Philosophy Discussion Forums | A Humans-Only Club for Open-Minded Discussion & Debate

[Fried Egg]

With recent events in America tariffs being imposed at varying rates across the board, I think a focused discussion on the subject of tariffs would be useful.

Technically, a tariff is a tax on imports, that is paid by the importer of the goods subject to a tariff. Although precisely where the economic incidence of tariffs fall is up for debate. i.e. If the importers are able to pass on the cost of the tariff to somebody else, then it is not really them that the burden of the tariff falls. But where this burden falls might have a significant impact on whether you think tariffs are a good idea or not.

Historically, the USA funded the federal government largely through tariffs, back in the days when there was no federal income tax. Since the 30's this has changed and tariffs have largely fallen away in favour of other tax raising methods until now, where some might say America is returning to it's historic norm.

So what are the benefits and costs of tariffs and how does this vary over time?

Personally, being of a libertarian leaning, free market advocate, I have not been in favour of them and see them as a bad idea. The division of labour across the globe has lead to specialization and higher productivity on a global level although one must recognise that there has been localised negative effects on areas that now find themselves bereft of traditional industries. David Ricardo's theory of comparative advantage makes the argument why each country is better off specialising and only producing the things it is best at rather than trying to produce everything itself.

But I've heard criticism of this argument along the lines of the fact that it makes no consideration of future possible comparative advantage. i.e. Taiwan didn't start off in the 70's with a comparative advantage for producing microchips. It was a deliberate (industrial) policy to develop this industry that it eventually developed a comparative advantage for. It didn't just stick to it's existing comparative advantage in rice and fishing. So perhaps tariffs are needed to help protect certain industries while they develop?

This is know as the "infant industry" argument. Protect developing industries against established global competitors with tariffs (and perhaps subsidies) until they have developed enough to compete. But even if this is true, it doesn't completely undermine Ricado's argument. We are still better off specializing and not trying to produce everything for ourselves.

Are trade deficits inherently bad? It seems to me that Trump believes that the very existence of a trade deficit is bad, evidence of a country "ripping off" the US. But is that always the case? Not all industries can be re-located to inside the USA. Madagascar for instance exports a lot of vanilla to the USA. That can't be grown in the US so has to be imported. They are also so poor that they can hardly afford to buy anything the US makes. It is hard to characterise them as "ripping off" the US just because they have a trade deficit.

Will tariffs help bring back industry that has moved abroad to exploit cheaper labour? Will it lead to higher prices for consumers or might that only be in the short term? And if other countries retaliate, will that negate the benefits, leading to everybody becoming worse off?

[Sy Borg]

Global specialisation is efficient but it can pose national security risks. I can understand the US wanting to not be dependent on China for essential medicines or iron products. The west has been most supportive of China and other nations, ignoring IP breaches, but China has been nothing but aggressively competitive in response. If China wants to play hardball, it would be naive for the US to be soft in response, as has been their usual approach with China. The US is not so far ahead that it doesn't need to try and compete.

Whatever, the US's debt is so wildly out of control, something had to be done. It will instructive to see how it plays out.

[Pattern-chaser]

Are trade deficits inherently bad?

I have little knowledge of the details of how international trade works. But I admit my first thought, about this topic, and about tariffs in general, is your question here.

If some nation makes stuff that you want to buy, then you will have a trade imbalance unless you make something *they* want to buy. In practice, this seems to say that trade imbalances will occur, perhaps quite often?

And, as you ask, why is this necessarily bad?

[Fried Egg]

Global specialisation is efficient but it can pose national security risks. I can understand the US wanting to not be dependent on China for essential medicines or iron products. The west has been most supportive of China and other nations, ignoring IP breaches, but China has been nothing but aggressively competitive in response. If China wants to play hardball, it would be naive for the US to be soft in response, as has been their usual approach with China. The US is not so far ahead that it doesn't need to try and compete.

It's interesting to see that China doesn't see the US tariffs as a response to previous crimes, which is why they are matching the US tariffs.

It does raise the question, what's the best response to another country that imposes a tariff on your imports to it?

Imagine you are a company operating in China that exports most of it's produce to America. It is precisely these sort of companies that the US wants to entice back to America with the threat of tariffs. And if the tariffs are high enough, that's precisely what might just happen. But does it make a difference to your calculations if China imposes a reciprocal tariff? I would say not because the company sells little (or none) of it's produce to Chinese consumers. Chinese tariffs imposed on American imports will have no effect on it if relocates to America.

Whatever, the US's debt is so wildly out of control, something had to be done. It will instructive to see how it plays out.

Do you think that budget deficits are tied to trade deficits then?

[Fried Egg]

Are trade deficits inherently bad?

I have little knowledge of the details of how international trade works. But I admit my first thought, about this topic, and about tariffs in general, is your question here.

If some nation makes stuff that you want to buy, then you will have a trade imbalance unless you make something *they* want to buy. In practice, this seems to say that trade imbalances will occur, perhaps quite often?

And, as you ask, why is this necessarily bad?

