Tariff for world trade could properly be import transportation cost minus difference between import price and domestic production price

Note: to understand this post, it may be necessary to read yesterday's post, 'Transportation costs of imported products can result in cheap imports damaging the overall world economy' ( http://davidvirgil.blogspot.com/2009/04/transportation-costs-of-imported.html ).

Let: Xaw = wage cost in foreign low-wage land for production of product Theta; Xat = transportation cost to move product from location Xa to location A; Xa = wage cost in location A, the high-wage homeland; wdiff= Aw - Xaw.

when the alternative of production in location A the high-wage homeland is used, the money spent producing product Theta, is an amount equal to Xaw, what would be paid if product Theta were to be produced in location Xa, plus wdiff, which is the difference in wage cost between high wage location A and low wage location Xa.

When the alternative of production in location Xa the foreign low-wage area is used, the money spent on product Theta, is Xaw the wages paid to the workers at location Xa, plus Xat, the money paid to transport the product Theta from location Xa where it is built to location A where it is sold.

Thus in the equlibrium condition when Xaw + Xat = Xa, an important comparison becomes wdiff compared to Xat.

Xat money is spent on employing persons to engage in unnecessary busy-work type activity that does not contribute anything to the quality or quantity of product Theta.

Wdiff represents money spent donated or invested by workers in high wage location A, using the money as they see fit; this is money spent on necessities, pleasures, errands of conscience.

Looking at the world as one being, conceivably in one case Mr. World is engaged in moving things from one place to another for no good reason, using time and energy he does not need to expend on moving things from one place to another; and Mr. World is not doing this not because he enjoys moving things from one place to another or because moving things from one place to another accomplishes anything.

In the other case, Mr. World is enjoying purchasing goods and services he wants to purchase or needs to purchase.

It can be a shocking surprising thing, the realization that in the state of equilibrium, in equation terms Xaw + Xat = Aw, the alternative involving production of product Theta at location A the high wage location is superior to production at location Xa the low wage location, from the total world economy perspective.

What one naturally expects, is that in the state of equilibrium, Xaw = Xat = Aw, the production in location Xa and production in location A alternatives, would have equal impacts on the world economy as a whole.

The concept that in the state of equilibrium the produce-in- location-A the high wage location alternative is superior in terms of impact on the global economy, hits the mind and the world like a bolt of lightning; similarly Einstein and others were and still are shocked and surprised by the concepts Einstein's equations pointed to.

The importance of, equationally speaking, location A being superior from the global perspective should not be underestimated, because it leads in the direction of the world becoming competent in the art of applying the proper level and type of transportation-inhibiting tariff; this compared to the world being relatively speaking much poorer, as it is in its present beknighted condition, due to its belief that in ( Xaw + Xat = Aw ) equilibrium type conditions no tariff should be applied.

Tariffs applied to equilibrium ( Xaw + Xat = Xa ) or near-equilibrium conditions would have the maximum beneficial effect on the world's economy, if tariff were to be applied in the right amount.

Looking at and using as a basis the equilibrium equation, Xaw + Xat = Aw, I produced a first estimate regarding what the tariff applied to conditions of near-equilibrium or equilibrium ( Xaw + Xat = Aw) should be.

The first estimate, is that a tariff placed on generally speaking all imports in the world should be:

Xat which is the cost transporting product from Xa to A, MINUS Pdiff which is the difference in price when produced at location A compared to location Xa; Pdiff = Aw - (Xaw + Xat).

This tariff may not be perfect from the impact-on-world-economy or fairness perspectives. However extremely complicated, verbose, unpredictable tariff laws that are constantly tinkered with, and that vary enormously from location to location and product to product, have their own disadvantages which could easily outweigh the disadvantage of a very simple, consistent, comprehensible, easy to work with tariff.

Plug in various possible numerical values for Xaw, Xat, Aw, and you get impressive results. Try 6 to 9 for Xaw, 1 to 3 for Xat, Xa held steady at 10.

As the Xaw + Xat falls below Aw, the tariff declines to zero.

As the cost gap between the cheaper Xaw + Xat and the more expensive Aw increases, the tariff declines to zero, in honor of price of the import being respectably low compared to the price of domestic production (this could satisfy the free-market purists & unleash positive free-market forces). This allows for a certain level of downwards pressure on the home nation's wages, symbolized as Aw.

With the Xat MINUS Wdiff tariff, as Xat declines, the tariff declines to zero; this promotes trade with importers whose transportation of product costs are low.

The greater Xat - Pdiff is, the higher the tariff is; and as Xat - pdiff declines to zero or a negative number, the tariff declines to zero.

Thus the Xat - Pdiff tariff is directly proportionate to the Xat - Pdiff result, which is the equation I established, which measures the extent to which using imports instead of home production has damaged the global economy, by balancing transportation cost of a imported product against the extent to which the product is cheaper when imported, compared to when domestically produced.

