2nd Market Economy Colloquium: The Fallacy of Country-Firstism

2nd Market Economy Colloquium

Date and Time: 11:00 a.m., January 17, 2025, Venue: Yeollim Hall

Topic: The Error of National Prioritism

Presentation: Youngyong Kim, Emeritus Professor, Chonnam National University

Discussion: Hyeokcheol Kwon, Director, Free Market Institute; Haengbeom Kim, Emeritus Professor, Pusan National University; Jaewook Ahn, Chairman, Center for Free Enterprise (CFE); Sung-no Choi, President, Center for Free Enterprise (CFE)

The Error of National Prioritism

Youngyong Kim, Emeritus Professor, Chonnam National University

Donald Trump, who will be inaugurated as the 47th President of the United States on the 20th of this month, is advocating America First under the slogan “Make America Great Again (MAGA).” As part of this, he plans to impose a 60% tariff on China and tariffs of 10–20% on other countries in order to curb exports to the United States.

But is imposing tariffs really a measure that helps MAGA?

Politicians often favor tariffs, which tax imports, or quotas, which limit import volumes, because they believe such measures protect domestic industry and jobs. But this is wrong.

First, if the United States imposes a tariff on Hyundai cars from Korea, the price of Hyundai vehicles in the United States rises. Of course, the tariff is paid by Hyundai to the U.S. government. Since the tariff raises Hyundai’s U.S. price, the relative price of similar American Ford vehicles compared with Hyundai falls in the short run. As a result, U.S. demand for Ford cars increases, Ford earns higher profits, employment rises, and workers’ wages go up. At first glance, the politician’s claim seems correct, because the gains enjoyed by Ford and its workers are plainly visible.

But the story surrounding tariffs is not so simple. Invisible long-term losses offset short-term gains and harm the country as a whole.

As demand for Ford cars in the United States rises, prices increase and production expands. But the increase in Ford production does not match the reduction in Hyundai imports. Now, as car prices in the United States—both Ford and Hyundai—rise, American consumers buy fewer cars. As a result, the benefits American consumers derive from using automobiles decline.

Next, while employment at Ford rises and wages increase, other industries in the United States decline and employment falls. This is because Korea earns fewer U.S. dollars from exporting Hyundai vehicles to the United States than before, so the number and quantity of products Korea imports from the United States decline. A tariff intended to protect the automobile industry thus ends up reducing production and employment at many other American firms. Companies specialized in exporting to Korea may even face existential threats.

However, these effects, which are spread across many industries, are not easily seen, because it is not obvious which company is affected and by how much.

Of course, some workers will move to Ford, but their productivity at Ford will inevitably be lower than it was in their previous jobs. In other words, resources within the United States are allocated inefficiently.

Quotas produce the same result. The only difference is that under a tariff, the tariff paid by Hyundai becomes revenue for the U.S. government, whereas under a quota, the increase in Hyundai’s U.S. price becomes income for the American importer.

Voluntary export restraints (VER) produce the same result. A voluntary export restraint means that Hyundai agrees with the United States on a fixed quantity it may export—for example, the amount it would be allowed to export under tariff or quota restrictions—and this can also serve as a way for politicians to avoid the risks that come with explicitly supporting tariffs or quotas. The difference from a quota, however, is that Hyundai can capture all of the increase in its U.S. price as income. In other words, the income that would go to the U.S. government under a tariff or to the American importer under a quota instead goes to Hyundai under a voluntary export restraint. Thus, if Hyundai cannot avoid U.S. tariffs or quotas, it is more profitable for it to choose a voluntary export restraint.

In addition, if the United States imposes tariffs or quotas, including voluntary export restraints, Hyundai can build factories directly in the United States and produce there. This is in fact what the U.S. government wants. But again, the impact on the U.S. economy is the same as in the case of tariffs or quotas, because newly built Hyundai plants create jobs related to the auto industry in the United States, not jobs for the U.S. economy as a whole.

If the United States abolishes tariffs and quotas and adopts free trade, U.S. imports of Hyundai vehicles will increase, and accordingly the variety and quantity of goods the United States can sell to Korea will increase, creating more jobs in the United States. In other words, even if the United States uses protectionist measures such as tariffs and quotas to compel Hyundai to build factories in the United States, the overall effect on the U.S. economy is negative.* Of course, this too is not readily visible.

Finally, tariffs and quotas protect the U.S. automobile industry from import competition, which leads Ford to neglect new discoveries and innovation and to lose its creativity. Competition is a process of discovering new knowledge. The fact that countries that relied on competition to discover new knowledge prospered clearly shows this.

In the end, protectionism in any form only harms the U.S. economy. This happens because the opportunities lost over the long run through tariffs, quotas, and the like are not easily visible. Moreover, the contraction of trade shrinks the size of the economy in the United States and all other countries and reduces individuals’ quality of life. Therefore, protectionism is a path that leads not only one country but the entire world into poverty.

If the United States engages in protectionism, then, should Korea do the same?

Trade is exchange between countries. Exchange is an act through which I receive from someone who can produce at lower cost than I can a product I do not have or would find costly to make for myself, while I give the other party a product that they do not have or would find costly to make for themselves, but that I can produce at lower cost. This means that the purpose of exchange is to receive, and the purpose of trade is imports. Since one must give in order to receive, and must export in order to import, exchange is an act of giving and receiving.

Therefore, even if the United States adopts protectionism, it is in Korea’s interest to maintain free trade. Of course, as time goes on, it will be impossible to avoid a decline in trade volume and the resulting impoverishment of all countries.

* The portion of the U.S. dollars earned by Hyundai at its U.S. factories that is remitted to Korea as profits can increase U.S. exports to Korea and thereby increase jobs in the United States.

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Original title: 제2회: 자국 우선주의의 오류

Author: Market Economy Colloquium

Date: 2025-01-17

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=collo&pn=1&idx=27275