Leopold on supply chain independence

Leopold said when he started his new blog that he would be thinking long-term. He has managed to stop staring at footage of the capital raid last week and produced a forward-looking blog. He is not the first person to speculate that the US has a vulnerability in its reliance on the country we buy the most stuff from.  

Free trade is awesome. Something that is going to link together all EWED writers is a common respect for the power of trade to make lives better. Consumers who have access to world market can have much more great stuff. Enjoying your chair, or your phone, or you lightbulbs right now? It’s great to have access to more stuff and be able tot get it cheaper.

However, there are those who worry that if country A abandons domestic production of widget B, then in the unfortunate/unexpected event of a war, country A will be in trouble. For example, it would be concerning for a military power if they are not able to make any steel themselves.

Should country A use tariffs to stimulate domestic production? Tariffs really bother economists. Tariffs bite into the wonderful benefits of free trade. Since I talk to economists, I have heard a lot of arguments against tariffs. Leopold makes a novel argument against using tariffs to advance national security interests.

The problem with tariffs, however, is that they are royally ineffective at reducing the security vulnerability we are concerned about. A general tariff incentivizes onshoring the production that is cheapest and easiest to onshore—but it is likely the imports for which onshoring would be the most expensive and difficult that present the greatest security vulnerability, as I will explain.  In the language of economics, I argue that the imports that present the greatest security vulnerability are those with the most inelastic import demand—while a general tariff most reduces those imports with the most elastic import demand.

I propose an alternative approach: general per-product quotas. These would better target vulnerability than a general tariff.

Instead of having tariffs, require that a certain number of several products be made domestically. That would be expensive, but we already put up with huge losses from tariffs. We already spend hundreds of billions of dollars on defense. The question is not whether we are going to spend money on defense. How can we spend money in the smartest way that recognizes how markets generate information? Think about the government buying 1,000 digital watches made on a friendly supply chain, and also dispensing with some costly tariffs.

Note that Leopold, if I understand him correctly, uses the word quota to mean that the government will buy a block of domestically produced goods at above-world-market prices. This is different from the way “quota” is sometimes used in international trade. See this MRU video narrated by Alex Tabarrok for a discussion of import quotas versus tariffs, a separate topic.

One thought on “Leopold on supply chain independence

  1. Leopold January 19, 2021 / 8:27 am

    Joy, thank you so much for your kind words! 🙂

    I think you put it very well. If we going to incur these large costs by restricting trade on national security grounds, we should actually target the trade restrictions in a way that advances national security!

    Related to this, you might also enjoy this paper (and podcast) by Josh Hendrickson on the much-maligned Jones Act; he argues that Jones Act fulfills an important function by subsidizing the merchant marine. I thought it was interesting. (H/t Basil Halperin) https://economicsdetective.com/2020/02/maritime-policy-and-the-merchant-marine-with-josh-hendrickson/

    Like

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