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Tariffs Will Make the Global Economic Collapse Much Worse: Part 2

By: Steve Johnson

3/26/2010 - 35 Comments

A growing number of politicians and economists are calling for an increase in trade tariffs, to reign in the unfair monetary policies and currency manipulations of other nations – namely China.

In Part 1 I started this discussion about why I don’t think tariffs are going to help us deal with the ongoing global economic collapse.

Chinese Currency Manipulation

The Chinese government is clearly manipulating their currency in order to keep as many of their citizens employed as possible.  At the same time they are hurting their people by reducing the value of their money through major inflation.  They are allowing the U.S. to export our inflation to them. 

This is why we have been able to get away with creating massive inflation by increasing the supply of dollars by the trillions, because other nations are buying up the dollars to keep their currencies from rising against the dollar in order to keep their exports shipping. 

This is why inflation is growing at 10%+ in many of the developing nations, while we have 0% inflation – yet the Federal Reserve is the primary source of global inflation.   

Both the U.S and China know that this policy has already lasted too long and a change in policy will not be easy for either nation to deal with, although China will clearly be more beneficial.

The day that China realizes that we cannot repay our debts to them and starts selling dollars will not be a good day for us.  Perhaps the day has already come, as China has been a net seller of Treasury Bills for several months.

China has done us a favor by allowing us to continue to create inflation much longer than we should have. 

Obama’s plan to double our manufacturing jobs in the next five years that he mentioned in his state of the union address will not come with higher paying jobs or a higher standard of living.  These jobs will come with a drastic drop in wages (or a drop in the value of wages by way of inflation) and living standards. 

China’s currency manipulation has put off the day of reckoning.  Increasing tariffs with China will cause them to stop doing us this favor.  Therefore, Obama doesn’t realize what he is asking for.  Tariffs will accelerate the global economic collapse. 

Tariffs or not, governments around the world need to drastically reduce spending in order to avoid a global bankruptcy.

Tariffs Are Taxes

Tariffs are a means to control prices and labor, just like price controls or wage freezes.  Central control of prices or wages always ends badly.  Labor and capital need to be free in order to find the businesses that can best serve the consumer.

In that sense, tariffs are just another form of economic central planning, which I have written about many timesGovernment central economic planning hinders capitalism by reducing capital and production and results in wealth destruction. 

Wealth is best created when labor and prices are free.  Tariffs reduce global wealth.  

The global economic crisis is not going to be solved by reducing global wealth.  Tariffs are only good for a small group of people for a short period of time.

What the world needs is sound money (backed by gold), then a reduction in government debt, and a reduction of government controls (tax and regulation) to unleash capitalism (free labor, wages and prices) throughout the world. 

Obama supports tariffs just as he supports higher taxes, because they temporarily create more income for the government, at the expense of the people as we pay higher prices for goods.

Tariffs are just another form of taxes, which result is even less jobs as the businesses that the tariffs are protecting go bankrupt.

The real issue with our trade problems are the massive increase in money that we continue to create (inflation) and export in exchange for goods and services.

The source of our demand to continue to create new money (inflation) is our ever expanding government.

If we stopped creating inflation, China wouldn’t be able to continue vendor financing our consumers to buy their products and we wouldn’t be in this situation to begin with.

Tariffs don't protect jobs or wages. The only real solution to our trade problems is to stop printing money and reduce the size of our government so that the dollar strengthens in value rather then continues to weaken.

International Trade Agreements

Another complicated issue related to tariffs is the threat of national sovereignty that large scale international trade agreements like NAFTA and CAFTA create.  This is where free market economists struggle to agree. 

The WTO (World Trade Organization) and the International Trade Organization were created after WWII.  But many of the large scale international trade agreements they have helped to create over the last several decades threaten national sovereignty because they put the authority to trade in the hands of the international community.

Therefore many of these international trade agreements are actually unconstitutional because they give away our authority to regulate commerce – which the U.S. constitution clearly grants only to Congress.  Here is an article by Ron Paul that further explains. This is also why Ron Paul is sometimes accused of being in support of tariffs, which he is not.

Most international trade agreements are disguised as free trade agreements to gain political support for their passage.

These international trade agreements do not support our freedom, they oppose our freedom.  And their underlining principle is to control labor and prices – much like a monopoly.  Therefore they are not in our best interest.  They do not represent free trade because free trade occurs in the absence of government interference of the flow of goods.

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