Lawrence Solomon: Mad at Trump’s tariffs? They’re a better idea than you think
Counterpoint: Unlike work-discouraging income taxes, tariffs act to promote investment and production and nurture domestic industry
Tariffs aren’t optimal for an economy, but they come pretty close, given what passes for a free market today. Tariffs are certainly not the demons they’re made out to be, and that especially goes for U.S. President Donald Trump’s proposed “reciprocal tariffs” that infuriate America’s G7 trading partners.
Those who characterize tariffs as taxes that harm consumers by raising the costs of imports are giving us only half the story. While tariffs hit consumers, they relieve taxpayers, because the revenue governments raise through tariffs displaces money governments would otherwise raise through income taxes.
A century and more ago, when federal governments relied on tariffs for their revenues, there were no income taxes. The United States developed the greatest industrial economy on earth in less than a century under a tariff-based economic system, as did the United Kingdom before it. Those accomplishments were no coincidence.
Governments were lean then, because there was a limit to how much revenue a government could raise through tariffs — if a tariff on an imported product became too high, domestic companies would produce the product, creating a natural check on the size of government while also giving governments an incentive to keep tariffs low. In contrast, the sky was the limit with income taxes, where the political ease of taxing the rich and growing government often proved irresistible. Over the last century, Western governments grew enormously via the progressive income tax, which usually exceeded 50 per cent at the margin and sometimes exceeded 90 per cent. Too-large government — a.k.a. socialism — became the undoing of the United Kingdom and undermined America’s economic growth as well
Most economists recognize that high marginal income taxes discourage production by discouraging work. Many economists instead favour taxes on consumption, which both encourage prudence in purchases and lead to more savings, which then can be invested. Canada’s GST and the EU’s VAT are two examples of consumption taxes. Tariffs are a third example and share the same virtues: unlike work-discouraging income taxes, tariffs act to promote investment and production. As an added virtue, from the perspective of governments, tariffs help nurture domestic industry: the high tariffs of the 19th century, which Republicans especially favoured, were often credited with propelling American industry to world dominance. Likewise, tariffs are credited with fuelling Britain’s Industrial Revolution.
Reciprocal tariffs of the kind the Trump administration favours can promote competitive markets
Reciprocal tariffs of the kind the Trump administration favours are especially praiseworthy in that they promote competitive markets. Take the automobile industry, where American-made cars sold into the EU are hit with a 10-per-cent tariff while EU-made cars entering the U.S. face only a 2.5-per-cent tariff. The Trump administration threatens to place a 10-per-cent tariff on EU cars if the EU won’t match the 2.5-per-cent U.S. tariff.
Under the status quo, losers abound. U.S. auto manufacturers and autoworkers lose because the EU tariff overprices U.S. cars in Europe, limiting the market for U.S.-made cars. EU consumers of EU cars also lose since, to the extent EU carmakers are being protected by the 10-per-cent tariffs, the EU auto industry can afford to be less lean than otherwise, whether by buying peace with its unions through over-generous worker remuneration, or by paying excess taxes to support the EU welfare state. Either way, EU cars cost more than they otherwise would.
Under a reciprocal tariff regime, losers become winners on both sides of the Atlantic, especially if the EU lowers its tariff to the American level. The U.S. auto industry would benefit by having better access to the large EU market, and EU consumers would benefit when buying U.S.-made cars. Because EU carmakers would be facing stiffer competition, they would need to up their game as well, to stay competitive in the EU market.
Winners would abound even if the EU refused to lower its tariff to 2.5 per cent, although now the winners would tilt American. Once EU cars faced a 10-per-cent tariff, the EU would sell fewer cars in the U.S., giving the U.S. auto industry and its workers a boost at the expense of their EU counterparts. American taxpayers would also share in the spoils, since federal revenues from the 10-per-cent tariffs could further Trump’s goal of pushing through deeper income tax cuts. European consumers could see benefits in this scenario, too, since European carmakers would need to lower their costs to limit their losses in the U.S. market, benefiting European purchasers of European cars in the process.
Trump’s steel and aluminum tariffs, designed to protect core industries needed for national security, are not reciprocal. His reciprocal tariffs, designed to promote fairer trade, would do so. If they succeeded in lowering tariffs, they would make trade freer, too.
