Teaching Everyone, Especially Mr. Trump, About Tariffs
Updated: Jun 15, 2018
I bet you would be surprised to hear that “tariff” is a device for managing the point of balance between producers of goods and services and consumers of goods and services. Let me explain.
Consider a simple picture of a product’s supply and demand. In my simple example a country’s supply and demand for a product has achieved balance at five units produced and five units consumed at a price of 5. All this happens in the country isolated from the rest of the world. It seems like a well-balanced production and consumption of a product. It however changes radically and achieves a different point of balance when the country becomes open to world producers.
With world as supplier note how the country’s production and consumption changes. The local production drops from 5 units to 3, a 40% drop. It means a corresponding 40% drop in local employment of those that produced the product. With the country open to world producers, the price drops from 5 to 3. Those local companies that previously could produce at price of 5 but cannot do so at price of 3, they go out of business. Only companies that produce and compete at price of 3 remain. The lost employment does not look good. But look at the consumer side. With price dropping to 3, a 40% reduction, more people become capable of buying the product and every consumer pays a lower price. The consumption increase from 5 to 7.5 corresponds to a 50% increase in consumers. More humans previously not capable of buying the product at price of 5 can now buy it at price of 3. All consumers benefit from lower price of 3. So what is the conclusion? One side of the society, the consumers, is benefiting. The other side of the society, the producers, not.
This raises the inescapable question: where is the point of balance between serving the producers of goods and services and the consumers of goods and services? Since all human interactions take place within the context of laws that the society sets up for its force network, the question returns to the design adopted for societal force network. Should the laws be set up to tell 40% of workers they would lose their jobs and have to go and find another job? Or, should the laws be designed so the local producers would have full employment, producing 5 units, and instead telling the consumers that they have to pay the price of 5 and if they cannot afford to pay it, that’s the way the society works?
Should society pay full attention to well-being of the local producers? Or to the well-being of the consumers by giving them access to global producers? Do we let the consumers buy from anyone’s capabilities shared anywhere on earth, or limit them to locally-shared capabilities regardless of how that arrangement excludes consumers and makes many unable to get the product they need?
In all my books you will find me saying that the humanity’s greatest challenge lies in “balancing” the interests of different humans. A challenge originating at uniqueness of the human individual and the difficulty of managing uniqueness when developing societal “all-agree” positions. Every all-agree position is a destroyer of human uniqueness. The balance between uniqueness and all-agree positions has to be managed well if humans are to thrive. Otherwise the society falls apart and many resort to brute force to watch out for their own local and individual interests and that further degrades and eventually destroys the society.
Thus in the case of my simple example, what is the society to do? That is where “tariff” makes its appearance as a device for creating balance. It is a device that shifts the world supply. Have a look at my example and see what happens when a 33% tariff has been added to the world supply. The tariff changes the world supply from a price of 3 to a price of 4. The tariff placed on world supply changes the local production from 3 to 4, corresponding to 33% increase in local employment. But at the same time, with price increasing from 3 to 4, the consumption drops from 7.5 to 6.5. This means 15% of consumers are thrown out of the market as they can no longer afford the product. All other consumers have to bear a price increase of 33%.
Does the 33% tariff achieve a better societal balance? The answer lies in the society itself. After all, the supply and demand are outcomes of the societal decisions to manage force and resources. The society can choose to go “local,” have high employment while at the same time forcing the consumers to pay high prices with many unable to buy the product they need. Or, the society can choose to open itself totally to the world supply, bringing low-priced goods and services to its consumers and at the same time create high levels of unemployment in its local companies. The society has to choose where the point of balance lies.
Let me add one more view of the situation. I have already said that tariff is an aspect of the design of the “societal force network.” As such, tariff is a distancing device. It seeks to prevent the producers and consumers going at one another with brute force in order to settle their differences on societal point of balance. In general, the better a society is in managing force, resources and knowledge, the less it needs tariffs to determine the societal point of balance. I recommend reading The Sucker Punch of Sharing and Here Comes the Watchman to develop a deeper understanding of the foundations that govern human well-being, especially in societal and global interactions that lead to societal points of balance.