More than four hundred years ago a Polish astronomer redrew the universe. Educated men throughout Europe believed in a spherical earth at the center of a collection of nested crystaline spheres, carrying along in their rotation sun, moon and planets. That picture, the Ptolemaic system, had been accepted since classical antiquity. Copernicus replaced it with the modern solar system: sun at the center, planets orbiting around it.
You know this is simplified, leaving out every other possible reason why tariff barriers might be useful. There are more choices available than just mercantilism and free trade.
I feel reasonably certain that you have the knowledge to do a better job than I could of steel-manning various pro-tariff positions, and may even be aware of more uses for tariffs than I know about.
As I understand it, the classic reasons are:
- shelter infant industries so capability can be built. (In particular, industry producing things likely to be more profitable in the long run)
- keep/regain/gain the capacity to produce certain things at home, so they are available in case of war, trade disruptions, etc.
One problem with the infant industry argument is that infant industries have a lot less political muscle than senile industries, so in practice it is the latter that get protected.
One argument for a tariff or an export tax is that, if the country is a large enough part of the world market, it can push down the world price of something it buys by buying less (tariff) or force up the price of something it sells by selling less, essentially functioning like a cartel. That works for, at most, very large countries or ones producing things almost nobody else produces, It applies to export taxes as well as import taxes, but you practically never see the former, because the objective driving real world trade restrictions isn't maximizing national welfare.
The point of my essay was not that there are no possible circumstances in which a wise and benevolent government would impose a tariff but that much of the support for tariffs is based on bad economics, ideas refuted two hundred years ago.
Historical note: mercantilism was not necessarily misguided when gold/silver were the major internal currencies because a lack of gold/silver would make national markets seize up for lack of liquidity, forcing national economies back into local ones where trust/barter/private notes could substitute for precious metals.
If there was less gold in a country it would exchange for more goods per ounce. What matters is not how many ounces of gold are in the country but what value of gold. As Ricardo pointed out.
Alas, maximizing goods and services available ignores the effect on unemployment: the Dutch may get more butter if they sell natural gas to the Poles, but this means that only a fraction of the current Dutch population is needed.
Optimizing for two goals cannot be done (AFAIK), so we are left with imperfect solutions: free trade + UBI or trade as free as it can be before unemployment exceeds some arbitrary limit. Plenty of practical issues and potential for political hijacking for these options and others, but this - I think - lies at the core of the modern resurgence of protectionism.
I am no economist. Could you translate that to English? How does trading natural gas for butter mean that only a fraction of the current Dutch population is needed? What do the rest of them do?
And what does a UBI have to do with free trade?
More to the point, why does a national border matter but an internal border does not? The US has states with borders, states have counties and cities with borders. Free trade across those borders doesn't require UBI; why would national borders? The Netherlands must have internal borders, but my American ignorance means I don't know what they are called -- states, provinces, districts -- but that doesn't matter. I'm sure some have more dairy farms and produce more butter than others, and trade it for other products without massive unemployment. Why is that different from trading with Poland?
If the Dutch don't trade butter for natural gas, what do they do with all the excess butter, burn it for heating? Oh wait, maybe they don't produce as much, and Boom! now there's a lot of unemployed dairy workers. There's that UBI again, I suppose.
He means that the Dutch start with two industries, natural gas and butter. Because they can buy butter cheaper from someone else, it actually makes sense (from a national perspective) to stop making butter and just buy it. In practice this would look like everyone buying the cheaper foreign butter and too few people buying the domestic kinds because of expense. The domestic shuts down as unprofitable, but this is fine for everyone who buys butter because they weren't buying domestic anyway. The only people who suffer are those who were making butter. If they can find other jobs, great. If they cannot, then they may need some support - presumably from the surplus dividend of buying cheaper butter instead of the more expensive butter.*
*-obviously butter being a stand-in for whatever industry or good we're talking about.
There's no difference at all between internal and external borders for our purposes. A small nation can ensure satisfactory employment by simply having an onerous enough tariff, and letting the market figure the rest out.
A large one may find that even full autarchy may not suffice to achieve the same.
There's no regulation forbidding or encumbering the use of mules as pack animals, and yet no mules are used nowadays. Why would labour be different to mules, and somehow exempt from the technology frontier? As with mules, it may very well happen that supply and demand for labour intersect at a quantity much lower than the current number of people of age.
In short, there's nothing preventing unemployment in a free market. Hence, we mau have to choose between UBI and unfree trade or other limitations in the division of labour.
