Tariffs, Markets and States

The President's reintroduction of tariffs betrays a larger theme. We are, whether he is aware of it or not, dealing not just with the issue of whether China is getting the best of us. His Presidency along with Brexit, and the nationalists in countries such as Poland and Hungary, in Turkey and India point to something more regarding how we view the nation-state, or countries, today. In this essay, focusing on the relation between nations-states and trade I try to flush out the issues at a very high level, in the process, eliminating the smoke and haze of the local politics. At least that is what I attempt.

The Menu or Basic Options

Tariffs focus us on what is happening inside a country. The question becomes what is important: the market or the people? Are we to focus on constituents who are being hurt in the marketplace or do we focus on the market. Obviously, any good politician, any good political leader, must have a concern for their constituents. So what does one do in this situation? Does one focus on the pain inflicted, or does one trust the market?

Now there are traditionally three ways to deal with this: tariffs on the abusive import, subsidies for the domestic producer-the victim, or take the offending nation, where the products are originating from, to court.

Tariffs basically impose a tax on the products being imported into the country and that are causing the economic pain. You are basically forcing the imports to compete at the price point that your domestic companies are able or willing to compete at. It should be noted that this only helps your domestic producers domestically. They still cannot compete outside of the domestic markets.

The second option is to subsidize those being harmed-your constituents. to give a subsidy to them allows them to now offer their products at the same price or lower than those being imported. They can now compete with the import. Unlike the tariff, the subsidy allows the the domestic producer to not only compete domestically with the import, but also allows the domestic producer to export the product and compete abroad. Of course, the state or government is paying for this.

Lastly, you could take the offending nation to court. Basically, you take your case to the World Trade Organization (WTO) and prove that they are engaging in unfair trade practices, or at least discuss the issue with the nation(s) that are causing the problem. To embrace these solutions is to reveal a reliance upon diplomacy at the least, and more importantly non-state and non-market players.

A fourth option, which is often done, is to ignore the issue. To select this option is to either stick one's head in the sand, or to simply trust the market. Obviously to stick your head in the sand is silly. The other, however, is almost radical. It simply assumes that there are winners and losers and that in this case the losers happen to be constituents. In short, to trust the market is to accept the fact that the role of a government is largely not to pick winners and losers at the market place. There is a dash of idealism here, as no state or government can afford to not pick winners and losers. A state, in its normal functioning, must pick winners and losers. In its taxation policy it decides such. In its selection of government contracts, it does such. Yet, regarding markets, and who will survive in the market, and being aware of and concerned about constituents harmed by such, the fourth option is common.

To go back to my opening, these four approaches betray a larger theme or themes. You can infer, assuming that a state is acting rationally, what their intent is, what their values are by their selection of the above four. Let us assume that states are rational actors. What is revealed in such a process is their attitudes towards markets, both domestic and international, the role of nation-states, and the role of what I described above as non-market non-state actors.

Tariffs and Subsidies

Both tariffs and subsidies involve the power of the state or nation-state. In both, the nation-state protects the domestic industry being challenged. With the tariff it not only protects the domestic industry, but punishes the perceived challenger to that industry. What it does not do is encourage the domestic industry to go beyond the borders of the nation-state. Tariffs focus on only the domestic market. They offer nothing aside from perhaps the capital, to explore the world beyond its borders, and that is, in this case, a decision made by the leaders of the various firms in this sector.

The second option is to respond to the trade opponent with subsidies. Typically, unfair trade practices occur due to another nation-state subsidizing an industry. With subsidies, we are fighting fire with fire. Regardless, this subsidy allows the businesses in the sector to offer lower price points, below what was the normal market ranges previously. The subsidy allows the domestic sector to cover cost and compete against the exports being sold below costs. Subsidies, unlike tariffs, allow for the domestic industry or producer to sell abroad. The domestic industry, with a subsidy, is now able to compete in both the domestic market and the international market.

Both subsidy and tariff are the tools of nation-states, but each involves its own domain and history. The tariff is based upon the ability of the state to tax. It takes that ability and uses it to protect domestic producers and industries. It focuses these industries on the domestic markets. The tariff says nothing about the market beyond the nation-state's borders. The state is encouraging industry to look no further than the domestic market. In fact, it is basically insuring that the domestic industry cannot compete outside its borders, as it facilitates and encourages prices and practices that cannot be afforded in the global market.

