June 2024

Pathway to Poverty 

“The only way in which a durable peace can be created is by world-wide restoration of economic activity and international trade.” James Forrestal

President Biden recently announced a wave of new tariffs on Chinese imports: 100% on electric vehicles, 50% on semiconductors, 50% on solar panels, 25% on EV batteries, 25% on steel and aluminum, and 25–50% on medical equipment. In his speech, the President asserted that government subsidies give foreign manufacturers an unfair advantage. Later that day, he posted, “China is determined to dominate these industries. I’m determined to ensure America leads the world in them.”

In sharp contrast to the President’s current position on tariffs, in 2019, he slammed then-President Donald Trump for raising taxes on Chinese imports. Biden stated, “Trump doesn’t get the basics. He thinks his tariffs are being paid by China. Any freshman econ student could tell you that the American people are paying his tariffs.” He went on to declare that, if elected, he would remove Trump’s tariffs.

Biden was 100% correct on two key points: (Chinese) subsidies give foreign manufacturers an unfair advantage, and the consumer always pays the price for trade tariffs. Which begs the question; if tariffs were bad then, why are they good now?

To be clear, any policy that restricts or impedes free trade, such as subsidies, embargoes, quotas, regulatory barriers, dumping, intellectual property theft, and currency manipulation, diminishes prosperity. For centuries politicians foolishly perceived protectionism as a magic economic elixir that would boost domestic production, exports, and wealth. Nothing could be further from the truth. To illustrate, Trump’s tariffs on foreign steel and aluminum (25% and 10%) in March 2018. Over the course of the next 3 ½ years, the price of steel and aluminum increased by 64% and 57%, respectively, and his tariffs had a deleterious effect on domestic GDP, jobs, and wages. Protectionist trade policies may sound patriotic, feel good, and increase bureaucrats’ political capital, but they inevitably make a nation poorer.

Subsidies are the inverse of tariffs and equally destructive. In 2009, President Obama funneled $570M into Solyndra, a U.S. solar manufacturing company. At the time, he declared, “The true engine of economic growth will always be companies like Solyndra—It’s companies like these that will help lead us towards a brighter, more prosperous future.” Less than two years later, Solyndra filed for bankruptcy.

When Uncle Sam attempts to pick winners, everyone loses, including the favored industry or company. Protectionism distorts market dynamics by favoring certain industries or companies, which leads to inefficiency and a misallocation of capital and resources. Furthermore, protectionism creates dependency and a welfare state among recipients, hindering innovation and competitiveness, and encouraging overproduction (which leads to dumping). Lastly, it creates scarcity and reduces consumer choice.

There are times, however, when restrictive trade policies can and should be employed. One such example is when a trading partner poses a national security risk. Food, energy, technology, and military equipment are essential to national sovereignty and public safety, and policymakers would be prudent to ensure the U.S. isn’t sacrificing long-term prosperity and security for short-term gain.

Furthermore, restrictive trade policies can and should also be used as a temporary cudgel to punish bad actors. Both Biden and Trump were right to declare China a pernicious and untrustworthy trading partner. But the goal should be to maximize free and fair trade, which would, in a perfect world, mean zero tariffs, and zero domestic subsidies. In other words, reciprocal trade agreements with no direct or indirect government interference. Companies should live and die based on their ability to create value, rather than rely on the government teat.

History has proven that protectionism doesn’t enrich a nation. Rather, it makes it poorer. Policymakers must learn that free trade is not a zero-sum game and, if done correctly, everyone wins. Rather than promote policies that produce negative economic consequences, policymakers should instead seek to remove impediments to trade, which would boost global prosperity and pay an invaluable associated peace dividend.

Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
Wasatch Finance, LLC
pathwaytoprosperity.com