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Friday, June 1, 2018

Tariff Walls and Trade Wars Equal Government Planning

When you get down to it, there's not much difference, in principle, between trade protectionism and Soviet-style central planning.

Trade wars are dangerous and harmful policies for governments to pursue. They hurt consumers due to higher prices and fewer alternatives, they reduce competitive opportunities for producers by restricting markets, and they narrow the benefits that come from a market-based system of division of labor in which each participant tends to devote his or her efforts to supplying the goods or services in which they may have the greatest comparative advantage.

But besides this, protectionist policies also introduce forms of government economic planning. The visible hand of the State replaces Adam Smith’s “invisible hand” of spontaneous market interactions in which everyone makes and directs his own plans about what to produce, where to do the producing, and with whom.

Trump’s Trade War Threats

This is seen in the recent trade row between the United States’ and Chinese governments. It was set into motion by President Trump, who insisted that China was taking advantage of the United States. The core indication of such nefarious conduct, in Trump’s eyes, is the 2017 $337 billion trade deficit. That is the amount by which the United States buys more of Chinese goods than the Chinese purchase of U.S. goods.

One of the Chinese delegates insisted that no such hard target number had been agreed to and was a provocative claim by the Trump Administration.

President Trump first threatened to impose $50 billion of new or higher tariffs on Chinese goods entering the U.S. if the Chinese did not mend their ways. When the Chinese government responded with a list of American goods upon which they would impose retaliatory tariffs of comparable value, Trump raised the tariff threat against Chinese imports to a value of $150 billion. This brought an indignant reply from Beijing that, while they wished no trade war with the United States, they were not going to bullied or humiliated by Washington—there had been enough of that by Western nations during the imperialist age of the 19th and early-20th centuries.

Both sides decided to try to tone down the threats they were throwing at each other. An American delegation went off to Beijing for trade negotiations with their Chinese counterparts. (Supposedly, according to some news stories, members of the American delegation spent some of the time yelling accusations at each other for being either “too soft” or “too hard” in the talks, but with all the Americans determined that China had to stop being a “bad” trading partner.)

A Chinese trade delegation reciprocated in the middle of May with a visit to Washington, D.C., to continue talks about cutting a deal that would head off any potential trade war that both sides said they did not want, but were willing to fight if “the other side” made it necessary. The Chinese said they would attempt to increase the number of goods purchased from the United States so to move in the direction of reducing the trade deficit; a member of the Trump Administration asserted that the Chinese had promised to reduce that $337 billion trade deficit by $200 billion within a relatively short period of time. Before heading back to China, one of the Chinese delegates insisted that no such hard target number had been agreed to and was a provocative claim by the Trump Administration to try to pressure China and look good in the eyes of Trump’s supporters at home.

Trade Restrictions Are Government Planning

But whether a “direction” or a “hard target,” the presumption by both the American and Chinese was that China would buy more of America’s finished goods, and American businesses would be selling more of various types of such goods in China, as a consequence. Now, all of this would raise little or no concern if the U.S. and Chinese governments had simply determined to institute a policy of greater freedom of trade.

But this is not what either the Trump Administration or the Chinese government authorities have in mind. In the joint communiqué issued at the end of these recent trade talks in Washington, the Chinese government said:

To meet the growing consumption needs of the Chinese people and the need for high-quality economic development, China will significantly increase purchases of United States goods and services. This will help support growth and employment in the United States.

This includes meaningful increases” in U.S. agriculture and energy exports, the joint statement explained. An American team will return to Beijing in the near future to work out the details of which U.S. farm and energy products the Chinese will buy more of and from whom. The Wall Street Journal reported that the U.S. Department of Agriculture has approached a group of farm producers to determine which agricultural crops could be increased the fastest to increase sales in China to meet any Chinese import targets for more American farming products.

The government’s “plan” is for a detailed micro-management of trade patterns between the U.S. and China.

On May 20, 2018, U.S. Treasury Secretary Steven Mnuchin said that the Trump Administration had specific “targets” for increased Chinese purchases of American goods, and the government has gone through designing the list of what the Chinese will buy, “industry by industry.” The government’s “plan” is for a detailed micro-management of trade patterns between the U.S. and China.

