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2018-03-03 07:00 by Karl Denninger
in Foreign Policy , 424 references
[Comments enabled]  

Nice idea, no donut.

Don't get me wrong.  There really should be tariffs -- plenty of tariffs.

But the focus here, to point at steel and aluminum and slap a percentage on them on a flat basis, is wrong.

I spilled quite a lot of ink on this in Leverage, in which I examined the reason we have such a profound trade imbalance, given that we have a highly-skilled workforce and plenty of technological prowess.

It was simple when you got down to it: Workers rights, environmental conditions and (which wasn't part of the discussion in Leverage but probably should have been) intentional, targeted monetary (exchange-rate) distortion.

Simply put if you have slave labor whether at literal gunpoint or government policy (e.g. steal the peasant's land, turn it into a factory, and the peasant has the alternatives of working for what amounts to dollar a week and some rice or starving!) you can radically undercut anyone else's labor costs and thus make things cheaper.  If you also allow environmental destruction you can do the same; not poisoning the air, water and ground costs money for it is much cheaper to simply throw those poisons out into the environment.

If you then add monetary and IP machinations from a centrally-controlled economy and government, including outright fraudulent debt issuance, theft of intellectual property, forced "partnerships" to sell into the nation and more you can tilt the scale far enough that it's impossible for fair competition to take hold.

Multinational corporations are thus provided incentives to move production there, whether of final, finished goods or various precursors and to give up their IP or they're literally run out of business by the Chinese!

The answer to this is not all that complex.  Calculate the advantage in dollars that this provides on a given product and set the tariff at that figure plus 5% -- the 5% being intended to punish the behavior and provide an incentive to stop it.

I call these Wage and Environmental Parity Tariffs in Leverage -- because that's basically what they are.

If you do that then across the economy there is no longer an economic incentive to offshore work.  If the tariffs recapture all of the intellectual property theft value, all the suppressed wage value, all the environmental mitigation value plus five percent, there is no incentive to do any of that anymore.

It would generate hundreds of billions of revenue to the government, but neither China or anyone else will continue their behavior in the face of such an action.  They will effectively be forced to cut that crap out immediately.

The WTO might not like this, but **** em if they don't.  This is not only perfectly defensible on the facts it is utterly insane for WTO rules to not already demand such tariffs to account for these abuses.  If the WTO won't change the rules then screw them with a chainsaw and walk off.

We would survive that economically.

China and a number of other nations that do the same crap would not.

Note that this would leave without tariffs essentially all first-world nations -- Canada, the EU and Britain.  With regard to Japan they would get hit with the monetary side due to their extreme central bank actions including buying stocks but on the wage and environmental side they'd be fine.

If you want to actually have open and fair trade then it must be both open and fair.

This is how you get there.

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