Trade is not a zero-sum game

The Bush administration is getting a lot of heat for the steel tariffs Bush agreed to impose on foreign steel importers, and rightly so. In granting the tariffs, Bush betrayed his alleged free-trade principles in a pragmatic move that is costing him much more than he bargained for. I hope not only for Bush’s sake, but much more for the sake of the economy that my income depends on, that he sticks to his principles on free trade. (And on national security, if that’s not asking too much.)

While the case against steel tariffs should be obvious, the bigger lesson is lost on the nations and organizations (such as WTO) threatening “retaliatory” tariffs. Their assumption is that trade is a zero-sum game, where the tariffs of one nation somehow “steal” the wealth of another. In retaliation, they threaten their own tariffs, won’t return the stolen wealth, but are supposed to put a stop to the leakage of any more. This is mercantilist nonsense, of course. Just like trade between any two individuals within a country, international trade is a case of voluntary exchange to mutual benefit. Tariffs imposed by any nation harm the producers of foreign exports in addition to the consumers within that nation. This applies equally to “first-strike” tariffs as well as to retaliatory tariffs. While retaliatory tariffs are a politically effective move because they can be targeted at politically nimble exporters to generate opposition within the “enemy” nation, the proper policy of any free country is to establish unconditional, unilateral, and permanent free trade. (With the exception of countries that pose a military threat, that is.)

As an aside, it is often argued that American steel manufacturers should get special treatment because European steel manufacturers get massive aid from the government. People fail to realize that European taxpayers are in effect paying for a large chunk of the steel we import from Europe. High American tariffs on imported steel are in effect a wealth transfer directly from the pockets of European taxpayers into the vault of the U.S. treasury dept, which has gained $650 million of hard-earned European money from imported steel tariffs since March 2002. On the down side, $680 million has been lost by American consumers due to the higher price of steel at home.

In a related note, check out Bruce Bartlett's latest article, which explains why “the existence of a surplus or deficit may tell us exactly the opposite of what the mercantilists believed. Deficits may be a sign of strength, while surpluses are a sign of weakness.”