Supply and demand are not numbers, they are functions of price. Their intersection is at the price (wage) at which quantity of labor supplied equals quantity demanded.
Are you implying that supply of labour is fully vertical at whichever point is determined by the able-bodied population? Assume heterogeneity away for our purposes.
I assume his claim is that the market value of some people's labor goes to zero or negative, so they, like mules, don't get used. If there is a coherent price theory model other than that behind his argument I don't know what it is.
I agree with your overall take, but want to add two complications that are often relevant when a politician or voter express concerns about a trade imbalance or similar.
1) While as a whole a country is wealthier with trade, individuals within it may be poorer. Consider the steel workers losing their jobs. In the 1970s they were very well paid, while by the 90s they were out of jobs and unable to find comparable work. This benefitted the US overall significantly, but these individuals were badly hurt. I used to work with a guy who made the equivalent of $75,000/year in the 1980s but only about $50,000 in 2010. The actual dollar figure was higher, and he could buy more stuff (because they were cheaper imports or new technology), but his standard of living was still subjectively lower despite moving into management and progressing along his career.
2) Maintaining high skill and strategically important industries can be important in the sense of national security. This used to be industries like steel, but more relevant today would be things like computer processors and semiconductors. Taiwan controls a significant share of the semiconductor business (60% of all, 90% of advanced), such that both China and the US may consider going to war over it. If this industry were located in Nevada, it would be a non-concern. Even less strategically valuable industries can become important in times of war or other significant economic shocks. We saw this in 2020 when imports lagged and prices soared. If we imported 50+% of our food, we would be in danger of massive famines if something happened to the supply chain - even if we were fabulously well fed in normal times.
The corn field / auto factory trade is fine for a limited time.
But factory production improves much faster than farm production. (except for places where the farm system is already far far behind "state of the art" -- India a couple decades ago.) Honda employes fewer workers, those remaining workers eat less Iowa corn. Then Iowa farmers don't sell or export as much so can't buy or import as much.
Historically nations building up factories and trading finished manufactured goods for imported food or raw materials can become wealthy rather suddenly. Britain, Japan, Singapore, South Korea... Nations depending on large efficient plantation style farming of, for example, sugar, rubber, coffee, tobacco, bananas... tend to get poor nearly as rapidly. Cuba, Jamaica, Brazil, Argentina, Uganda, Guatemala, ...
The Copernican model was replaced with an improved one from Kepler. Where in the economic literature does the Ricardo "Wine vs Cloth" model evolve to take into account a generation or two of new technologies in either wine-making OR cloth-manufacturing?
If car factories around the world improve and farming doesn't, the price of cars falls relative to the price of corn, so the quantity of cars we get doesn't fall in proportion to the reduction in the number of Honda workers. Besides which, the exported corn doesn't have to be eaten by Honda workers, just by Japanese.
I think if you work through the logic of comparative advantage you will see that the development of new technologies doesn't affect it.
There is no need to micro manage any of this. It is self-correcting. If corn gets cheaper, or cars more expensive, corn trades for fewer cars. Other products take their place.
Look up Bastiat and "Paris feeds itself." All micro management does is reduce efficiency.
Brazil and Argentina are terrible examples for your case. Both countries have, with some periodic exceptions, ran on a protectionistic import substitution industrialization policiy for nearly a century, starting with Peron and Vargas. Their failure cannot be blamed on a lack of tariffs.
Why does any complaint about Ricardo assume advocacy of Colbert?
I don't actually worry about tariffs any more than I care about sales taxes, inheritance taxes, or value-added-taxes, etc. Governments interfere with trade -- sometimes heavy-handedly. Domestic and global trade are both targets. Traders, global and domestic, divert excessive resources into influencing, lobbying, or outright corruption of governments into evading, waiving, postponing, minimizing taxes for themselves or imposing taxes on competitors. This stuff is bad. Agreed. Given. And, it's background.
By the way, Copernicus had a better model than Ptolemy. We can point out that planets do NOT -- quite -- move in circles around the sun without reverting to Ptolemaic errors.
I'm looking for guidance toward an economic Kepler, here. We KNOW that nations that rely on one single -- presumed best -- product for trade have historically seen their total social wealth rise and fall. Sometimes this fall has been accompanied by terrible government policy. What's the trigger, and what should a government policy be towards the next generation and advantages -- comparative, competitive, or absolute -- that aren't yet apparent?
