Tariffs May Impede Growth, But Politics Often Trump Logic

Jim Prevor - The Fruits of Thought

Tariffs are an issue across America now‭, ‬and those affecting the produce industry are no exception‭. ‬Whether it is tariffs on Chinese goods leading to retaliatory measures that impact American exports of fruits and vegetables‭, ‬or tariffs on Mexican tomatoes threatening to raise costs for American consumers while hurting Mexican exports‭, ‬tariffs are front-and-center in public policy disputes‭.‬

This is interesting‭, ‬because tariffs have not been a major focus for many years‭, ‬as there is a broad consensus among economists‭ ‬that tariffs raise consumer costs and impede growth‭. ‬If Mexico has resources‭ ‬‮—‬‭ ‬say less expensive labor‭, ‬land and water‭ ‬‮—‬‭ ‬which‭ ‬allow it to produce tomatoes inexpensively‭, ‬then mutual prosperity is gained by letting Mexico produce all the tomatoes‭, ‬while the United States deploys its land‭, ‬labor and water in ways to optimize its own output‭. ‬This might be another agricultural crop or luxury hotels or something else‭. ‬It is called‭ “‬comparative advantage‭” ‬and is not really in dispute as a matter of economics‭.‬

But what if a country is using‭ ‬“unfair trading practices”‭ ‬to overwhelm a U.S‭. ‬industry‭? ‬Well‭, ‬by definition‭, ‬no one can be in favor of something that is‭ ‬“unfair‭,‬”‭ ‬but the concept doesn’t really make much sense intellectually and certainly not with a perishable product‭. ‬Imagine that the government of Japan wanted‭ ‬to thank Americans for being steadfast allies and beneficent in the aftermath of World War II‭. ‬Imagine it did so by donating a‭ ‬Japanese-made car‭ ‬‮—‬‭ ‬free of charge‭ ‬‮—‬‭ ‬to every American with a driver’s license‭. ‬While certainly this would be hard for the U.S‭. ‬auto industry to compete with‭, ‬most Americans would consider it quite‭ ‬a gift and feel appreciative‭. ‬

Yet‭, ‬the allegation of subsidizing exports is the same thing‭. ‬Just imagine that instead of giving the cars away for free‭, ‬Japan‭ ‬gave its domestic car makers‭ $‬20,000‭ ‬per car in subsidies for each vehicle they exported to the United States‭. ‬Should we consider this a crime‭? ‬Or something you send a thank-you note for‭?‬

The allegations against the Mexican tomato growers hinge on an allegation of dumping‭. ‬The problem is that‭, ‬with perishables‭, ‬the‭ ‬whole concept of dumping rarely makes sense‭. ‬Typically‭, ‬dumping has two definitions‭: ‬If a product is sold below the cost of production or if it is sold below the price in its domestic market‭, ‬it is deemed to be dumped‭.‬

But produce‭, ‬domestic and imported‭, ‬is sold below cost every day‭. ‬Because of its perishable nature‭, ‬this is not a product that one can store in a warehouse until one gets a profitable sale‭. ‬A homebuilder may keep an unsold home on the market for years until a buyer willing to pay a profitable price appears‭. ‬But a produce marketer must sell‭, ‬or he will have rotten produce‭. ‬I can’t tell you how many perfectly good honeydew melons I sold to fruit salad producers because it was better than nothing‭. ‬

The domestic-market test also makes little sense‭. ‬Many large exporting countries‭, ‬such as Chile‭, ‬grow for the export market‭. ‬The‭ ‬price in Chile of table grapes is irrelevant‭, ‬because that market is infinitesimal compared to the export market‭. ‬

So why the focus on tariffs‭? ‬Because economists aren’t answering the questions that are being asked‭.‬

The Chinese tariffs implemented today address a political question with economic impact‭: ‬How do you move a country on issues such as intellectual property rights‭, ‬forced technology transfer‭, ‬the role of government-owned entities‭, ‬etc‭.? ‬President Trump is basically saying that discussions of these matters with China have had no effect‭, ‬and that tariffs will move China to act‭. ‬The President may be right‭, ‬or may be wrong‭, ‬but economists don’t have much to contribute here‭.‬

Besides‭, ‬income maximization is not really something one can figure without knowing the endgame‭. ‬If mutual trade produces mutual‭ ‬benefits‭, ‬but China uses those benefits to develop better nuclear weapons and we are forced to spend more to defend ourselves or we suffer an attack from those weapons‭ ‬­‮—‬‭ ‬well‭, ‬maybe‭, ‬the trade benefit was a chimera‭.‬

Indeed‭, ‬the tomato issue is perhaps most vulnerable on assessment of these kinds of secondary effects‭. ‬Let us say tariffs were successful‭, ‬and the Mexican industry shrinks‭. ‬That means fewer jobs in Mexico‭. ‬So‭, ‬either we bring in more Mexicans to work in U‭.‬S‭. ‬fields or these Mexicans will be unemployed‭, ‬and many may seek to come to the United States to find work‭. ‬Is either outcome what American policy planners are seeking‭?‬

When Amazon was planning to build a big complex in Queens‭, ‬NY‭, ‬there was a huge outcry politically‭, ‬and Amazon withdrew its plans‭. ‬There were many reasons‭, ‬but you see here a similarity with the scenario of tariffs on Mexican tomatoes and the policies of Alexandria Ocasio-Cortez‭, ‬the left-wing Congresswoman who opposed the deal‭. ‬

Amazon promised 25,000‭ ‬jobs‭, ‬which would each pay over‭ $‬150,000‭ ‬a year‭. ‬It was transformative for the area‭. ‬But it would not have been the current residents of that neighborhood who would get those jobs‭ ‬‮—‬‭ ‬most being unqualified as the jobs required high level degrees in specific high-tech fields‭. ‬So‭, ‬what makes for political success‭? ‬Would a mayor who saw his city’s average wage triple be a success if the current residents have to leave because rich people move in and the city becomes gentrified and current residents can’t afford the place anymore‭.‬

So‭, ‬with his focus on Midwest industrial output and‭, ‬now‭, ‬U.S‭. ‬tomato farming‭, ‬Trump is asking the same question‭: ‬How can his policy increase the prosperity for the people who live here‭? ‬It is not clear that economically he is on the right track‭. ‬How can you make American citizens more prosperous by increasing what they must pay for tomatoes‭? ‬It may be an avoidance of hard truths‭. ‬Maybe we should look closer at our own public policies on labor‭, ‬environment and more that make it difficult for farmers to compete‭.‬

But‭, ‬maybe‭, ‬President Trump knows a thing or two about politics‭, ‬and what he thinks people want is a fighter‭ ‬‮—‬‭ ‬someone who is on‭ ‬the side of American tomato growers or American industry bullied by Chinese policies‭. ‬Lectures on comparative advantage are fine and may even be true‭ ‬‮—‬‭ ‬but‭, ‬maybe‭, ‬what the people want is someone who will disregard the theories and just be on their side‭. ‬If so‭, ‬look for Trump to be victorious in 2020‭.‬