It’s at Salon, of all places, that we get half the lesson about why international trade is good and tariffs are bad. That 50 percent of the clue is in their examination of how Amazon is forcing other retailers to buck up their act or go bust. The entirely true point is that the competition from the retail behemoth is cutting swathes through the other people who try to sell us things. Anyone sticking with the same old methods, like Toys R Us and others, disappears. Only those who also use the insights of new models with more efficiency survive.
That means competition from Amazon is forcing the entire retail sector to become more productive. Greater productivity is what makes us all richer over time. The major effect is that the resources now not being used in the original activity (the labor, capital, and land) can now be used to go do something else. We’re richer by the output of that something else. If Amazon drives the rest of retail into using fewer people, less capital, fewer stores, then we get all our retail needs plus all that those resources produce instead – diversity advisers, perhaps. We’re richer by whatever the value of diversity advisers is.
Which brings us to international trade. The argument in favor of tariffs is that our own domestic producers will be driven out of business by this competition from foreigners. To the economist, this is exactly the point. Sure, in the short term it’s just about consumer prices. Without tariffs we’ll all pay less for our steel. With them we’ll pay more. Why 330 million of us should pay more for steel so that a politician can buy the votes of a couple of hundred thousand steelworkers isn’t adequately explained, but then that’s politics for you.
But in the medium to long term that competition from foreigners works exactly as does that from Amazon. Domestic producers must either become more efficient or vanish. In this manner productivity rises and we all become richer. There’s no difference in this process between competition from a domestic company and a foreign one.
Except for just the one difference. It’s a standard observation, an empirical one, that only the 10 percent or so most productive firms in any industry even try to export, probably on the grounds that exporting is difficult and expensive to start doing at least, plus mediocrity is in ready supply everywhere. No need to import mediocre products given that we can get them easily enough from around the corner.
That is, import competition exposes the domestic producers to competition from the most efficient, most productive producers in the world. As we’ve already asserted, it’s this very competition which is the point, not the thing to be protected from. Thus competition from the world’s best is doing more of what does us good.
Amazon’s competition is upending the American retail sector to our benefit. Any and every sector of the economy becoming more efficient makes us richer. The argument in favor of trade and against tariffs is that competition from foreign firms is just more of the same, perhaps even better of the same competition. That’s the very thing which makes us richer over time, the incentive for productivity to rise.
It was Paul Krugman who said that productivity isn’t everything, but in the long run it’s pretty much everything. Yes, we all know, he’s a very irritating parti pris columnist at the New York Times. He’s also a Nobel Laureate economist whose expertise is trade. On this point he’s right.
Tariffs are a bad idea because they negate the very function of trade itself, protecting us from the competition that makes us richer.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