Peron -- well, agreed. Although Argentina's collapse of the rubber industry in the 19-teens predated Peron's dictatorship by a full generation. (We really want into the weeds of Argentinian errors? How 'bout when their Supreme Court refused to hear accusation of election fraud in the 1930s, leading into the military coup that put Peron and his "social justice warriors" into power in the 1940s? )
Some people point out that the problem with free trade is that, once we become dependent on another country to produce a particular good, it becomes a serious issue when it no longer trades with us, perhaps because of geopolitical tensions between the two countries.
The government of, say, China could decide to cut off trade with the U.S., thereby depriving us of some goods we normally rely on the Chinese to produce. Yes, that would hurt China too, but by hypothesis, that won’t stop the Chinese government. I wonder what professor Friedman would say in response to this argument.
My own view is that the scenario described is possible, but unlikely to be nearly as harmful as protectionism in the long run. Using the less efficient method today on the off chance that the more efficient method *might* become less efficient than the less efficient one at some unknown point in the future seems to me a bizarre thing to do.
If the problem was predictable and your country did not have price controls, it would pay an entrepreneur to either warehouse some of whatever you might be cut off from or maintain some backup productive facilities, since if the problem did arise he could sell at a high price.
More generally, this is not very different from the uncertainty an economy faces for other reasons. There could be a late freeze or a drought — that's not a reason not to grow crops.
Some theologians balked at heliocentrism, but somehow the astronomers came out on top eventually. Perhaps this is because the theologians didn’t really have as much to lose as they thought. Mercantilism will never die because business owners will never tire of looking for ways to screw their competition. By doing so, they might end up screwing themselves, but they can more easily imagine the benefits than the costs. I guess we could count that as a market failure in the market for ideas.
I view tariffs as one example of market failure on the political market, a consequence of the fact that a concentrated interest can solve its internal public good problem — getting everyone in the interest group to contribute to buying favorable legislation — more easily than a dispersed group. The fact that firms are arguing for tariffs may be one reason the mercantilist model has survived but I think a more important reason is that the theory of absolute advantage, while false, is easier to understand, more intuitive, than the theory of comparative advantage.
"Mercantilism will never die because business owners will never tire of looking for ways to screw their competition."
You are wrong to blame business owners. The real culprit is the ability of government to define its own limits, yielding corruption from top to bottom. When a business owners has the choice of "doing the right thing" and going out of business, or "screwing the competition" by means of corrupt government, he'd be a damned fool to go out of business.
I suppose there are two flavors of mercantilists, those whose arms are being twisted and those who smell an advantage. Which are more enthusiastic in supporting the policies? Which ones vote for them? It is one thing to tap out when you're in a hammer lock, and another to lie down and beg to be pinned.
Monopolies and mercantilist power only exist when governments create them. Mercantilists without government backing are harmless or in jail for donating to the wrong campaigns.
One can understand the visceral appeal of mercantilism. It’s a whole lot easier to measure your worth and success in a single, objective measure like “how much gold do I/we possess?” than to ask whether your people on the whole are happier, healthier, and better off than before.
And once you’ve picked a single, objective measure (which happens to be approximately a conserved quantity), it’s a short step to concluding that international trade is zero-sum, which implies that there’s no such thing as an objectively good trade deal — only (good for you, bad for me) or (good for me, bad for you). Heck, might as well conclude that _all_ trade is zero-sum, and there’s no such thing as an objectively good deal anywhere. The only rational policy is to beggar thy neighbor; if you don’t, he’ll beggar thee.
And once there’s no such thing as an objectively good deal, only “good for me, bad for you”, you gradually stop believing in _any_ objective reality. My facts are just as good as your facts, and I prefer mine not because they’re objectively true but because they serve my interests.
What’s astounding is that some people who actually think this way also consider themselves successful businessmen and statesmen.
I think mercantilism actually made sense from another perspective as well, separate from trade. For the rules of countries, to whom power might be their ultimate objective, beggaring your neighbor actually does increase your objective. For people, relative power seems to make more sense than absolute, since we seem to care about the power to make other people do what we want. With nationalism, you could even extend this to the people of a nation. This is obviously true in war, where the British wanted the Germans to starve and vice-versa. You can see this in Ukraine, where both Russia and Ukraine are taking tremendous losses in pursuit of a non-monetary gain. Otherwise someone could run a ROI calculation and determine a peace settlement with little to no fighting.
From a purely economic standpoint this is obviously terrible decision-making. I would suggest that our takeaway should be to recognize that not everyone makes decisions only for rational economic reasons - at least if we measure economics only by wealth and goods.