The subsidy is the opposite. It is preparing the domestic industry or company(s) to dominate not only  the domestic market, but also the global market. It is a step beyond the tariff in that it can be done through a national bank, a set of tax breaks and tax incentives, or an outright joint venture between the state and business. With an eye towards global markets, and the willingness to actually invest in a business or sector, the subsidy is a higher risk to a nation-state. The nation-state is here providing capital in some form and betting on certain businesses or sectors to thrive. There is no guarantee that will happen, regardless of a state's actions. Not only is there a business risk here, but also there are risks inherent to a nation-state.

So, in short, the tariff insures that the domestic producers continue to dominate in the local domestic market. It really no assistance regarding the export of goods outside the nation-state. The subsidy on the other hand encourages business to take their product abroad. it facilitates the domination of global markets. A nation-state that wants to see their industry thrive in the international markets, will subsidize them. And a nation-state that values their domestic market, will simply impose tariffs.

Diplomacy, the WTO, and doing nothing. . . 

Now we move onto the second set of options. Diplomacy, appeals to the WTO or the World Trade Organization, and doing nothing, all defer to trade. In each of the three is an acknowledgement that trade is of value and wherever possible should be left alone. Further, nations-states embracing the above three, and that value trade, see trade as different from and separate from the state. Here it is simply not the function of the state to engage in or manipulate trade. Those who subscribe to the above three, largely accept that nation-states, countries, though they will facilitate trade, will ideally not limit or support, or partner in trade. Such negotiations or actions to limit or enhance trade are the exceptions. Even going to the WTO is an exception. Doing nothing is the norm.

And just to qualify, doing nothing is in reference to trade. It is not in regard to what is traded, and likewise trading partners like to be known. Nation-states reserve the right to determine if slaves can be bought or sold. Likewise, military weaponry is largely not freely traded. Banking and healthcare are highly regulated. Each nation-state will have regulations and procedures, laws protecting property, the transfer of property, copyrights, patents and so forth, but again, they will not themselves actively engage in the trade of such items. In short, the goal of these countries is to embrace the rule of law and with that insure that transactions are fair and equitable. Nothing more.

It should be noted that typically a contemporary successful nation-state will also offer a solid infrastructure, access to high-speed internet, solid educational options and healthcare. All of these lead to success as a nation-state and in trade. Trade beyond one's borders again tries to insure merely that trade is fair and equitable.

What I describe is perhaps the ideal of those countries that embrace this second set of options regarding trade. They will negotiate trade agreements, they will if there are issues work through diplomatic channels, they will go to the World Trade Organization, but in general, they do not dirty their hands with trade. There are plenty of exceptions. Agriculture in the US is such a case. Steel and solar panels are one of many cases for China. Rice in Japan is another common example.

Consequences

The result of these actions, the use of diplomacy, the appeal to the WTO and the like, can be seen, however, as simply limited actions. They really are limited actions, a small step away from doing nothing. Further, they lead inevitably to the diminishment of the nation-state that embraces such. If what you can offer in response to trade abuses is a series of diplomatic responses, and an appeal to the World Trade Organization, which is often seen as itself ineffective, you do not have much to offer.Your rule of law does not protect domestic industries, nor does it enable those same industries to get a step up in the international markets.

Not only is the nation-state which embraces only diplomacy and the like unable to compete with foreign competitors, foreign traders, it creates its own problems. The international conglomerates or corporations, which grew out of free trade, now have little or no obligation to any one nation-state. A corporation is not a citizens of any country. Their employees flow between countries continuously, and its business is global and follows the sun, 24 7. Its only loyalties are to its shareholders and senior management.

Worse is that the contemporary nation state, seeing itself as a rational actor has created multiple institutions which usurp the nation-states' authority. We have in this category, the United Nations, and the World Trade Organisation itself. In Europe you have the European Union. Entities which are neither states nor corporations, yet make decisions on trade and other matters, which will effect all of us, and yet we have no direct representation in these institutions.

Considering the above, the choice becomes do you subsidize and go the way of China, or do you embrace tariffs and bolster your domestic markets, basically attempting to return to the nineteenth century?. Is there a third option?