On the other hand, if the trade talks fall through, the Chinese government has made up a list of which American goods would be barred from being sold in China, or at least not to the same degree as now through the institution of their own higher tariffs. Beijing early on made it clear that their import restriction list would be targeted on those sectors of the U.S. economy that were big supporters of Trump in the 2016 election, the goal being to hurt those upon whom Trump would be dependent for a successful reelection in 2020. (Oh, no, China is threatening to use its trade restriction policies to influence a U.S. presidential election if a trade war breaks out! We need a special prosecutor to see if the Democratic Party is colluding with the Chinese government to bring down Donald Trump!)

Protectionism Is Planning Winners and Losers

It is noteworthy that all such trade-restricting policies represent forms of governmental economic planning. It is usual to think of “planning” in the classic Soviet or Nazi sense of a government directly and comprehensively owning and/or controlling the means of production and commanding their allocation and use. But the fact is that any form of government intervention, whether it be domestic barriers to trade and competition or fiscal measures to provide subsidies or impose penalties on the production and sale of various goods and services made within the home country, represent forms of government planning. It no less the case when all such economic policy tools are used to influence the production and flow of goods and services between nations. They, too, are all forms of government planning.

The government changes which industries grow, decline, or remain the same, and therefore the profits they may earn.

The government targets the importation of specific foreign goods or services that it considers harmful to, say, domestic employment or business profits and market share in a sector of the economy that it labels “essential” for some stated reason. Or it introduces a subsidy or a restriction to either foster or limit the production and export of a designated product or service.

It all such instances, the government plans to influence the patterns of production and consumption of goods and services from the ones they would have followed if not for the government’s visible hand in manipulating the outcomes of the market. In doing so, the government changes which individuals and groups have greater or fewer employment opportunities; which industries grow, decline, or remain the same, and therefore the profits they may earn; as well as which areas of the country experience more or fewer investments flows of various types within their regions of the national economy. (See my articles, “Trump’s Economic Warfare Targets Innocent Bystanders” and “Trump’s Protectionist Follies Threaten a Trade War”.)

For instance, the entire cloud of potential trade wars between the United States and other parts of the world all began earlier in 2018 when President Trump announced planned import restrictions on foreign steel and aluminum. The government’s goal, its “central plan,” is to retain and expand American steel and aluminum production and jobs. This same plan inescapably includes the intention of reducing sales, profits, and employment opportunities of the foreign producers, including a diminishment of the U.S.-based supply-chain of American middlemen and wholesalers who purchase and distribute those imports.

Another way of saying this is that President Donald Trump and President Xi Jinping are picking “winners” and “losers” in their own and the other’s country.

The Chinese government warned that if the U.S. actually imposed the threatened import duties on goods from China, one of the American sectors to be targeted for retaliation would be the importation of soybeans from the U.S. This would be a centrally planned attempt to reduce sales, profits, and employment in a particular sector in the American economy. But this would also include a planned increase in costs for Chinese importers of American soybeans who would have to pay the higher tariff expense to bring it into their country, a higher cost that then would be at least partly born by the Chinese consumers who purchase soybean-based products.  

Another way of saying this is that President Donald Trump in the United States and President Xi Jinping in China are picking “winners” and “losers” in their own and the other’s country. They are planning the future of businesses, investments, employment, and profits and losses across the boundaries of their respective countries.

Trade Protectionism and Soviet and Nazi Central Planning

How, in principle, is this any different in its essential assumptions, logic, and consequences from the Soviet five-year plans introduced by Stalin in the late 1920s to build the bright and beautiful “worker’s paradise” or the four-year plans implemented in Nazi Germany after 1936 so Hitler could make the German nation “great again”? Both the Soviet and Nazi regimes included in their central planning systems controls and restrictions on imports and exports to assure that their respective countries grew and developed in the ways their collectivist political ideologies demanded.

The premise of protectionist trade planning is the rejection of free markets and individual planning by the citizens within the boundaries of the nation-state.

The premise of protectionist trade planning is the rejection of free markets and individual planning by the citizens within the boundaries of the nation-state. The choices of multitudes of individual Americans and Chinese are made subservient to the goals and “interests” of the State as defined and imposed by the political leadership of each country. In President Trump’s case, his is a crude and long-ago refuted form of Mercantilism that sees trade among nations as zero-sum games in which one country does better by making another worse off. (See my article, “The Zero-Sum World of Donald Trump”.)

