An Analogy for the US-China Trade Relations
Drawing our attention to the famous Candlestick makers' petition satire on protectionist tariffs by Frederic Bastiat, I summarize the satire and apply it with modifications to the current context of US-China trade relations. You may read the satire here or go to http://bastiat.org/en/petition.html
Concern: The sun was bad for the candlemakers' business
Petition: That the government would enable a law to prevent the sun from accessing their country so that they could produce candles, lanterns, etc. for light instead.
Arguments: This was good for their jobs and for the economy as a whole. They would produce more, hire workers in the process and would also contribute to economic growth through the spending from their higher profits, and spillover growth to other sectors etc.
Reasons to debunk these arguments:
1. Consumers of light want to enjoy the sun’s light instead of the candle light. Without having to pay for the sunlight consumers are able to spend on other things. Things which will not get produced if they spent on candles and other forms of artificial light.
2. The sun provides us with a free resource. We are better off by not needing to reproduce what we can already get freely. Should we reject free resources in a world of scarcity?
3. In the event that we as a society do care strongly about the welfare of the candlestick makers and similar producers of artificial forms of light, when we do utilize the sun, instead of candles, we can still have the consumers transfer, through a tax scheme, to the producers what they would have got in the absence of the sun. Such transfers can then be used instead to produce other things that we would not have if we had instead discarded the sun’s light and produced candles etc. instead.
4. The sun’s light represents a superior technology in place compared with candle light and other artificial forms of light. To reject that would reflect technological regression and a reversal of economic growth.
In international trade we obtain things we need or use at a cheaper price from somewhere else. Think about steel or solar panels, instead of having to produce them at a higher cost (thereby giving up other productive choices). High cost production means high prices to be paid for these goods.
Analogous to keeping the sun out, tariffs keep us from accessing the cheaper products by making them as or more expensive than what it would cost us to produce and pay for them on our own. So we end up buying them locally instead. In effect we are inefficiently reproducing part of what would otherwise have been “free”.
From Bad to Worse
Interestingly, the cheaper the foreign import is, relative to what the cost to produce is domestically, the more we believe the foreign firms are unfairly dumping their products in our markets and we seek to impose bigger tariffs, thus effectively raising their prices by a whole lot.
Now think about this... the closer the foreign product is to being free, the more we take action against the product, so in the extreme, we have a free product and we apparently do not like that. Much like we should not like the sun because its light is free... Wait, we do like the sun, well all of us that are not candlestick makers, and we do not think about sticking with candles (no pun intended) or other artificial light rather than having the sun's light.
Further, we do not even think about how the sun is obtaining its comparative advantage in providing us with free light. We are excited instead about it and give no thought of the need to reproduce light, while the sun’s light exists.
So here is some really inconsistent thinking. We seem to be more excited about obtaining light from the sun for free and think it ridiculous to indulge the candlestick makers requests, but we are not thrilled about getting cheaper steel, aluminum, products of all sorts, from abroad and are even all the more outraged the cheaper these products are and feel that we should do something to restrict access to them and instead encourage domestic production of these same goods.