Kuttner’s Clunker of a Defense of Tariffs

By Don Boudreaux.

"Here’s a letter to The American Prospect.

Editor:

Robert Kuttner argues that U.S. tariffs on imports from China help Americans economically (“Tariffs: Maybe Not So Crazy,” January 14). But for many reasons, his argument cannot be taken seriously. Here are four of those reasons.

First, Kuttner mistakenly assigns economic meaning to China’s trade surplus with the U.S. In a world of more than two countries, one country’s trade ‘balance’ or ‘imbalance’ with another country is utterly meaningless. Even if every country’s trade were ‘balanced’ – that is, no trade deficit or surplus with the rest of the world – every country might nevertheless have so-called ‘trade deficits’ with each of dozens of other countries, and ‘trade surpluses’ with each of dozens of yet other countries.

Second, Kuttner wrongly presumes that China’s trade surplus with the rest of the world is unambiguously an advantage for China and a disadvantage for other countries. When a country runs a trade surplus it suffers a drain of capital. While this drain isn’t necessarily evidence of economic problems, it’s also not necessarily evidence of economic health: The more promising the economy, the greater the desire of both domestic and foreign citizens to invest in that economy rather than outside of it.

Third, Kuttner erroneously claims that countries that run trade surpluses “cost the U.S. and other nations jobs” – that is, reduce employment in countries that run trade deficits. Although protectionists parrot this claim ad nauseam, the evidence contradicts it. The U.S. has run annual trade deficits in each of the past fifty years. Over this half-century, the U.S. unemployment rate has trended downward. Today this rate is 4.4%; in 1973 – the last non-recessionary year during which America ran an annual trade surplus – it was 4.9%. And over these years the number of nonfarm jobs in the U.S. more than doubled, from 77,071,000 in 1975 to 159, 526,000 today – as real wages rose.

Why the U.S. and other market-oriented countries that run trade deficits should worry about net inflows of capital remains a mystery.

Fourth, Kuttner incorrectly writes about the tariffs that “the evidence suggests that most costs are being absorbed by foreign exporters or by domestic sellers accepting lower profit margins.” Benn Steil calculates that most of the costs of Trump’s tariffs are paid by American consumers. Foreign exporters pay at most 25% of the tariffs’ costs, with domestic U.S. sellers ‘eating’ around 10% of these costs. (It’s worth noting that, given the competitiveness of the global economy, foreign exporters and domestic sellers – to the extent that they remain unable to pass along to American consumers the full costs of the tariffs – will over time supply even fewer goods than otherwise to us Americans, thus raising consumer prices even higher in the future.)

It’s telling that attempted defenses of protective tariffs invariably rely on faulty reasoning and factual inaccuracies."