Even the Mercantilists of the 1700s understood that it is an erroneous conception of international trade to look at the balance-of-trade with one nation at a time relative to one’s own. They at least understood that it was more reasonable and logical to look at a country’s balance of trade as a whole with all of its trading partners. Thus, they reasoned, if “A’s” manufacturers purchased, say, a $100 more of raw materials from country “X,” that “X” bought of “A’s” goods, but “A’s” manufacturers could work those resources up into finished goods they could, then, sell to other foreign buyers in country “B” for total revenues of $120, on net country “A” would have a resulting overall “positive” balance of trade, regardless of its trade deficit with any one or group of countries.

Now there are still fundamental flaws even in this Mercantilist argument concerning the balance of trade that were challenged by Adam Smith and many of the Classical Economists in the 19th century, and beyond to the present. But even those 18th-century Mercantilists demonstrated more sophistication than Donald Trump seems to possess. (See my article, “Trade Deficits Don’t Matter – Unless Caused by Government”.)

China’s Drive for National and Global “Greatness”

In the case of China, President Xi Jinping rules over a Communist Party and a political dictatorship that rejects the very notion of individual freedom and a free-market economy. China is a peculiar mix of State enterprises and private businesses (great and small) all of which are overseen, directed, and controlled by the central planning purposes of the Party leadership. President Xi is busy making China “great” again on the global stage, economically, politically, and culturally. He seems to reflect one of the most dangerous forms of power-lusters: one who works his way to the top of the political machine, but not only due to personal ambition, alone. He apparently is infected with the same hubris virus as many other arrogant social engineers who have brought tragedy to society.

Buying into the Marxist caricature of “capitalist imperialist policies,” President Xi uses it as a playbook to design China’s policies toward the rest of the world.

He is determined to control the development of China to leave the legacy of having made his country into the great world power by the end of the 21st century. He commands the building of military bases on reefs in the South China Sea as one of the steppingstones to making China a great naval power; he has his government negotiate strings of military bases in other countries (like the great imperial powers of the past); and uses the financial resources of the Chinese government’s coffers to bribe foreign governments in underdeveloped countries to give China exclusive 99-year leases to pockets of “vital” resources and raw materials. And he uses those government funds to set up cultural centers around the world to influence other peoples to an appreciation of the “superiority” of China’s culture and political system. Buying into the Marxist caricature of “capitalist imperialist policies,” President Xi now uses it as a playbook to centrally design China’s policies toward the rest of the world. And this includes the planning and direction of China’s domestic economic development and interrelationships around the globe.

The United States government cannot directly dictate the choices of the Communist Party of China, and President Xi, in particular, as he continues to elevate himself into the “good” and new Chairman Mao of unlimited power. Any attempt to do so, as is clear from President Trump’s trade war threats, is for the U.S. government to merely extend and intensify its own “central planning” over the American people.

Lessons from the Free Trade Movement of the Past

When the British free trade movement succeeded in ending virtually the entire network of protectionist and restrictionist policies in the 1840s, they did so by advocating a policy of unilateral freedom of trade. They wished, first of all, to free the people of Great Britain from the follies of government social engineering and control. If other countries chose to retain or introduce misguided interventionist and regulatory and trade-hampering policies, their errors should not dictate the course followed by the British people.

Both, in his own way, are proponents of central planning with the interests of the State taking precedence over the liberty and peaceful choices of their citizens.

They were confident that a truly free society unleashed and liberated from that heavy hand of government planning would bring forth the ingenuity, enterprise, and industriousness of the British people. Freedom and prosperity would follow if government got out of the way. And those 19th-century free-traders were confident that a demonstration of the benefits from wide personal and economic liberty would serve as an example for others to follow, without the British government attempting to twist the arm of any other people. (See my article, “James Mill, David Ricardo, and the Triumph of Free Trade”.)

Unfortunately, Donald Trump and his economic policy entourage assume the opposite. They speak of private enterprise set free from a spider’s web of domestic regulations and burdensome taxes that limit industry and investment. But theirs is not a case for free enterprise. Instead, it is a private enterprise in which the president of the United States tells businessmen where and when to invest and hire workers, who decides what are the necessary industries for America to be “great,” and tries to dictate who, when, and under what terms Americans may buy from and sell to trading partners in other lands.

When President Trump says that Chinese President Xi is his “friend,” that is truer than he likely implies. Because both, in his own way and his own vision of his respective country’s “greatness,” are proponents of central planning with the interests of the State taking precedence over the liberty and peaceful choices of their citizens.

  • Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.