Co-editor and Economics professor (who happened to predict the economic crisis of 2008 in a book a year before it happened) Fred Foldvary makes a very important point regarding some of the common fallacies associated with trade deficits and tariffs:
The reason the US has a big trade deficit is that US taxes make exports more expensive. Most other countries have big value added taxes, which get subtracted from export prices. WTO rules allow for the deduction of VAT but not of income taxes from exports. If the US shifted from income taxes to either VAT or LVT (land value taxation), the trade deficit would largely disappear.
But given current taxes and WTO rules and the trade deficit, high tariffs on imports would destroy US comparative advantages, artificially boosting high-cost industries. The US would have to abandon the WTO, and other countries would retaliate with tariffs against the US.
If California has a big trade deficit with New York, would a tariff against imports from NY help? If not, then a tariff against China is likewise counterproductive. The law of comparative advantage works regardless of borders. I have a big trade deficit with my local grocery store; I import their food and they get no products from me, only a money asset. Would a tariff on the food store’s exports help me? Sure I would buy less of their food, but I want their food, and I want it cheap!
Two things I would like to draw attention to in this great piece of insight: 1) income taxes are horrendous and 2) the avowed internationalism of the freedom message. I would like to repeat a basic insight that Dr. Foldvary provides to readers: “If California has a big trade deficit with New York, would a tariff against imports from NY help? If not, then a tariff against China is likewise counterproductive. The law of comparative advantage works regardless of borders.”
One of the best ways to tell a “real” libertarian from a “fake” libertarian is the defense of internationalism that is given for any argument. Nationalism is a vulgar and often extremely harmful way of thinking and has destroyed countless lives and restricted countless others from attaining affluence and dignity. It feeds the growth of the State at the expense of the individual and contributes to malice in foreign affairs. The concept of international trade as it is spelled out by Dr. Foldvary is especially important. Also remember, if you have any questions regarding subjects, don’t hesitate to ask. This is a blog run (mostly) by intellectuals, and one of the goals of this consortium is to help educate the intelligent layman on sophisticated subjects.
“The individual is core in a democracy, and the process should not be beyond his reach, or overwhelm him so, that he may not select his representative by reason, or further recognize intrusion on his or his neighbor’s liberty. The people are the ultimate check and balance on the system, but if they be separated from it, the scales will continually tip toward tyranny.”
I highly recommend reading the whole ‘comments’ section.