How to Turn International Trade into a Zero Sum Game
Tariffs and trade agreements are a complex subject and going down the rabbit hole can result in endless and ultimately pointless discussions. Strangely, tariffs and trade agreements are simply a game that ideally is beneficial to all and has no true winners and losers.
Trade is not a Zero Sum game where a winner takes all and the loser gets nothing. Trade is a Non-Zero Sum game, which means the amount switched between the winner and loser is not equal.
That means there are actually three game outcomes: Positive Sum, Zero Sum and Negative Sum games.
In a Positive Sum game the gain and loss balance is positive and both players can gain, and in Negative Sum games the gain and loss balance is negative and both players can lose.
It actually gets a bit more complicated, because it is possible for one player to make all the gains in a Positive Sum game and for the other player to incur all the losses, but that is subcategory that occurs under circumstances that are similar to a Zero Sum game and warrants no further discussion in tariffs and trade agreements.
Strangely, animals and humans tend to inherently act at the Zero Sum level; I eat you, I defeat you, I take something from you.
Zero Sum is brutal and, at best, results in a status quo and, at worst, result in massive destabilization. In a Zero Sum game I eat you, and then I eat your brother, and then I eat your sister, which will eventually result in a collapse once there are only eaters and no eaten. This occurs in nature all the time and is the reason why nature is so unstable. Yes, fellow tree huggers (I am one), nature is brutal and unstable. At any moment in time, it can be quite beautiful, but the moment you take your eye away and look back, you see it has changed. Often it swings back and forth, and occasionally it results in extinction or evolutionary changes. Change is constant and the best we can wish for is predictability of positive change.
Humans instinctually tend to be drawn to Zero Sum games. In America’s Cup racing Zero Sum is mostly harmless, but in societies, Zero Sum is useless and Non-Zero Sum games are the games that advance societies.
One of the things that distinguishes humans from animals is trade.
Trade is an advanced form of cooperation. Cooperation occurs naturally in nature (it is incredibly common, but is generally unnoticed), but trade is very rare in nature. Trade is a cooperative mechanism where the exchange of goods occurs due to varying values of goods over distance. If there are two countries that have identical assets such as food, tools, shelter, recreation, and health there is no reason for any trade to exist between two countries.
Only if one country has excess food and the other country has, say, excess tools is there a reason for trade to occur. In that case it becomes a Non-Zero Sum game. The exchange will increase the living standard in both countries.
And that is the magic of trade. However, Non-Zero Sum games are not inherently stable either, and it is important that trade gets managed and that is where tariffs come in.
In completely open trade, assets production will shift to the most efficient producer, but a country may decide they want to retain some of the production of some products and that can be managed through tariffs and subsidies and, in maritime, through cabotage.
It is easy to point at some of those arrangements as unfair, and to some extent they may be, but all trade games are inherently unstable and to manage the instability makes sense. However, to achieve positive sums almost all tariffs can only be temporary and gradual to increase predictability and facilitate soft landings.
An American straw broom manufacturer does not have to be clairvoyant to realize that there are less expensive manufacturers in other countries who, at some stage, may invade the American market. In general, that invasion will not happen overnight and the American broom manufacturer has many ways to deal with that threat. Some of those may be positive sum, she may decide to train her manufacturing personnel in sales and simply rebrand imported Mexican or Chinese brooms thereby increasing her sales volume and profit margins. On the other hand, to passively continue making brooms and incur losses until it is no longer possible to compete with imported brooms is just bad business sense and no different than losing out to a US competitor if any of those are left.
This also explains how tariffs can help. Surgically, it may be beneficial to place a tariff on imported brooms for a while to allow the US broom manufacturers to come in for a soft landing, but to keep tariffs in place perpetually simply turns the broom trade into a (handicapped) Zero Sum game, and nobody gains.
Tariffs can also be used to revive certain industries. Often those industries have a strategic military requirement. Weirdly, if trade were truly open and all nations trade on a cooperative and friendly basis there is no need for strategic military requirements.
However, trade can only occur if a country (or a region, or a state or even a town) has tradeable assets. Unfortunately, that is not always true. The United States is very lucky because, by luck of the draw, it inherently has gorgeous tradeable assets and that has made the US one of the wealthiest countries in the world. Other countries don’t have as many tradeable assets but obtain them by becoming traders like Venice or the Netherlands. And then there are the countries that really only have one asset; cheap labor. And if they were lucky enough to have logistical access to the richer parts of the world, trade will raise their standard of living and meanwhile, and here is the magic bit, it has also raised the standard of living in the wealthier countries. Richer countries could not have increased their wealth as quickly in a Zero Sum world and, mathematically, it is unlikely they could have increased their wealth at all without free trade.
Based on the above, the proper way to figure out tariffs is to start with zero tariffs and carefully manage tariffs on specific issues as needed.
When the ill-informed start to reach for massive tariffs, they do not lack an increase in wealth from trade between nations, but rather they suffer from a lack of proper distribution of wealth within the country, which is internal policy and not related to trade.
What happens when suddenly the door of international trade is slammed shut across the board with universal, instead of surgical, tariffs? The world turns from Positive Sum to Zero Sum and even to Negative Sum and everybody loses.
Across the board tariffs are not a magic fix, and anybody who thinks so, lives like an animal in a Zero Sum world; a world that inherently cannot get better.
From every column I write, MREN makes small donation to a charity of my choice. For this column I nominate AFS International Programs, a grass roots international student exchange program with one of the coolest origin stories.
