A colleague recently sent me a YouTube clip featuring a pro-Trump campaign stop that Vivek Ramaswamy and Charlie Kirk made at a college in Georgia. Most of the students were progressives who favored Kamala Harris over Trump, but one who stepped forward was a self-described Austrian who challenged the wisdom of tariffs against Chinese imports. In this article I’ll critique the first two arguments Vivek offered in response. (The portion of the video to which I’m responding begins around 29:46, and Vivek’s answer occurs soon after the student poses the question.) Before diving in, let me say that I respect Vivek Ramaswamy as a deep thinker who is also quite eloquent. I just think he’s totally wrong on this issue.
First, Vivek claimed that even Hayek (in The Road to Serfdom) said that the principle of free trade didn’t mean a nation should be reliant on importing vital military hardware from its adversaries. He claimed that currently, the US is heavily dependent on China for semiconductors and other inputs for the defense industry, and that this was presumably insane. I don’t recall (and couldn’t find) the passage where Hayek said this, but it’s a standard argument and so I should address it (whether or not Hayek himself put it just the way Vivek did).
My immediate counterargument is that the US government itself, in its role as the purchaser of military hardware, could have obvious criteria before approving a contract; there would be no need for a blanket tariff—even one targeted at a specific country—just because of the military preparedness. For an analogy, presumably the Secret Service wouldn’t hire dozens of personnel to protect President Trump who were born and raised in Iran. They could simply vet the backgrounds of applicants to the Secret Service, without enacting a barrier to foreign workers immigrating into the US. (There might be other reasons for a more restrictive immigration policy, but surely, “We can’t have an Iranian spy ending up working for the Secret Service” wouldn’t be one of them.)
More generally, the free market is capable of handling the nuanced risk that worries Vivek. For one thing, in the event that trouble began brewing with China, speculators (so long as they didn’t fear an anti-price-gouging crackdown!) would have an incentive to rapidly import semiconductors and stockpile them, expanding the window within which US production could continue at its usual pace even in the event of a complete Chinese embargo. The logic here is that if China did indeed halt its export of semiconductors with the outbreak of hostilities, the global price of semiconductors would spike, thus justifying the earlier cost to American importers of building the warehouses necessary to import and store excess inventory as war approached.
In addition, if market participants anticipated a protracted war (with an interruption of foreign sources of semiconductors for years), it would make sense to either keep a domestic factory “in mothballs” or running at lower capacity producing some other product. The analogy here would be a movie theater on a Wednesday afternoon: It wouldn’t make sense to have such a big building if the only traffic were Wednesday matinees, but given the scale of the operation on the weekends, it makes sense to run it with a skeleton crew on weekday afternoons. On the other hand, a ski resort located in the mountains might completely shut down during the summer months. Even so, it’s still profitable for the developers to build the resort, knowing that the revenues during the peak skiing season more than justify the overall expense.
Similar logic applies to building US semiconductor plants that have the capacity to ramp up production in the future, when demand spikes. Again, depending on the specifics, given that the factory is built, it might make sense to run it at lower output (perhaps making other items), even though it wouldn’t make economic sense to build it if that were the only revenue stream. Or, if Chinese imports (during peace) were so much cheaper than US counterparts that the US factory couldn’t even cover its variable (let alone fixed) costs, it would make sense to keep the factory idle, analogous to a ski resort during the summer.
The beauty of leaving these speculations to market participants is that they have their own money on the line, and so the various considerations contribute to the end result. In contrast, politicians setting tariff rates in DC have no idea whether the chance of a distant war justifies making semiconductors more expensive for all American businesses.
Next Vivek argued that a free trade policy only makes sense if one’s trading partner reciprocates. In other words, if China is engaged in currency manipulation, slave labor, and other subsidies to its exports, the doctrine of laissez-faire doesn’t require the US to refrain from retaliatory actions.
My response is that the case for free trade as presented by standard economics has always been a unilateral one. In other words, whether or not other countries enact tariffs on US goods, it still makes Americans poorer (per capita) for the US government to put taxes (i.e. tariffs) as a “wedge” in between US consumers and foreign producers. You don’t make Americans richer by levying more taxes on their purchases.
(Note: There is a slight subtlety if the claim is simply that through threatening to impose large tariffs, Trump could induce foreign nations to reduce their own tariffs. Yet there, it wouldn’t be a US tariff itself that brought prosperity, it would be the lowering of the foreign one. Someone who straps dynamite to himself and uses it to rob a bank might end up richer, but it’s not because blowing yourself up with dynamite boosts your productivity.)
For those who missed it, I encourage you to review my recent article and follow-up podcast episode laying out the classical logic for free trade. Nothing in the argument depends on an outside country obeying the same rules.
For an analogy, presumably Vivek agrees with me that hiking the minimum wage to $30/hour and enacting a “Green New Deal” would hamper US businesses and make Americans poorer (on average). This is true whether or not other countries are hiking their minimum wages or imposing their own GNDs. If other governments want to impoverish their people through misguided interventions into their economies—which admittedly do spill over and make Americans poorer too—the US government doesn’t help by adding its own inefficient interventions on top.
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together Whole Life insurance policies and digital blockchain-based issuance.
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