All Trade is Reciprocal. Trump's Tariffs Interfere With That Reciprocity.
Governments should just get out of the way of free trade among consumers and businesses.
President Donald Trump's "Liberation Day" massive tax hikes—err, tariffs—are here, and the effects are already apparent in stock market selloffs, layoffs, and plant closures. We're also being asked to tolerate a little pain for the duration of the trade war with the entire planet until "reciprocal" tariffs close American trade deficits with other countries. But all this talk of allegedly fine-tuned tariffs intended to counter other countries' trading barriers is based on faulty assumptions: that every imbalance in commerce with other nations can be attributed to trade barriers, and that trade deficits are necessarily bad.
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A Lack of Reciprocity
"I, DONALD J. TRUMP, President of the United States of America, find that underlying conditions, including a lack of reciprocity in our bilateral trade relationships, disparate tariff rates and non-tariff barriers, and U.S. trading partners' economic policies that suppress domestic wages and consumption, as indicated by large and persistent annual U.S. goods trade deficits, constitute an unusual and extraordinary threat to the national security and economy of the United States," began the president's April 2 executive order invoking questionable unilateral executive authority to hike tariffs.
The recent report from the Office of the United States Trade Representative assessing international trade barriers looks not only at formal tariffs, but also at such impediments as weak intellectual property protection, "buy local" policies, discriminatory licensing requirements, subsidies, "sanitary" standards that exclude American goods, and much more. Many of these are easily recognizable as efforts to reduce competition to local companies. But they also seem very difficult to assess in terms of their impact. So, how did the White House come up with such specific numbers to assign to other countries' trade barriers so that it could "reciprocate" with fine-tuned tariffs of its own?
Well, according to the Office of the United States Trade Representative, "reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the U.S. and each of our trading partners. This calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing. Tariffs work through direct reductions of imports."
Wait. So, any imbalance in trade is attributed to trade barriers and tariffs are supposed to fix this by choking the flow of goods brought to the U.S.? Apparently so.
"The numbers [for tariffs by country] have been calculated by the Council of Economic Advisers…based on the concept that the trade deficit that we have with any given country is the sum of all unfair trade practices, the sum of all cheating," an unnamed White House official told The New York Post.
Flat-Earther Statistical Fabrication
That's quite a simplistic calculation to use as the basis of a global trade war. It's the sort of estimate that has economists scratching their heads and wishing they could punch somebody else's.
"The tariffs are much worse than we thought," Independent Institute economist Phil Magness commented on Facebook. "The CEA literally improvised them from a made up formula that confuses trade deficits for tariff reciprocity. The entire CEA should be fired and purged for this. It is not even 'economics' – it is flat earther statistical fabrication."
Worse, flat-earther humbug is being invoked to fix a problem that is really no problem at all.
"The gain from foreign trade is what we import," the late and great Milton Friedman commented during a lecture at Kansas State University in 1978. "What we export is a cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things so that we get as large a volume of imports as possible, for as small a volume of exports as possible."
Friedman added that "when people talk about a favorable balance of trade…it's taken to mean that we export more than we import. But from the point of our well-being, that's an unfavorable balance."
That is, trade deficits, by which we import more from a country than we export to it, are good.
The idea that exports are the cost of imports was emphasized by the Cato Institute's Michael Chapman in a piece he wrote last summer. He pointed out that trade isn't some state-level exchange in which one government mugs another. It takes place voluntarily between individuals and businesses.
All Trade Is Reciprocal
"In their criticism of global trade and imports, Vance and the GOP platform don't mention several important things: the American consumer, private property, and the freedom that people should enjoy to voluntarily exchange goods and services," he noted. "Some folks call this liberty and the pursuit of happiness: people freely choosing to buy and sell what they want, not what the government dictates."
And what do we call voluntary exchanges between willing participants? Well, as economist Roy Cordato wrote for the John Locke Foundation in 2018, "all trade, by definition, is reciprocal. It is best to think of a trade as simply two parties coming together for mutual gain with each of them giving up something that they possess for something that they want more."
So, in order to eliminate trade deficits with other nations that aren't really a problem to begin with, the Trump administration is hiking tariffs to raise the cost of imported goods so that Americans will buy less of them. That's interference in the free reciprocal exchanges chosen by consumers and businesses. And the price of that interference comes out of Americans' pockets. That's because, as the Tax Foundation's Alex Durante warns, tariffs are taxes that, while partially paid by foreign firms, are mostly a burden for people in the countries that impose them—especially as they rise to the heights we now see.
"If the US imposes a large enough tariff, the resulting reduction in economic activity would also entail a meaningful increase in unemployment," adds Durante.
This, of course is true of the tariffs and other barriers imposed by other governments as well—the ones to which President Trump claims to be responding and the new ones implemented as retaliation for the recent U.S. measures. But those are mostly a worry for their own people who suffer the consequences.
In a Newsweek column written back when American politicians fretted over a trade deficit with protectionist Japan, Milton Friedman cautioned: "We only increase the hurt to us—and also to them—by imposing additional restrictions in our turn." He urged the U.S. "to move unilaterally toward free trade" to minimize harm caused by tariffs and to maximize gains from trade.
If we want trade reciprocity, the government should get out of the way and let businesses and consumers engage in voluntary exchanges with each other and overseas partners as they please.
