Free Trade or Tariffs: Promoting Specialization Through Reformed Tariff Regimes

Trade is a vital and complex component of the global economy as well as the economies of almost every nation.  An inability to access the global economy via trade either pushes the Peoples of embargoed nations into poverty or forces their national economies to produce all of their needs, which can mean higher prices due to limited resources and limited expertise.  It is why free trade has been heralded as the elixir to everything from sluggish economic growth to recession.  Free trade, however, has costs.  It is why trade partners are reluctant to expose their domestic industries to global competition.  Unfortunately, trade partners often agree to “free trade” in principle then adopt policies that advantage their ow domestic industries over those of export countries.  Today, the lack of real and perceived “fairness” in global trade has pushed the Trump Administration to initiative a trade war, which can only be resolved by recalibrating bilateral trade relations.

For decades, proponents of increased trade have pushed for the adoption of free trade across the globe.  Nationalists and protectionists, who have largely been silenced until recent years, have simply resisted accelerated globalization and free trade, thereby advocating for the status quo.  Quite frankly, the reason the free trade movement gained so much momentum is that increased trade does offer significant benefits while the traditional tariff regime is ill-adapted to a globalized world.  Meanwhile, the way countries tariff goods produced in foreign lands is inconsistent and overly complicated.  Although technology can help ease the administrative burden placed on importers, determining if, and how large of, a tariff applies to an import requires a great deal of expertise and/or research.  Recognizing US tariffs average out to less than 2% of the nearly three trillion dollars imports Americans consume annually, the cost of tariffs is not a significant barrier by any measure.  The chaotic nature of how tariffs are applied to imported goods and services is the real barrier.  
 
Given the US federal government, for example, receives less than $50 billion of its revenue from tariffs, versus $1.7 trillion from personal income tax, it is tempting to simply conclude that tariffs are not worth the effort and should be abolished.  Like the corporate tax, which provides the US about $225 billion in revenue, tariffs once contributed a great deal more to government fund.  In the future, they may contribute more once again.  That said, the most important impact of tariffs does not come from the amount of money they raise.  It comes from their distorting influence on the economy.  When favoring products produced in lower-cost economic environments, i.e. less developed and less regulated countries, a lack of tariffs helps favor those products over domestic products.  Free trade between rich and poor trading partners can, therefore, deleverage domestic workers, businesses, and industries, i.e. they lose the ability to charge more money.  Tariffs also deleverage governments by making it even more costly to regulate and tax.  This deleveraging, in turn, distorts the economy to the advantage of companies that exploit cheap labor, skirt taxes, ignore workplace safety, and avoid environmental regulations.
 
On the other hand, tariffs prevent poorer countries from accessing the global economy and the investment capital they need for development.  One of the selling points for free trade among progressive has been, in fact, the ability of free trade to uplift the impoverished of underdeveloped countries.  The problem is that free trade has a tendency of pushing worker incomes toward equilibrium, which means impoverishing workers in rich countries when they are forced to compete against multitudes more workers in poorer countries earning much, much less.  Clearly, there are costs to free trade.  There are also costs to the traditional tariff regime.  A new tariff regime is needed.  In the Commonwealth of Pennsylvania, for example, a six percent sales tax is applied to any product with exception to a few classes of products.  There should be a more straightforward approach when it comes to tariffs.  Because the lack of taxes, regulation, and government costs impact the competitiveness of foreign and domestic goods, the goods of every country should be tariffed at a different base rate.  Because the distorting impact of imports needs to addressed, the products of certain industries should then fall under various tariff brackets that build on the base rate. 
 
Furthermore, one of the most compelling defenses of free trade has been the case for specialization, nations can preserve their industries by specializing in unique products and services.  Specialization can, however, also exist alongside tariffs.  The specialized goods of nations should be exempted from tariffs.  For those in a non-competitive industry that make a novel or speciality product, tariffs should not be applied as they just add costs and deny consumers access.  For competitive industries, governments should negotiate tariffs down so they reflect the higher productions costs of their economic environment, thus their disadvantage can be erased.  Europeans, for example, should negotiate for the US to zero tariffs on novel, speciality European products and limit tariffs to levels that only eliminate pricing advantages European goods inherently have due to their smaller economies, so they all producers are competitive on quality and sound business practices instead of price alone.  Poorer countries, in turn, should be exempt from tariffs on products their economies can readily contribute to the global economy instead of products already produced in developed countries.  Not only would this promote specialization, it would help prevent the over-exploitation of cheap labor, which is harmful to all the Peoples of the world.