Outburst of conventional wisdom on trade merits caution

Last week, the Trump administration announced new tariffs on aluminum and steel imports from various countries. These moves bring up old debates. One expressed concern is that retaliation tends to take place, with a longer-run outcome that all countries are worse off. I am annoyed and even disappointed at times when tariffs are painted as obviously and always knuckle-headed.

Two things to be kept in mind by concerned observers—say, people who would be interested in the work of the Ralph Nader-inspired Public Citizen organization or efforts to re-do the economics curriculum–and many others who simply seek to remain open-minded:

1) a series of ad hoc tariffs can certainly have a disastrous effect involving retaliatory moves. Often in such historical cases many things are going badly awry already.

2) Subsidies and tariffs sometimes do work–to help growth and development. Most developed countries developed behind tariff walls and with tariffs as a significant source of government revenues. Countries such as S. Korea, Germany, and the United States are among cases where such instruments worked to effect policy aims. It was not extremely difficult for such countries to find and select industries for protection as part of their strategies.

Other issues that are relevant:
For those inclined to economic models and proofs, development and trade models exist where subsidies and tariffs can be rigorously shown to be effective under some reasonable conditions for such countries—though not in all conditions and for all countries. Some of these simply alter assumptions behind basic models in very minor ways.

Progressives can support better models of international trade and cooperation by seeking fair trade products, which help producers maintain dignity and a fair standard of living while producing for export. Textbook models that show free trade works usually do not include money, current account imbalances, or unemployed workers and capital; they are the usual bad textbook neoclassical models and are not, say, solid and detailed macro models. Conventional neoclassical economics treats these nonincluded elements as somewhat distinct and different matters rather than an integral part of a problem such as trade policy and theory.

Finally, recent trade agreements in which the US is involved have involved the world in big problems. They tend to enable outsourcing and the like more than they permit or “free” trade in goods and services. They threaten legal protections and regulations in countries to the extent they are already in place.