Good point. As David wrote recently, publicly committing yourself to retaliate for any attack may be an irrational strategy _ex post facto_ (in that it reduces your options), but a very rational strategy _ex ante_ (in that it reduces the likelihood of people attacking you).
That said, any actor whose goal is relative power/wealth/whatever rather than absolute power/wealth/whatever has automatically discounted win/win and cooperative solutions, and is on the path towards rejecting objective reality altogether in favor of pure Big Brother relativism (“if I say I’m holding up seven fingers on this hand, that’s what you should believe”).
I agree that they're missing out on cooperative strategies. I think those of us who grew up post WWII take peace for granted compared to previous generations. For thousands of years it has been the norm that defect is common and inescapable. To try to cooperate was to open yourself up to both relative and absolute loss. Pre-emptively defecting, but trying to do it better, makes a lot more sense in such an environment.
What about the argument that trade wars are like real wars? Real wars are expensive and irrational, but it is necessary for a rational nation to prepare for war to protect it from an irrational nation. Could there be an argument for engaging in protectionism as a deterrent against an even worse nation? Say, a nation that is happy to mutilate its economy in order to make a rival nation dependent upon its exports, then exploit that advantage by extracting political concessions from its rivals in exchange for the goods they have become dependent upon? A nation that doesn't care how poor it makes it's citizens so long as it's Military adventures go un-proteSted?
I do not think that protectionism is an honest mistake borne of ignorance. I believe that in order to understand it, we should -- again -- dispose of the model of "nations" being monolithic actors acting in "self" interest; there is no "self". A while ago I wrote an opinion piece about seemingly insane agricultural trade policies in the Europe and the North America; they are perfectly rational from the points of view of governments that aim to maximize their power:
The only reason that the economic refutation of the utility of mercantilism and the continuing promotion of trade wars and anti-free trade policies is still held by State rulers is because it benefits them and not the general public. The general public tolerates this because they are economically ignorant and submissively obedient. The general explanation for this situation was postulated by the following:
“After hydrogen, the most common thing in the universe is stupidity.”
--- Albert Einstein
“Those who learn don’t seek to rule. Those who seek to rule don’t learn.”
I may have failed to reflect back a sufficiently strong understanding of Ricardo's logic. Which I do follow and accept as perfect, in the typical fashion of economics generally. Ceteris paribus ( omnia alia, tam ab Oriente quam usque ad Occidentem, tam a Levante quam ad Hebridas, tam ab Ultima Thule et Hyperboreas terras usque ad Mauretaniam, tam materia quam philosophia, tam antequam post, tam diabolica quam caelestia, in saecula saeculorum et ultra, usque ad consummationem mundi.)
Ceteris paribus, each party in a trading relationship should produce the products they can produce best. Yep. Agreed. Absolutely. History has shown. 97% Consensus. Moving on...
My -- admittedly trivial -- observation is that ceteris doesn't durably remain paribus. And the nominal response that other trading partners aside from Honda workers confirms this. The original comparison between specific Iowa farmers and specific Japanese (Honda*) autoworkers breaks down and we are to assume on faith without examination or analysis that Japanese textile workers or wine-makers have comparable advantage over Iowa farm workers. This, assuming the Honda workers displaced from the Japanese auto industry will retain a comparative advantage over Iowa farmers even when working a loom or a winepress. Objecting to that, we are instructed to understand the price fluctuations between an exported ton of American corn and an imported pallet load of Japanese manufactured goods of any variety will balance things out. And we assume it to be the case that the currency values, interest rates, documentation fees, and other forms of government interference in trade are not as easily or visibly manipulated as tariff rates.
It's a heavy lift.
And historically, from Ricardo forward, textiles provide us a lot of data on manufacturing. Fruit of the Loom (tm) builds and moves textile (t-shirt) factories all over the globe chasing cheap (as yet, unskilled, young, fresh-off-the-farm) labor. What overall lessons can be learned about the empty factories and middle-aged, specifically-skilled, workers left behind after such a move? I am not arguing in FAVOR of a protective tariff, mind you. Or what Felix would call "micro management". I favor understanding markets that evolve. Right now, I don't. Abd I am pointing out puzzle pieces that still, in my head, need to assembled within the framework.
*Honda is a special case maybe. If I recall correctly the original Mr. Honda ran a textile factory before setting up a small engine factory then getting into vehicles ...
You know this is simplified, leaving out every other possible reason why tariff barriers might be useful. There are more choices available than just mercantilism and free trade.
I feel reasonably certain that you have the knowledge to do a better job than I could of steel-manning various pro-tariff positions, and may even be aware of more uses for tariffs than I know about.
