The case for tariffs
From the June 2019 print edition
I am writing this column in the midst of a so-called trade war between the US and China. The reason why I refer to it as “so-called” is because war is very serious business, and it seems to me that a more accurate term to describe what is going on would be a tariff tit-for-tat. The US put 25 per cent tariffs on $250 billion of Chinese exports and China retaliated by imposing tariffs that range from 5 per cent to 25 per cent on a variety of US goods. Some prognosticators are predicting that this will significantly slow down the global economy and even lead to recession in North America.
This strikes me as highly dubious. Higher tariffs will impact the Chinese economy significantly, but it will be much more a zero-sum game in that what China loses, other countries will gain. Manufacturing will shift to other developing countries, like Vietnam and Bangladesh for low-value added products, and there will be some limited relocation of production to North America. But the most important result will be that people will shift their consumption. If, for example, iPhones are significantly more expensive, it’s likely that people will make do with their current phone, or perhaps substitute to a cheaper model and take those savings and spend more on something else.
By temperament and inclination, I’m in favour of free trade for a few reasons. In theory, at least, free trade makes perfect sense. The explanation is comparative advantage. If everyone specializes in what they do best, then it will be a win for everyone. A simple model demonstrates: there is a surgeon who can earn $250 an hour doing her slicin’ and dicin’. Work around the house requires 10 hours a week. If she works 40 hours a week in medicine and does her own housework, she grosses $10,000. However, if she operates for 50 hours a week and pays someone $20 an hour to do his chores, now she’s netting $12,300.
Except, what if the surgeon’s services aren’t required for 50 hours a week? What if she can only get paid for surgical work 30 hours a week? Now the surgeon will clearly be better off if she does her own housework. It seems that the benefits of free trade hinge around a number of important assumptions and may be the most important of them is that all ultra-productive resources are always fully utilized. And this is patently ridiculous.
If you believe‚ as I do, that there is still a tremendous amount of slack in the North American labour markets, then it strikes me that a very good argument can be made for imposing tariffs. And there is another and maybe even better reason for tariffs: they raise revenue.
Time for tariffs
There is general consensus among most economists that the best taxes are value-added taxes like the HST. The reason is because this “penalizes” consumption. Income taxes, on the other hand, discourage productive activity. It’s very difficult (particularly in the US) to argue in favour of sales taxes or value-added taxes. Tariffs are a back-door way of getting there and are generally politically popular which is just not true of sales taxes.
I almost can’t believe that I’m writing this but the time has come for tariffs. There should be something closely akin to a free trade zone between Canada and the US. The reason why I qualify that with “closely” is that nominal charges for the transfer of goods and services would help pay for border security. But otherwise, there should be a tariff policy that would work along the following way: if an input or final product costs $100 or less, the tariff would be 5 per cent. If the final product costs $100 to $1,000, the tariff would be 10 per cent. Otherwise, for all products that cost $1,000 or more, make it 25 per cent.
This would mean the following for Canada. First, all automotive manufacturing would take place in the US and Canada which is just fine with me. There is sufficient competition to keep the auto companies in check. The majority of products that average Canadians use regularly (socks, dishes and so on) would be only nominally more expensive. And luxury products—and here I’m thinking of electronics—that should be understood as luxuries would become significantly more expensive. And that, too, is something I can live with.
Canadian society faces two important and related economic problems. One is the divide between the “have-alots” and “have-a-littles”. The second is that lower skilled, yet relatively well-paying, work has been exported to other parts of the world, and there is a broad cohort of Canadians who haven’t been able to find work that pays similarly well.
Tariffs won’t solve all of our economic problems, but they are a tax whose time has come.