Tariffs and the Politics of Bizarro World

One knows it’s a strange, new political world in the US when Paul Krugman attacks a Republican President from the right. Krugman criticized President Trump’s tariff proposal for steel and aluminum imports for being insufficiently pro-free market.

A few thoughts about the President’s proposal.

First, the tariff proposal holds little but political upside for Trump. It is economic nationalism par excellence; red meat for the most enthusiastic part of Trump’s base. Relatedly, given what I would guess is the high correlation between economic nationalists and pro-gun Trump supporters, the timing of Trump’s tariff announcement can’t but help offset some of the sting his supporters felt from his comments favoring heightened gun controls in response to the Florida shooting.

On the other hand, despite Krugman’s criticism of Trump’s proposal, the most committed free traders are on the right. They either became “Never Trumpers” long ago, or reconciled themselves to the Trump trade-off (that is, being willing to trade off the decrease in national domestic economic regulations for the occasional anti-market implications of Trump’s economic nationalism). More substantively, even if the tariffs result in negative economic outcomes overall, they would take years to realize and would be difficult to disentangle from other causes.

Irrespective of these claims, the case against Trump’s tariffs is not as straightforward as critics like Krugman would have it.

In his column, Krugman criticizes Trump’s proposal for potentially starting “a cycle of tit-for-tat” cycle of trade restrictions. Whether one’s actions actually “start” such a cycle, however, depends on whether one is titting or one is tatting.

As an abstract matter, in repeated prisoner dilemma games, tit-for-tat strategies are simple ways actors can deter defection and to sustain cooperative play. If in fact other nations subsidize their production, and thereby under-price American domestic production, not because of a cost advantage but because of the political subsidy, then a U.S. tat for the other countries’ tits could be justified.

It gets complicated, however. On the one hand, even asymmetric free trade can be a good thing for the importing nation. Think of it: If an exporting country subsidizes production of a particular good, then it effectively transfers its wealth to the importing country; the exporting country’s subsidy gives money to consumers in the importing country.

But it’s not always as simple as that. If one company uses subsidized pricing to drive a rival company out of business, and there are substantial startup costs to entering the market, then one has purchased a modicum of market power by the subsidy, with the ability to reap higher profits in the future. This is sometimes easier said than done, however. One theory for the dip in oil prices a couple of years ago had the Saudis and the Russians lowering their prices in order to drive U.S. frackers out of business. While many U.S. firms closed down marginal wells during the price dip, they simply opened them up again when the price of oil increased again.

The time and cost to restart domestic production relates directly to the national security rationale for Trump’s proposal for tariffs on steel and aluminum imports. This is a classic case for tariff protection, as Adam Smith observed centuries ago in The Wealth of Nations. (And repeated by Alexander Hamilton in his Report on Manufactures.)

The risk, however, is in all the noise of the signals. How do we know the other countries are subsidizing their exports, as opposed to offering goods at lower prices simply because of their cost advantages in production, which allows them to pass that advantage on to consumers in importing nations? Relatedly, how do other countries know Trump’s proposed tariffs stem from bona fide security concerns, as opposed to him using security concerns as a cover for politically-motivated economic nationalism? This is not just a challenge to the case for Trump’s tariffs. The lack of transparency as to what’s really the motivation for this policy cuts as much against Krugman’s criticisms as it does against Trump’s. But there are no grays in Krugman’s world when it comes to Trump’s proposals.