As I understand it, the classic reasons are:
- shelter infant industries so capability can be built. (In particular, industry producing things likely to be more profitable in the long run)
- keep/regain/gain the capacity to produce certain things at home, so they are available in case of war, trade disruptions, etc.
One problem with the infant industry argument is that infant industries have a lot less political muscle than senile industries, so in practice it is the latter that get protected.
One argument for a tariff or an export tax is that, if the country is a large enough part of the world market, it can push down the world price of something it buys by buying less (tariff) or force up the price of something it sells by selling less, essentially functioning like a cartel. That works for, at most, very large countries or ones producing things almost nobody else produces, It applies to export taxes as well as import taxes, but you practically never see the former, because the objective driving real world trade restrictions isn't maximizing national welfare.
The point of my essay was not that there are no possible circumstances in which a wise and benevolent government would impose a tariff but that much of the support for tariffs is based on bad economics, ideas refuted two hundred years ago.
Historical note: mercantilism was not necessarily misguided when gold/silver were the major internal currencies because a lack of gold/silver would make national markets seize up for lack of liquidity, forcing national economies back into local ones where trust/barter/private notes could substitute for precious metals.
If there was less gold in a country it would exchange for more goods per ounce. What matters is not how many ounces of gold are in the country but what value of gold. As Ricardo pointed out.
http://www.daviddfriedman.com/Academic/Ng_Ricardo/Ng_Ricardo.html
Alas, maximizing goods and services available ignores the effect on unemployment: the Dutch may get more butter if they sell natural gas to the Poles, but this means that only a fraction of the current Dutch population is needed.
Optimizing for two goals cannot be done (AFAIK), so we are left with imperfect solutions: free trade + UBI or trade as free as it can be before unemployment exceeds some arbitrary limit. Plenty of practical issues and potential for political hijacking for these options and others, but this - I think - lies at the core of the modern resurgence of protectionism.
I am no economist. Could you translate that to English? How does trading natural gas for butter mean that only a fraction of the current Dutch population is needed? What do the rest of them do?
And what does a UBI have to do with free trade?
More to the point, why does a national border matter but an internal border does not? The US has states with borders, states have counties and cities with borders. Free trade across those borders doesn't require UBI; why would national borders? The Netherlands must have internal borders, but my American ignorance means I don't know what they are called -- states, provinces, districts -- but that doesn't matter. I'm sure some have more dairy farms and produce more butter than others, and trade it for other products without massive unemployment. Why is that different from trading with Poland?
If the Dutch don't trade butter for natural gas, what do they do with all the excess butter, burn it for heating? Oh wait, maybe they don't produce as much, and Boom! now there's a lot of unemployed dairy workers. There's that UBI again, I suppose.
He means that the Dutch start with two industries, natural gas and butter. Because they can buy butter cheaper from someone else, it actually makes sense (from a national perspective) to stop making butter and just buy it. In practice this would look like everyone buying the cheaper foreign butter and too few people buying the domestic kinds because of expense. The domestic shuts down as unprofitable, but this is fine for everyone who buys butter because they weren't buying domestic anyway. The only people who suffer are those who were making butter. If they can find other jobs, great. If they cannot, then they may need some support - presumably from the surplus dividend of buying cheaper butter instead of the more expensive butter.*
*-obviously butter being a stand-in for whatever industry or good we're talking about.
There's no difference at all between internal and external borders for our purposes. A small nation can ensure satisfactory employment by simply having an onerous enough tariff, and letting the market figure the rest out.
A large one may find that even full autarchy may not suffice to achieve the same.
Sucks, but it is what it is.
Labor is just another good traded in an economy. Unemployment is a problem in the first place only because of unreasonable labor regulation.
Yes to your first, obvious no to your second.
How many mules do you see around nowadays? Yeah.
First, you missed "unreasonable"; you would seem to be saying that even unreasonable regulation is perfectly cromulent.
Second, what do mules have to do with labor regulation?
No, I didn't miss that, it's just not relevant.
There's no regulation forbidding or encumbering the use of mules as pack animals, and yet no mules are used nowadays. Why would labour be different to mules, and somehow exempt from the technology frontier? As with mules, it may very well happen that supply and demand for labour intersect at a quantity much lower than the current number of people of age.
In short, there's nothing preventing unemployment in a free market. Hence, we mau have to choose between UBI and unfree trade or other limitations in the division of labour.
