Wednesday Morning Rant

Closing in on a week from Trump's announcement of tariffs, it's been a wild ride so far. Markets are up. Markets are down. Countries are dealing. Countries are doubling down. Some support them. Some don't. Some - perhaps most - are confused. I know I am confused about some aspects of it, but then I have a slightly different view of tariffs than many. I also think the Trump administration hasn't gone out of its way to be very clear about how it views tariffs, which is probably part of the problem.

That aside, I figure I'll throw my tattered hat into the commentary ring on it, too. To do that, though, I think it might be best to start with a simple question: what is a tariff? That's easy, as far as it goes. A tariff is a tax on the movement of goods over national borders. They can be outbound or inbound, though inbound (a tax on foreign goods) is much more common. As with all taxes, they are not free and somebody pays them. It usually ends up being a mixture of your own citizens and foreigners. But why tariffs, and why are they good or bad?

Because tariffs are a tax and taxes act as disincentives (tax what you want less of), they must be handled with care because the thing being disincentivized is trade. Tariffs fall into one of four categories most of the time. Don't look for these in an econ 101 book, because you won't find them. They're how I view tariffs.

1. Protectionist tariffs. These are used solely to protect some industry or activity in the domestic market. For example, suppose your country makes a lot of TVs and has a big TV industry. Then somebody else starts making a better TV and your people start buying the other guy's TVs instead. You think the TV manufacturing industry is important, so you put up a tariff to make the foreign goods noncompetitive and force a market preference for domestic TVs. Most economists seem to argue that all tariffs are protectionist and leave it at that. I disagree.

2. Parity tariffs. These are used to try to impose parity on trade with another country. These can take many forms. For example, reciprocal tariffs - "you have a 10% tax on my products, so I have a 10% tax on your products" - are the simplest form of parity tariffs, and are straight tit-for-tat. Another form are, say, for labor or environment or policy parity. "You have no labor laws and use slaves, so we try to estimate the market value of your slave labor and raise the price accordingly." Keeping with the TV example, assume the other country subsidizes TV manufacturing and so its firms can dump them on your market below cost and destroy the native industry thanks to unfair advantage. You can subsidize your own manufacturers, ban foreign goods, do nothing or impose a tariff. A tariff that attempts only to offset the foreign subsidy to maintain a level field would not be a protectionist tariff, but a parity tariff. This is what we probably should have done to Japan starting in the late 70s. Its amount will be guesswork, because everyone who calls economics "the dismal science" is dead wrong. It's not a science at all. It's mostly guesswork and estimation. Just try to get close.

3. Diplomacy tariffs. These are not economic at all and have nothing to do with parity or protectionism. They are punitive, and designed to force diplomatic progress as an alternative to, among other things, war. Another country is bullying your ally or interfering with your objectives, and that other country is also a trading partner. So tax their goods to cause consumers to shift to alternate suppliers in other countries, hurt their bottom line and try to force them to come to the negotiating table.

4. Revenue tariffs. Tariffs are a tax, after all, and can be used to generate tax receipts into the treasury.

My confusion - and I suspect many others' confusion - stems from the fact that it appears that Trump is pursuing all four simultaneously, to different degrees and in different contexts. Most of it appears to be in the form of parity tariffs, and most of those are straight reciprocal tariffs. Some countries, like Red China, are also seeing diplomacy tariffs. Relatively few of them seem to be straight-up protectionist tariffs - though steel tariffs probably qualify. The others look very much like revenue tariffs.

Much of the shrieking about an inconsistent policy and Trump's bumbling seems to come from the seemingly contradictory position of "reciprocal tariffs for all" and "baseline tariffs for all." These are, in fact, two policies that are not irreconcilable but can be in conflict. If what we are doing is essentially imposing a tariff floor, then that changes the math somewhat. "10% minimum, but as high as yours" will essentially cause a global 10% tariff on everything between everyone (except exceptions, where other things are in play). We see this in the example of Singapore, a country with which we have tariff-free genuine free trade that also might see a tariff under the New Rules. If so, then Singapore would be right and correct to impose a baseline tariff on us - turnabout is fair play.

In my opinion - though not the opinion of mainstream economics - all tariffs are not created equal. All do impose costs. There is no question on that. They're a form of taxes and taxes are never free, but whether the tax is justified and appropriate is another question. I am not generally fond of straight protectionist tariffs. They reward inefficient or incompetent producers at the expense of the citizens. Outside of a good national defense argument ("vital defense industry" or somesuch), I don't see a way to justify them and even then, they should be the minimum level needed to ensure the vital industry can survive.

Parity tariffs are trickier. I will always and without exception support reciprocal tariffs. If you want a seat at our table, you are welcome to it - but you do not get a throne while we get a folding chair. Those days appear to be over and I am thrilled about it. Other parity tariffs are more complicated because while they impose some form of ersatz "fairness," they can also mask the costs of bad decisions. If you impose an environmental policy parity tariff on a country that has no emissions controls, that makes sense on paper - but at what point are you papering over the problem of your own regulatory regime being insane and overly burdensome and well on the downward side of the marginal utility curve? This is a really hard problem and one of many, many reasons it's better to have as little regulation as reasonably manageable.

Revenue tariffs are not necessarily a bad thing, but they will not happen in a vacuum. If major players impose them, their counterparties will also impose them. The final effect - after initial disruption - will be a more or less consistent global baseline tariff of all on all. The net effect is zero, which is good for competition (because it nullifies the tariff and it nets out to a relative zero in terms of the costs of goods sold, and so are equivalent in comparative terms to having no tariffs), but it also imposes a universal "government cost" line-item on everything. Is it the worst way to fund government? I doubt it. I am not even necessarily convinced it's a bad way to fund government. But it is an added cost and no amount of political double-talk can change that.

No economic argument applies to punitive/diplomatic tariffs, because they're not economically motivated. They're an alternative - an unreliable but possible and legitimate alternative - to war. They're what you try before war. The question there is "is this worth going to war over?" If it is, a punitive tariff regime is probably justified. If it isn't, the policy needs a lot more consideration and scrutiny.

Form where I sit, it looks like the Trump Administration is trying all four at once, all rolled into one action with very muddy messaging. Do I support it? By and large, yes, at least as far as I can tell at this point. Most of the action is on parity tariffs and most of that is straight-up reciprocity (if even that - a lot of those reciprocal tariffs are just 50%, and they should be 100% of what the other country charges). I fully support reciprocity.

We'll see how it shakes out over the next 6-12 months. You can't remake the basic rules of the global economy - which are, basically, "America pays for everything" - overnight without consequence. I suspect the consequences will net out to our benefit and so am cautiously optimistic. But I am also a bit nervous because all tariffs are not created equal, and choosing the wrong ones for the wrong reasons will just raise prices and help nobody. So far, though, I am not too displeased with what I'm seeing and as the dust settles, I - and everyone else - can make a better assessment.

There's no denying, however, that it's probably going to be very exciting and volatile year for the economy and for the capital markets.

posted by Joe Mannix at 11:00 AM

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