I had an exchange on Twitter with a fellow with whom I ultimately agreed, although he had to correct me on a simple premise. And in that exchange the following issue came up.
Imagine there is a small country, call it Britain, that suddenly finds itself facing tariffs from – for the sake of simplicity – ALL its trading partners.
We assume that such a country will levy retaliatory or offsetting (no need to be normative) tariffs against its trading partners. The purpose of this post is actually to challenge that assumption, but bear with me.
There are two reasons Britain might raise tariffs in this context. The received view, I think, is that she does so to gain “leverage” against the trading partners, so that she might win in negotiations to get them to drop their tariffs, after which she will gladly drop hers. Gladly is key. Please internalize that.
In other words, Britain levies tariffs even though she realizes that doing so hurts her, up until the point where her trading partners respond and do the right thing. This is the free trader’s case for strategic trade policy.
The second reason is that policy makers in Britain, responding to whatever incentives you might imagine, make the judgment that even without strategic considerations, they would prefer to have tariffs, particularly if the other country does. This distinction may seem nuanced. The point is that the purpose of the tariffs is to achieve something presumed desirable and not just influence the trading partners.
I want to throw on the wall the idea that the second reason is the real reason. The first reason might apply to a big consequential country that has leverage to bring to bear. But for a small economy with little leverage, it seems the less likely argument.
And if that won’t stick, then I want to ask, why are people so confident that the world of small countries is actually governed by the first reason?
I mention this imaginary scenario because the British Tories are implying that upon Brexit they may have to go with high tariffs against the EU. Apparently, WTO rules require this, unless Britain reduces tariffs against everybody. So then, why don’t they just unilaterally disarm? And why do they pretend they have no choice, when they clearly do?
The more general point here is the world is not actually governed by countries desperately wanting to eliminate tariffs and retaining them only to encourage other countries ultimately to join them. Rather, policy makers (like people generally) don’t actually buy the simple (ex-strategic-consideration) case for unilateral trade disarmament.
With low confidence, I would guess they should buy that case, because it is probably correct. But before you can have the debate, I think you would have to recognize that that is actually the issue.