Supply and demand are not numbers, they are functions of price. Their intersection is at the price (wage) at which quantity of labor supplied equals quantity demanded.
Indeed.
Are you implying that supply of labour is fully vertical at whichever point is determined by the able-bodied population? Assume heterogeneity away for our purposes.
Mules are still used as pack animals, last I heard. I still don't see the relation with humans.
I assume his claim is that the market value of some people's labor goes to zero or negative, so they, like mules, don't get used. If there is a coherent price theory model other than that behind his argument I don't know what it is.
I agree with your overall take, but want to add two complications that are often relevant when a politician or voter express concerns about a trade imbalance or similar.
1) While as a whole a country is wealthier with trade, individuals within it may be poorer. Consider the steel workers losing their jobs. In the 1970s they were very well paid, while by the 90s they were out of jobs and unable to find comparable work. This benefitted the US overall significantly, but these individuals were badly hurt. I used to work with a guy who made the equivalent of $75,000/year in the 1980s but only about $50,000 in 2010. The actual dollar figure was higher, and he could buy more stuff (because they were cheaper imports or new technology), but his standard of living was still subjectively lower despite moving into management and progressing along his career.
2) Maintaining high skill and strategically important industries can be important in the sense of national security. This used to be industries like steel, but more relevant today would be things like computer processors and semiconductors. Taiwan controls a significant share of the semiconductor business (60% of all, 90% of advanced), such that both China and the US may consider going to war over it. If this industry were located in Nevada, it would be a non-concern. Even less strategically valuable industries can become important in times of war or other significant economic shocks. We saw this in 2020 when imports lagged and prices soared. If we imported 50+% of our food, we would be in danger of massive famines if something happened to the supply chain - even if we were fabulously well fed in normal times.
The corn field / auto factory trade is fine for a limited time.
But factory production improves much faster than farm production. (except for places where the farm system is already far far behind "state of the art" -- India a couple decades ago.) Honda employes fewer workers, those remaining workers eat less Iowa corn. Then Iowa farmers don't sell or export as much so can't buy or import as much.
Historically nations building up factories and trading finished manufactured goods for imported food or raw materials can become wealthy rather suddenly. Britain, Japan, Singapore, South Korea... Nations depending on large efficient plantation style farming of, for example, sugar, rubber, coffee, tobacco, bananas... tend to get poor nearly as rapidly. Cuba, Jamaica, Brazil, Argentina, Uganda, Guatemala, ...
The Copernican model was replaced with an improved one from Kepler. Where in the economic literature does the Ricardo "Wine vs Cloth" model evolve to take into account a generation or two of new technologies in either wine-making OR cloth-manufacturing?
If car factories around the world improve and farming doesn't, the price of cars falls relative to the price of corn, so the quantity of cars we get doesn't fall in proportion to the reduction in the number of Honda workers. Besides which, the exported corn doesn't have to be eaten by Honda workers, just by Japanese.
I think if you work through the logic of comparative advantage you will see that the development of new technologies doesn't affect it.
But how come nations that invested heavily into plantation economies are so poor?
There is no need to micro manage any of this. It is self-correcting. If corn gets cheaper, or cars more expensive, corn trades for fewer cars. Other products take their place.
Look up Bastiat and "Paris feeds itself." All micro management does is reduce efficiency.
Brazil and Argentina are terrible examples for your case. Both countries have, with some periodic exceptions, ran on a protectionistic import substitution industrialization policiy for nearly a century, starting with Peron and Vargas. Their failure cannot be blamed on a lack of tariffs.
Why does any complaint about Ricardo assume advocacy of Colbert?
I don't actually worry about tariffs any more than I care about sales taxes, inheritance taxes, or value-added-taxes, etc. Governments interfere with trade -- sometimes heavy-handedly. Domestic and global trade are both targets. Traders, global and domestic, divert excessive resources into influencing, lobbying, or outright corruption of governments into evading, waiving, postponing, minimizing taxes for themselves or imposing taxes on competitors. This stuff is bad. Agreed. Given. And, it's background.
By the way, Copernicus had a better model than Ptolemy. We can point out that planets do NOT -- quite -- move in circles around the sun without reverting to Ptolemaic errors.
I'm looking for guidance toward an economic Kepler, here. We KNOW that nations that rely on one single -- presumed best -- product for trade have historically seen their total social wealth rise and fall. Sometimes this fall has been accompanied by terrible government policy. What's the trigger, and what should a government policy be towards the next generation and advantages -- comparative, competitive, or absolute -- that aren't yet apparent?
