Free trade and tariffs

Peter Theil was interviewed recently by Florian Schwab. Theil talks at one point about free trade and U.S. tariffs. I’m highlighting that exchange here because I’ve been trying to understand the relationship between an interest in free trade on the one hand, and the usefulness of tariffs to advance national policy on the other:

People are shocked by his imposition of tariffs.

At the center of this is the question with China. The US exports something like 100 bn a year to China, we import 475 bn. What’s extraordinary, is that if we had a globalizing world, we would actually expect the reverse to hold: you would expect the US to have trade surpluses with China and current account surpluses because we would expect that there is a higher return in China because it is a faster growing country than the US. This is what it looked, let’s say, in 1900, when Great Britain had a trade surplus of 2 percent and a current account surplus of 4 percent of GDP. And the extra capital was invested in Argentinean railroads or Russian bonds.

Clearly, today things are different.

The fact that the US does not have a surplus, that actually it has a massive deficit, tells you that something is completely wrong with the standard globalization picture that we have. It is sort of like: Chinese peasants are saving money and it is flowing uphill into low-return investments in the US and bonds in Europe with negative interest rates. There is something completely crazy about that dynamic.

What’s the problem with China?

It is certainly massive tariffs in China, trade barriers, informal controls, intellectual property theft, incredible restrictions on capital investments – it’s extremely hard to invest in China in any way whatsoever.

Still, free trade is a good thing.

In theory you always want to have free trade. I think it was Adam Smith who said that any country endowed with harbors would never throw rocks to them to make them not functioning. That is certainly the common sense dynamic. However, we are incredibly far from that world. And even if you are a doctrinaire, pro free-trade person, there is also an argument: How do you get from an unfair, partial free-trade to more free-trade? Maybe, there is a game theory and if you want to reduce barriers everywhere, you first need to impose tariffs, you have to escalate to de-escalate.

A paradox of free trade is that it isn’t free. It requires international organizations, it requires trust and enforcement mechanisms, it requires highly stable trade routes regulated by military powers, etc. Free trade and tariffs both seem useful to me insofar as they advance national policy or shared allied policies.

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