Tariffs are a bet on the free market rather than free trade

A notable feature of the latest US-China trade détente is the Trump administration’s apparent commitment to the 10 per cent global tariff as a permanent baseline. The common but peculiar objection to the president’s ongoing tariffs is that the burdens they place on so-called intermediate goods are self-defeating. Put a tariff on steel and the domestic steelmaker might benefit, but the many more manufacturers that use steel will suffer. More broadly, tariffs on inputs reduce the “competitiveness” of outputs in the global marketplace. Tariff the iPhone, if you must, but not its chips and screws and screen.

The error contained in this critique is the same one that free-traders have been making for a generation: imagining a global economy that operates like the friendly free market on the economist’s blackboard in which competitors sharpen one another and capital flows to its best use. Productivity rises, prices fall, everyone flourishes.

In the real world, by contrast, the global marketplace is dominated by government-built national champions. Capital flows towards the biggest subsidies and the most exploitable labour. Productivity falls, in the US anyway, where the typical factory requires more labour than a decade ago to produce the same output.

The free-trader is nostalgic for a bygone era when a developing country could offer its labour at a discount, subsidise its producers, and sell the resulting output to wealthier customers in other places. That model of “export-led growth” generated extraordinary increases in prosperity and depended above all on cheap inputs. Taxing those would have been senseless.