Peron -- well, agreed. Although Argentina's collapse of the rubber industry in the 19-teens predated Peron's dictatorship by a full generation. (We really want into the weeds of Argentinian errors? How 'bout when their Supreme Court refused to hear accusation of election fraud in the 1930s, leading into the military coup that put Peron and his "social justice warriors" into power in the 1940s? )
Some people point out that the problem with free trade is that, once we become dependent on another country to produce a particular good, it becomes a serious issue when it no longer trades with us, perhaps because of geopolitical tensions between the two countries.
The government of, say, China could decide to cut off trade with the U.S., thereby depriving us of some goods we normally rely on the Chinese to produce. Yes, that would hurt China too, but by hypothesis, that won’t stop the Chinese government. I wonder what professor Friedman would say in response to this argument.
My own view is that the scenario described is possible, but unlikely to be nearly as harmful as protectionism in the long run. Using the less efficient method today on the off chance that the more efficient method *might* become less efficient than the less efficient one at some unknown point in the future seems to me a bizarre thing to do.
If the problem was predictable and your country did not have price controls, it would pay an entrepreneur to either warehouse some of whatever you might be cut off from or maintain some backup productive facilities, since if the problem did arise he could sell at a high price.
More generally, this is not very different from the uncertainty an economy faces for other reasons. There could be a late freeze or a drought — that's not a reason not to grow crops.
Some theologians balked at heliocentrism, but somehow the astronomers came out on top eventually. Perhaps this is because the theologians didn’t really have as much to lose as they thought. Mercantilism will never die because business owners will never tire of looking for ways to screw their competition. By doing so, they might end up screwing themselves, but they can more easily imagine the benefits than the costs. I guess we could count that as a market failure in the market for ideas.
I view tariffs as one example of market failure on the political market, a consequence of the fact that a concentrated interest can solve its internal public good problem — getting everyone in the interest group to contribute to buying favorable legislation — more easily than a dispersed group. The fact that firms are arguing for tariffs may be one reason the mercantilist model has survived but I think a more important reason is that the theory of absolute advantage, while false, is easier to understand, more intuitive, than the theory of comparative advantage.
"Mercantilism will never die because business owners will never tire of looking for ways to screw their competition."
You are wrong to blame business owners. The real culprit is the ability of government to define its own limits, yielding corruption from top to bottom. When a business owners has the choice of "doing the right thing" and going out of business, or "screwing the competition" by means of corrupt government, he'd be a damned fool to go out of business.
I suppose there are two flavors of mercantilists, those whose arms are being twisted and those who smell an advantage. Which are more enthusiastic in supporting the policies? Which ones vote for them? It is one thing to tap out when you're in a hammer lock, and another to lie down and beg to be pinned.
Monopolies and mercantilist power only exist when governments create them. Mercantilists without government backing are harmless or in jail for donating to the wrong campaigns.
One can understand the visceral appeal of mercantilism. It’s a whole lot easier to measure your worth and success in a single, objective measure like “how much gold do I/we possess?” than to ask whether your people on the whole are happier, healthier, and better off than before.
And once you’ve picked a single, objective measure (which happens to be approximately a conserved quantity), it’s a short step to concluding that international trade is zero-sum, which implies that there’s no such thing as an objectively good trade deal — only (good for you, bad for me) or (good for me, bad for you). Heck, might as well conclude that _all_ trade is zero-sum, and there’s no such thing as an objectively good deal anywhere. The only rational policy is to beggar thy neighbor; if you don’t, he’ll beggar thee.
And once there’s no such thing as an objectively good deal, only “good for me, bad for you”, you gradually stop believing in _any_ objective reality. My facts are just as good as your facts, and I prefer mine not because they’re objectively true but because they serve my interests.
What’s astounding is that some people who actually think this way also consider themselves successful businessmen and statesmen.
I think mercantilism actually made sense from another perspective as well, separate from trade. For the rules of countries, to whom power might be their ultimate objective, beggaring your neighbor actually does increase your objective. For people, relative power seems to make more sense than absolute, since we seem to care about the power to make other people do what we want. With nationalism, you could even extend this to the people of a nation. This is obviously true in war, where the British wanted the Germans to starve and vice-versa. You can see this in Ukraine, where both Russia and Ukraine are taking tremendous losses in pursuit of a non-monetary gain. Otherwise someone could run a ROI calculation and determine a peace settlement with little to no fighting.
From a purely economic standpoint this is obviously terrible decision-making. I would suggest that our takeaway should be to recognize that not everyone makes decisions only for rational economic reasons - at least if we measure economics only by wealth and goods.
