Trade Does Not Create A National Security Externality – The Daily Economy

Tariffs are the talk of the town. The Trump administration is advocating for tariffs on just about everything and everyone, employing various justifications — they will bring back manufacturing jobs, help us combat China, and improve US national security — to sell them to the public. The national security argument is popular among foreign policy and national security experts, but the way it is often framed is flawed, which leads to erroneous policy conclusions.

Supporters of tariffs and similar policies that curb trade to improve national security argue that citizens who engage in foreign trade do not adequately consider the impact trade has on the national security community’s foreign policy goals. From the foreign policy perspective, if tariffs help secure the nation e.g., make it easier for foreign policy officials to negotiate national security agreements, then tariffs should be part of trade policy even if they hinder the economic choices of individual citizens. In this view, the desire of individuals to trade with the lowest-cost provider of a good or service is only one consideration, and often it is of secondary importance to the security goals of the nation.

One example of this view is the idea of the ‘national security externality’. As the economist and former Member of the European Parliament Luis Garicano describes it:

The national security externality exists because private actors do not account for how their decisions affect their government’s bargaining power through resilience to conflict. When a US company imports cheap Chinese chips and builds infrastructure dependent on them, it creates a strategic vulnerability — a cost not reflected in market prices.

In this framing, private citizens impose an externality on government actors, whose bargaining power is reduced by the actions of private actors pursuing their goals while ignoring non-market costs. Because of this market failure, government officials are justified in imposing some restrictions or taxes (tariffs) on the international economic activity of citizens.

This framing is wrong. Externalities only exist if two parties with different objectives can impose costs (or benefits) on each other in ways that are not captured by relevant prices. In America, government exists to protect the rights of individuals, and government officials should have no interests or objectives of their own, separate from the citizens who empower them, that can be impacted by externalities.

As stated in the Declaration of Independence, it is the government’s duty to protect the rights of individuals. This includes the right to engage in commerce, including commerce with foreigners. In fact, one of the grievances that motivated the Declaration was “For cutting off our Trade with all parts of the world.”  If international trade makes obtaining a given level of national security more expensive, the government can communicate this to the citizenry and request more resources to properly conduct its charge. The externality framing, however, makes it seem as if the goals of the government and citizens are of separate but equal concern.

If instead the government is viewed as a means for protecting the rights of citizens, with no objectives of its own, then all the costs of national security can be internalized. Citizens, through the democratic process, then choose the proper level of national security and trade considering these costs. Tariffs may have a role to play in the solution, but they should be compared to other remedies such as direct taxation, and only if citizens concede that national security is in fact being underprovided.

A non-tariff example may help illustrate this point. Suppose someone mows my lawn for $50 per week. Now, my son has taken up an interest in croquet, and the hoops in the yard make the mower’s job more difficult. In response, the mower tells me he must increase his price by $25 per week to compensate him for the extra time it takes to navigate my yard with the hoops in place. This extra cost is not an externality. There is only one set of preferences here, mine, and the cost my child’s hobby imposes on the mower can be internalized by the price the mower charges. Similarly, if my preference to trade with international producers imposes a cost on the US national security apparatus charged with maintaining a given level of security, they can communicate this to me and charge me more in taxes. Alternatively, I may decide to pay the same in taxes and accept less national security. Similarly, I could keep paying the mower $50 and accept a worse lawn-care experience.

In short, there is no government with its own goals separate from its citizens on which citizens can impose an externality. There are only citizens who make choices that can increase or decrease the cost of providing for their national security. Constrained by these costs, citizens must determine the most effective way to protect their shared interests from belligerent actors.

Government officials are not a separate interest group that can just assume a national security market failure and then take unilateral action to correct it since the citizens may in fact be maximizing their welfare subject to a resource constraint. In economic jargon, there is only one production possibilities frontier and one national objective function, and it is through the democratic process that we decide where to lie on that frontier.