29. Comparative Advantage
Comparative Advantage is an economist’s term that usually refers to the price advantage a foreign company has over a domestic one. The advantage typically manifests in a lower price and/or higher quality in a product or service offered. “Comparative Advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its Trading Partners.” (definition from Investopedia) Taking advantage of Comparative Advantage expands our wealth and welfare.
For example, Wrangler’s blue jeans are priced online from $24.99 to $109.99; however, imported knockoffs from China (as advertised on Alibaba) are $6 a pair. Using an average price of American-made Wrangler Blue Jeans of $45, a person would save $39 on each pair purchased from China. That would represent a significant Comparative Advantage that would enrich Americans. This advantage would allow an American to buy a coffee and breakfast sandwich at McDonald's for $5, a hammer on Amazon for $18.99, ten dollars of gas, and four pairs of Wrangler socks at Walmart for $4.99, with $0.02 change remaining. The Comparative Advantage from buying jeans from China would leave our consumer better off.
Trading with nations that have a Comparative Advantage to us always leaves American consumers better off. However, today, the government is increasingly placing taxes on imports, called tariffs. These taxes are intended to raise the price of imports to make them less attractive. Americans are forced to pay these tariffs imposed by our government should they buy an imported product with a tariff. The argument of our political ignoramuses is “make in America, save American jobs.” Let’s examine whether this makes sense. Suppose we have 990,600 American auto workers (Statista), and we must pay a 15% higher auto price by restricting Chinese imports. Over 52.2 million autos were sold last year at an average new car price of $47,000. The imports theoretically would save $7,050 per person, or $368,010,000,000 (368 billion), which could have been spent on other things or saved, significantly expanding wealth and welfare. A huge amount of wealth and welfare is being sacrificed annually by over 300 million Americans to pay more for autos by employing less efficient US auto employees, which will produce more inflation.
Each of the 52 million families that buy a car is paying an extra $7,050 a year to subsidize less efficient American auto workers.
Is it correct that “made in America” is a good thing for our economy? Or does it merely raise the American consumers' costs and add to inflation? What has happened in the past when we have imposed tariffs and restrictions on exports and imports? What about Consumer Sovereignty? Our basic guarantee that American consumers are the boss of their own money? Government tariffs and embargoes violate that basic right.
In August of 1929, the stock market collapsed, and the Great Depression began and would not end until 1941. There are a number of stupid things that our government did to try to end the depression that are debated, but there is unanimity of agreement that the Smoot-Hawley Tariffs passed extended the depression and made it worse. Why? “Although 1,000 economists recommended against it, Smoot-Hawley was passed on June 11, 1930. It raised already high tariffs by an additional 20%. Trade dropped by 2/3rds by 1932” (Britannica). “The Smoot-Hawley tariff act prompted retaliatory tariffs by many nations. The retaliation caused American exports and imports to drop by 67%” (Wikipedia).
We must remember that trade with other nations cements interdependent relationships as well as promoting individual welfare. To break these trade relationships with embargoes or tariffs causes anger and mistrust. In 1938, the US terminated its commercial treaty with Japan. In 1939, the US instituted a full embargo on exports to Japan in the Export Control Act. ”In 1940 the US imposed a gradual embargo of all militarily useful items with Japan... In mid-1941, Japan signed a neutrality pact with the Soviet Union... Faced with shortages because of the embargo and convinced the US officials opposed further negotiations, Japan’s leaders did the unthinkable on December 7, 1941, attacking Pearl Harbor” (Office of the Historian, US Government).
Can we make an analogy with what is occurring today with China by comparing it to what happened when we implemented tariffs and embargoes on Japan that led directly to our entry into WWII? We can and should.
Generally, our politicians have used tariffs and embargoes for “security” reasons; however, the inflicted costs of these actions are certain and twofold. First, they reduce our American standard of living by imposing unnecessary taxes, raising the prices of imports, adding irreparably to our nation’s inflation, and secondly, they alienate our trade partners and often isolate America, and have preceded conflict in the past.
The recent acts passed by Congress over the last five years, including the Chips Act and the Inflation Adjustment Act, among others, will prove to be highly inflationary and benefit only those close to the Federal Reserve’s printing and allocation, while impoverishing the rest of us. Placing tariffs and embargoes on our trade partners will only make this dreaded inflation more persistent. These tariff policies are supported by both Mr. Trump and Mr. Biden, revealing an insidious hypocrisy for both candidates. Leaving people worse off, more dependent, and more desperate.
Have a blessed week. Tony Christ