Wednesday, September 05, 2007

Trade Retaliation is the Worst Possible Response

Bob Wright asks: "When foreign countries have policies that keep U.S. products out of their markets, what is the appropriate response by the U.S. government?"

Another way to phrase the question: "When foreign countries enact trade policies that: a) deny their own citizens access to foreign products, or b) raise prices for their own citizens with tariffs (taxes) on foreign products, both which result in a lower standard of living for the citizens of those foreign countries, what is the appropriate response of the U.S. government?"

The response that would make the LEAST sense is for the U.S. government to "retaliate" with trade policies "to level the playing field" by denying American citizens access to foreign products or raising prices for Americans by imposing "punitive" tariffs on imports.

Reason? It would lower our own standard of living, with the following nonsensical logic: "OK, China/Japan/India, if you're going to lower the standard of living of your citizens with trade barriers, we'll really show you... we're going to retaliate and lower the standard of living of our citizens with our own 'punitive' trade barriers to get back at you." How childish. After all, imposing "punitive tariffs on Japan or China" is really imposing "punitive tariffs on American consumers or businesses buying Japanese or Chinese products"!

The response that would make the MOST sense is for the U.S. government to do nothing in most cases. Here's a few examples to illustrate:

Case 1: You grow the best and cheapest tomatoes in your area, and your neighbor grows the best and cheapest sweet corn in your area. You buy your neighbor's cheap sweet corn, but your neighbor refuses to buy your cheap tomatoes. What should your response be? You should probably continue to buy your neighbor's cheap sweet corn, regardless of whether he/she buys your tomatoes. To "impose a personal trade barrier" by refusing to buy your neighbor's sweet corn in retaliation, would only serve to make you WORSE OFF, not better off.

Case 2: A company in Japan develops a cure for cancer and has exclusive rights to sell it. A company in the U.S. develops a cure for AIDS and has exclusive rights to sell it. Suppose now that Japan has a trade policy that prevents its citizens from having access to the American cure for AIDS, or imposes a huge tariff on the drug, perhaps to protect a Japanese company that is developing its own AIDS drug.

What is the appropriate response of the U.S. government? Certainly not to deny American citizens access to Japan's cancer cure, or impose "punitive" tariffs on Americans buying the cancer drug, which would serve to make us WORSE OFF, not better off, and would even cause Americans to die needlessly. Japan's trade policy is unfortunate for Japanese citizens, because it denies its own citizens access to a drug for a life-threatening disease, or imposes tariffs/taxes on its own citizen, and could even cause some Japanese to die.

Bottom Line: The best response for the U.S. government to foreign trade barriers is NO response, and the worst response for the U.S. government is trade retaliation that restricts choices for American consumers and/or raises prices for Americans.

Remember that countries don't trade, individual consumers and individual firms trade. That is, China as a country doesn't trade with the U.S. as a country, it's American consumers and businesses buying Chinese products. Restrictions or tariffs on Chinese products are in reality restrictions or tariffs on Americans buying Chinese products.


Post a Comment

<< Home