Alternatives to tariffs

June 14, 2019

Those who don't trade goods trade bombs.

In other words, perhaps the greatest peacemaker of all time has been free trade. When people around the world both know each other and are bound to each by trade, they form affinities and dependencies that politicians cannot disrupt.

Americans' economic literacy has increased over the past century, and with it support for tariffs has plummeted. Tariffs have not worked historically and they will not now. Much like a market, a political conflict has two sides, and when the conflict is heavily publicized, no leader is going to be humiliated.

It's important to understand that a tariff is a tax. The government adds a price to a good, and that incremental price goes to its coffers. If you don't like taxes, you shouldn't like tariffs. The tariffs the United States is imposing now are one of the largest tax increases on its citizens in decades.¹

It's also important to understand that a tariff is antithetical to a free market. It allows the government to pick and choose winners. You can see this in the shoe industry as they write sycophantic letters to this administration, begging that their one industry be released. This behavior is more akin to communism than free markets. So if you like freedom, you shouldn't like tariffs either.

Historically, and now, it is common for a political leader to use a tariff to fear-monger, to divert attention from real issues, or to bend the scope of a problem and blame it on foreigners. That is almost all of what is going on today.

But there is one issue that is real, and that is the one that I want to address. By real, I emphasize that it is not important in the scale of important problems our country faces. It's frankly minor in that regard - there are many that are more pressing. But it's interesting academically, and it affects one industry disproportionately.

That is the issue of intellectual property theft cross-borders, as currently practiced by China. This primarily affects the high-tech industry.

Historically, we know that tariffs won't work. We also know that if you brow-beat someone into a pact, they will sign it and then cheat anyway, so nothing will be accomplished except politicians saving face. So what are realistic options? Here are two.

1. Take inspiration from the open source software movement. Several years ago Tesla open-sourced all of its patents. Why? Did Elon wake up and decide today was charity day? No, they open-sourced to intentionally create a larger electric vehicle industry, because they wanted more scale in their supply chain to lower costs. Smart businesspeople have figured out that you can create much more wealth, and much larger markets, but giving much of your business away. This is why we don't pay for each search on Google - though that idea was often discussed in the early 1990's search engines.

Open-source software companies give a portion away and build services on top of it. They assume they will always be moving faster than the folks copying and following, and that the revenue lost in the product is recaptured in market size increase. You can view international technology the same way.

2. Stop fighting in a "red ocean" of conflict,² step back, and reframe the approach. Realize that the people building the technology are more valuable than the technology itself. Robin Li grew up in China, determined to get to the United States. He did, and was educated here with a PhD in computer science. For various reasons, after September 11th we lost him and he returned to China and built the largest search engine in Asia. Losing Robin Li was arguably orders of magnitude more important than having some technology reverse-engineered.

If we focus on attracting bright, productive immigrants, we'll create a competitive system. And a system is tough to copy.

Dan Cunningham

1. CNBC 5/16/19: The tariff tax increase
2. The reference above to a "Red Ocean" is from the book "Blue Ocean Strategy."