Tariffs and duties have dominated the news since Trump launched his trade war. Initially, he intended to raise tariffs on all countries that had tariffs or VATs with the US. However, Trump later revised his strategy and chose to keep the increased tariffs only against China.
Why does this stir up so many emotions? Many argue that tariffs are worse than most government interventions, even though we Europeans have near +20% municipal tax, +20% VAT, and other excise taxes. Why are tariffs so bad? After all, they’re just a type of tax. And we like taxes these days—even the right wing likes taxes. But why not tariffs?
Tariffs are seen as disrupting the global flow of goods and services and undermining free trade.
Can we really call the enormous web of agreements and regulations of our time “free trade”? True free trade is the absence of agreements. So, there’s a lot of ambiguity in this debate. Additionally, we have VAT, which also makes foreign goods more expensive, even though it hits domestic goods just as hard. VAT simplifies things for low-price countries but complicates things for high-price countries, whose goods become even more expensive.
Is free trade always right? Should we always strive for free trade?
The answer is no. Let me paint a simple example. Let’s say the fictional country of Borduria introduces a 10% tariff on Syldavia. This means that all goods from Syldavia become 10% more expensive in Borduria, encouraging the purchase of domestic goods instead of goods from other countries, such as Syldavia.
What should Syldavia do then? Should they just ignore that Borduria has imposed a 10% tariff and continue trading as usual?
No, they must respond with 10% tariffs on Bordurian goods. Why? Well, Borduria could use the revenue from its 10% tariffs to build a new and larger port facility, which would give them even greater trade advantages, and Syldavia would fall behind.
Therefore, Syldavia cannot ignore other countries imposing tariffs on them. If they don’t impose tariffs themselves, the competition could become asymmetrical.
If Syldavia, on the other hand, imposes 20% tariffs on Borduria, then there’s a problem. Borduria would then have to raise its tariffs even further. And then we’ve got a trade war, which at best ends in some kind of agreement and at worst in open conflict.
So, there’s no simple political or ideological formula to follow here. Even if we strive for simple trade without regulations, we must be vigilant about what other countries are doing, ensuring they don’t unfairly enrich themselves at our expense and gain undue trade advantages. We must always prioritize our own country first and not sit around pondering what’s best for global trade. No point in following some righteous ideology, if your own country gets left behind and becomes poor.