Lawrence Solomon is policy director for Toronto-based Probe International.
source
https://business.financialpost.com/opinion/co...-you-think
Counterpoint: Unlike work-discouraging income taxes, tariffs act to promote investment and production and nurture domestic industry
Tariffs aren’t optimal for an economy, but they come pretty close, given what passes for a free market today. Tariffs are certainly not the demons they’re made out to be, and that especially goes for U.S. President Donald Trump’s proposed “reciprocal tariffs” that infuriate America’s G7 trading partners.
Those who characterize tariffs as taxes that harm consumers by raising the costs of imports are giving us only half the story. While tariffs hit consumers, they relieve taxpayers, because the revenue governments raise through tariffs displaces money governments would otherwise raise through income taxes.
A century and more ago, when federal governments relied on tariffs for their revenues, there were no income taxes. The United States developed the greatest industrial economy on earth in less than a century under a tariff-based economic system, as did the United Kingdom before it. Those accomplishments were no coincidence.
Governments were lean then, because there was a limit to how much revenue a government could raise through tariffs — if a tariff on an imported product became too high, domestic companies would produce the product, creating a natural check on the size of government while also giving governments an incentive to keep tariffs low. In contrast, the sky was the limit with income taxes, where the political ease of taxing the rich and growing government often proved irresistible. Over the last century, Western governments grew enormously via the progressive income tax, which usually exceeded 50 per cent at the margin and sometimes exceeded 90 per cent. Too-large government — a.k.a. socialism — became the undoing of the United Kingdom and undermined America’s economic growth as well
Most economists recognize that high marginal income taxes discourage production by discouraging work. Many economists instead favour taxes on consumption, which both encourage prudence in purchases and lead to more savings, which then can be invested. Canada’s GST and the EU’s VAT are two examples of consumption taxes. Tariffs are a third example and share the same virtues: unlike work-discouraging income taxes, tariffs act to promote investment and production. As an added virtue, from the perspective of governments, tariffs help nurture domestic industry: the high tariffs of the 19th century, which Republicans especially favoured, were often credited with propelling American industry to world dominance. Likewise, tariffs are credited with fuelling Britain’s Industrial Revolution.
Reciprocal tariffs of the kind the Trump administration favours can promote competitive markets
Reciprocal tariffs of the kind the Trump administration favours are especially praiseworthy in that they promote competitive markets. Take the automobile industry, where American-made cars sold into the EU are hit with a 10-per-cent tariff while EU-made cars entering the U.S. face only a 2.5-per-cent tariff. The Trump administration threatens to place a 10-per-cent tariff on EU cars if the EU won’t match the 2.5-per-cent U.S. tariff.
Under the status quo, losers abound. U.S. auto manufacturers and autoworkers lose because the EU tariff overprices U.S. cars in Europe, limiting the market for U.S.-made cars. EU consumers of EU cars also lose since, to the extent EU carmakers are being protected by the 10-per-cent tariffs, the EU auto industry can afford to be less lean than otherwise, whether by buying peace with its unions through over-generous worker remuneration, or by paying excess taxes to support the EU welfare state. Either way, EU cars cost more than they otherwise would.
Under a reciprocal tariff regime, losers become winners on both sides of the Atlantic, especially if the EU lowers its tariff to the American level. The U.S. auto industry would benefit by having better access to the large EU market, and EU consumers would benefit when buying U.S.-made cars. Because EU carmakers would be facing stiffer competition, they would need to up their game as well, to stay competitive in the EU market.
Winners would abound even if the EU refused to lower its tariff to 2.5 per cent, although now the winners would tilt American. Once EU cars faced a 10-per-cent tariff, the EU would sell fewer cars in the U.S., giving the U.S. auto industry and its workers a boost at the expense of their EU counterparts. American taxpayers would also share in the spoils, since federal revenues from the 10-per-cent tariffs could further Trump’s goal of pushing through deeper income tax cuts. European consumers could see benefits in this scenario, too, since European carmakers would need to lower their costs to limit their losses in the U.S. market, benefiting European purchasers of European cars in the process.
Trump’s steel and aluminum tariffs, designed to protect core industries needed for national security, are not reciprocal. His reciprocal tariffs, designed to promote fairer trade, would do so. If they succeeded in lowering tariffs, they would make trade freer, too.
Lawrence Solomon is policy director for Toronto-based Probe International.
source
https://business.financialpost.com/opinion/co...-you-think