Firstly, I would say that individual trade deficits between any particular pair of countries don't matter. It's possible that it balances out over all. i.e. Country A has a deficit with country B, which has a deficit with country C, which in turn has a deficit with country A.

Secondly, a trade deficit with the rest of the world is only possible as long as other countries are willing to hold on to your currency in reserve (or buy American assets with it). Otherwise the value of your currency would fall, making your goods cheaper for everyone else (and their goods more expensive for you) and the trade deficit would balance out.

This is a particular problem for the USA who's currency is the international reserve currency. It is held by governments, central banks and financial institutions around the world that use it to settle cross border transactions. It is seen as the ultimate safe haven. Hence why the dollar doesn't devalue in response to a rising trade deficit with the rest of the world.

But is that bad? In some ways, it has been beneficial for America. It has allowed them to borrow and spend way beyond their means because US treasury bonds are always in demand. Which suggest a link between the trade and budget deficit. But it seems that American goods will always be overpriced compared to foreign goods due to the fact that currencies are prevent from re-valuing.

Does America have to trash it's own currency in order to bring it back into trade balance? So much so that it is no longer considered the international reserve currency? But what happens then?

[Sy Borg]

Global specialisation is efficient but it can pose national security risks. I can understand the US wanting to not be dependent on China for essential medicines or iron products. The west has been most supportive of China and other nations, ignoring IP breaches, but China has been nothing but aggressively competitive in response. If China wants to play hardball, it would be naive for the US to be soft in response, as has been their usual approach with China. The US is not so far ahead that it doesn't need to try and compete.

It's interesting to see that China doesn't see the US tariffs as a response to previous crimes, which is why they are matching the US tariffs.

Xi would never admit to doing anything wrong because China is so perfect in every way (sic).

It does raise the question, what's the best response to another country that imposes a tariff on your imports to it?

Imagine you are a company operating in China that exports most of it's produce to America. It is precisely these sort of companies that the US wants to entice back to America with the threat of tariffs. And if the tariffs are high enough, that's precisely what might just happen. But does it make a difference to your calculations if China imposes a reciprocal tariff? I would say not because the company sells little (or none) of it's produce to Chinese consumers. Chinese tariffs imposed on American imports will have no effect on it if relocates to America.

All of this will ultimately lead to more companies abandoning China and moving to the US, which is the intent of tariffs. Xi's capricious and authoritarian approach had already made China less attractive to the west. The US took a lenient approach to China's constant theft of US IP to help them catch up and modernise, assuming that modernising would bring more freedom and democracy. Since that's not happening, there's no need to mollycoddle China over its blatant theft.

More disturbingly, if a nation is spoiling for war as much as China is (recently saying they are "ready for any kind of war with the US"), then it is absolutely essential for the US to move its companies from there, and to avoid relying on their products. To do otherwise, would be national suicide (hence the anti-American Marxist side of the media being so vehemently against tariffs).

There seem to be three main angles - to bring more manufacturing (especially high end) back to the US, to use the tariffs as a bargaining chip in negotiations, and the geopolitical angle - to stop prioritising cheap goods over national strength/security.

Whatever, the US's debt is so wildly out of control, something had to be done. It will instructive to see how it plays out.

Do you think that budget deficits are tied to trade deficits then?

I don't know enough to answer this so I asked AI:

The U.S. trade deficit with China—$419 billion in 2022, per the Census Bureau—means the U.S. buys far more from China than it sells. This sends dollars abroad, which China often recycles into U.S. assets, like Treasury bonds. Those bonds fund U.S. government borrowing, which sustains budget deficits—$1.7 trillion in 2023, per the Congressional Budget Office.

Essentially, China’s trade surplus fuels its purchase of U.S. debt, enabling Washington to spend beyond its means.
This dynamic creates a feedback loop. The trade deficit boosts foreign demand for U.S. debt, keeping interest rates lower than they’d otherwise be. Lower rates make borrowing cheaper for the government, encouraging larger budget deficits. Conversely, budget deficits stimulate U.S. consumption—through tax cuts or spending programs—which increases imports from China, widening the trade deficit further.

However, it’s not all one-directional. Other factors drive both deficits. The trade deficit stems partly from U.S. consumers’ appetite for cheap goods and decades of offshoring manufacturing. The budget deficit reflects domestic choices—tax policies, entitlement programs, defense spending—that aren’t directly tied to trade. China’s currency management and subsidies also play a role in the trade imbalance, but they don’t dictate U.S. fiscal policy.

Critics of this link argue it overstates China’s influence. The U.S. could reduce its budget deficit without touching trade, and trade deficits persist globally without always correlating to fiscal woes. Still, the recycling of trade surplus dollars into U.S. debt markets creates a symbiotic relationship that’s hard to ignore.

So, yes, there’s a connection—trade deficits with China indirectly facilitate budget deficits by funding U.S. borrowing. But it’s one piece of a complex puzzle, not the sole driver. Reducing either deficit would require tackling deeper structural issues, like consumption patterns or entitlement spending.