Good point. As David wrote recently, publicly committing yourself to retaliate for any attack may be an irrational strategy _ex post facto_ (in that it reduces your options), but a very rational strategy _ex ante_ (in that it reduces the likelihood of people attacking you).
That said, any actor whose goal is relative power/wealth/whatever rather than absolute power/wealth/whatever has automatically discounted win/win and cooperative solutions, and is on the path towards rejecting objective reality altogether in favor of pure Big Brother relativism (“if I say I’m holding up seven fingers on this hand, that’s what you should believe”).
I agree that they're missing out on cooperative strategies. I think those of us who grew up post WWII take peace for granted compared to previous generations. For thousands of years it has been the norm that defect is common and inescapable. To try to cooperate was to open yourself up to both relative and absolute loss. Pre-emptively defecting, but trying to do it better, makes a lot more sense in such an environment.
What about the argument that trade wars are like real wars? Real wars are expensive and irrational, but it is necessary for a rational nation to prepare for war to protect it from an irrational nation. Could there be an argument for engaging in protectionism as a deterrent against an even worse nation? Say, a nation that is happy to mutilate its economy in order to make a rival nation dependent upon its exports, then exploit that advantage by extracting political concessions from its rivals in exchange for the goods they have become dependent upon? A nation that doesn't care how poor it makes it's citizens so long as it's Military adventures go un-proteSted?
I do not think that protectionism is an honest mistake borne of ignorance. I believe that in order to understand it, we should -- again -- dispose of the model of "nations" being monolithic actors acting in "self" interest; there is no "self". A while ago I wrote an opinion piece about seemingly insane agricultural trade policies in the Europe and the North America; they are perfectly rational from the points of view of governments that aim to maximize their power:
https://danielanagy.medium.com/taking-food-from-the-table-b066de3404c7
The only reason that the economic refutation of the utility of mercantilism and the continuing promotion of trade wars and anti-free trade policies is still held by State rulers is because it benefits them and not the general public. The general public tolerates this because they are economically ignorant and submissively obedient. The general explanation for this situation was postulated by the following:
“After hydrogen, the most common thing in the universe is stupidity.”
--- Albert Einstein
“Those who learn don’t seek to rule. Those who seek to rule don’t learn.”
--- Doug Casey
I may have failed to reflect back a sufficiently strong understanding of Ricardo's logic. Which I do follow and accept as perfect, in the typical fashion of economics generally. Ceteris paribus ( omnia alia, tam ab Oriente quam usque ad Occidentem, tam a Levante quam ad Hebridas, tam ab Ultima Thule et Hyperboreas terras usque ad Mauretaniam, tam materia quam philosophia, tam antequam post, tam diabolica quam caelestia, in saecula saeculorum et ultra, usque ad consummationem mundi.)
Ceteris paribus, each party in a trading relationship should produce the products they can produce best. Yep. Agreed. Absolutely. History has shown. 97% Consensus. Moving on...
My -- admittedly trivial -- observation is that ceteris doesn't durably remain paribus. And the nominal response that other trading partners aside from Honda workers confirms this. The original comparison between specific Iowa farmers and specific Japanese (Honda*) autoworkers breaks down and we are to assume on faith without examination or analysis that Japanese textile workers or wine-makers have comparable advantage over Iowa farm workers. This, assuming the Honda workers displaced from the Japanese auto industry will retain a comparative advantage over Iowa farmers even when working a loom or a winepress. Objecting to that, we are instructed to understand the price fluctuations between an exported ton of American corn and an imported pallet load of Japanese manufactured goods of any variety will balance things out. And we assume it to be the case that the currency values, interest rates, documentation fees, and other forms of government interference in trade are not as easily or visibly manipulated as tariff rates.
It's a heavy lift.
And historically, from Ricardo forward, textiles provide us a lot of data on manufacturing. Fruit of the Loom (tm) builds and moves textile (t-shirt) factories all over the globe chasing cheap (as yet, unskilled, young, fresh-off-the-farm) labor. What overall lessons can be learned about the empty factories and middle-aged, specifically-skilled, workers left behind after such a move? I am not arguing in FAVOR of a protective tariff, mind you. Or what Felix would call "micro management". I favor understanding markets that evolve. Right now, I don't. Abd I am pointing out puzzle pieces that still, in my head, need to assembled within the framework.
*Honda is a special case maybe. If I recall correctly the original Mr. Honda ran a textile factory before setting up a small engine factory then getting into vehicles ...