted. However, they do not imply that economies strive for autarky, that is, self-sufficiency, as that is a sure-fire road to economic ruin. Neither is it an endorsement of government intervention on an ad hoc basis when some company or sector, such as steel or agriculture, encounters difficult market conditions.

With such trade barriers in place, there would be less division of labor and less efficiency in the world. The flip side of this is that there would be significantly more redundancy. In other words, there would be more numerous but shorter supply chains for most goods. Compared to today, some production would be onshored. This way, the world would have fewer single points of failure. How much fewer and the corresponding duty levels seem like worthwhile issues to investigate.

Such restrictions on global free trade would likely make us all poorer. However, other factors can also have that effect. Before the advent of laissez-faire in the 19^th century, under the Old Regime with guilds and the like, the tax pressure was commonly only about 5–6 percent of GDP in the West. Still, economic progress was prevented through intrusive regulations. Today, we observe the same situation in Europe and the USA. Hardly anything is allowed, and if it is, it requires a costly and complicated permit process. The Empire State Building was built in one year and 45 days, while today, it takes 4.5 years just to complete the necessary environmental impact report.

Taxes on labor decrease the amount of labor. In particular, taxes on high earners and prospective high earners diminish the number of innovations and startups. Taxes on savings lower the level of savings. Taxes on capital gains restrict the flow of capital goods.

One of the most vicious attacks on prosperity is working hour regulations. We know that becoming world-class in any field typically requires about 60 hours of work per week for ten years. However, this is illegal in most countries with labor legislation, including those in the European Union.

I do not find it obvious that tariffs, even high ones, are worse attacks on prosperity than many common taxes and regulations.

For example, I would argue that the European Union is economically dead or will be in 5 to 10 years due to so-called environmental protection measures, taxes, and regulations on working hours. Even if today the EU eliminated all customs duties on imported goods, meaning trade were entirely free, there would still be insufficient electricity, almost no permissible construction sites, few incentives to work hard, and heavy fines for any company that allows its employees to work long hours.

I venture that one reason economists focus so much on free trade is that Ricardo’s Law of Comparative Advantages is a neat mathematical truth. The effects of income taxes on entrepreneurship, not getting a construction permit, having to wait for a permit for one, five, or ten years, or the need to conduct a multi-million-dollar environmental study over several years to attempt to open a mine only to have the application rejected, cannot be easily expressed as equations.

Thus, I do not find it obvious that, for example, income tax – even a very low one – is less harmful to the economy than import duties. An income tax, by its nature, penalizes work, while import duties penalize trade and the division of labor. Which one is worse? Do the positive effects of increased duties that aim to remove harmful taxes result in a net economic benefit? Or provide other benefits?

It seems to me that with uniform, uncomplicated, and quite low import duties surrounding each of a few dozen economic spheres, we would increase the redundancy and robustness of the world economy. Such spheres should compete with one another with regard to the lowest and least harmful taxes, the fewest and best regulations, and the best legal system. It is competition that brings progress. Collaboration, for example, within the European Union, instead brings about stagnation, wastefulness, and general misery.

On one hand, the EU may seem like a free-trade area. On the other hand, the EU kills competition through the “harmonization” of technical standards, environmental regulations, and the so-called “social chapter,” which governs working hours, as well as rules regarding the lowest permissible VAT rates and corporate tax rates to prevent what is referred to as “social dumping” and disloyal competition.

In the words of Nicholas Nassim Taleb, a world containing such economic spheres would be anti-fragile to a larger degree than one with unrestricted free trade. Possibly, but not necessarily, it would be less prosperous, but that seems like a tradeoff worth considering.