The Xat - Pdiff tariff, would, I now estimate, dramatically and quickly boost the world economy; at the same time, its structure is such that it bends to the winds of free market doctrine, and is unlikely to economically damage the world through excess of tariff. Thus I now see the Xat = Pdiff tariff as an ideal solution for the global economy; it is a tariff that can with ease and simplicity be applied to all imports everywhere.

Note: by transportation costs, Xat, I mean those incurred due to production in location Xa, that would not be incurred if production was at A; factors omitted from the equation are assumed to be the same in both locations Xa and A; the concept can be further developed through inclusion of omitted factors; the equation can be considered with costs defined on the basis of man-hours put into production or transportation, as opposed to money wage costs.

@2009 David Virgil Hobbs

Non-minimal production cost production locations better for planet than minimal production cost production locations--an example

Roughly speaking, traditionally the majority opinion amongst economists has been, that buying product X, for price P1 from vendor V1, when an equivalent quantity and quality of product X can be bought from vendor v2 for price P2, when price p1 is higher than price P2, automatically damages the world economy, through the negative effect it exerts on the world's net income vs prices equation.

This is incorrect. the negative impact on the world's income vs prices equation, can be more than compensated for by factors related to how the money paid to the vendor circulates after the vendor is paid.

Imagine two planets, planets Alpha and Beta. Nation A is a nation on planet Alpha, and nation B is a nation on planet Beta. Nation A and nation B are identical twins as are planets Alpha and Beta.

Nation A on planet Alpha, faces higher non-wages production costs and higher wage costs when it comes to producing product Sigma, compared to other nations on planet Alpha. This nation A imports the product Sigma it consumes.

Nation B on planet Beta, like nation A on planet Alpha, faces higher non-wages production costs and higher wage costs when it comes to producing product Sigma, compared to other nations on planet Beta. Nation B, unlike nation A on Alpha, nevertheless chooses to produce the product Sigma that it consumes in its own territory, domestically, paying higher prices for product sigma compared to what would be the case if it imported product sigma.

Earth's simple minded economists who regurgitate what they have failed to digest (understand), will be surprised to learn, that nation B's domestic production approach, contributed more to nation B than Nation A's importing approach contributed to nation A; and nation B's domestic production approach, contributed more to the economy of it's planet Beta, compared to the positive impact of nation A's importing approach on the planet it is on, planet Alpha.

There are several reasons for the surprising outcome.

Reduction of costs in money time and human energy required for production per unit, is the major engine of actual (as opposed to illusionary) world economic growth.

Nations facing high production costs and high labor costs can by nature, tend to be more inclined to put resources into attempts to reduce non-wage production costs, compared to nations that enjoy low production costs and low labor costs. Nations featuring high wages can tend to have more money available to spend on goods and services that increase productivity.

After Nation B's management and workers were paid for producing product Sigma, as the money spent and invested by nation B's management and workers passed from person to person through financial transactions, a high percentage of the transactions involved persons purchasing goods and services that increased their productivity, their nation's productivity, and their planet's productivity (productivity per dollar paid and per hour worked).

An example of this was investments that increased productivity in terms of production of product Sigma in nation B.

By way of contrast, on planet Alpha, nation A imported product Sigma because imports of product Sigma were cheaper than domestic production of product Sigma.

The workers and management in nation D, the nation that nation A imported the product Sigma from, started chain reactions that damaged the productivity of the world, when they spent and invested the money that they received as payment for the product Sigma that they exported to planet A.

The people that nation D workers and management bought things from, took the money that they got, and spent it on things that damaged their own productivity as individuals, damaged the productivity of their nation, and damaged the productivity of their planet that they shared with nation A, planet Alpha.

Then those who sold the things that damaged productivity to the workers and management in nation D who got money from nation A for the product sigma, took the money they got for selling the things that damage productivity, and used it to buy more things that damage productivity, on and on it went like that.

Looking at the impact nation A's import-oriented approach had on nation A, compared to the impact nation B's self-sufficient approach had on nation B, nation A's citizens were reduced, through lack of circulation of money leading to poverty, to a state wherein from the productivity per dollar paid and also the productivity per hour worked perspectives, the input-output equations for them as individuals became non-optimal.

Meaning, if they got paid X amount, their productivity per dollar paid would have been greater; but they got paid less than X amount, because of the lack of domestic circulation of money due to the nation A's imports-oriented policy.

If they got paid Y amount, their productivity per hour worked would have been greater, and their productivity per hour spent studying would have been greater; but they got paid less than Y amount, due to the lack of money flowing through the nation A, due to nation A's imports-oriented policy.

By way of contrast in nation B on planet Beta, the reverse held true. In nation B on planet Beta: the citizens of planet Beta were paid not less than the amount at which their productivity per dollar paid was the greatest; rather, they were paid the amount at which their productivity per dollar paid was the greatest, because there was money circulating through the economy of nation B in sufficient quantity so as to allow for such to occur.

In nation B, workers were paid the amount at which their productivity per hour spent working or studying was the greatest, as opposed to a lesser amount, again due to the domestic circulation of money in nation B created through nation B's self-sufficient imports-independent, import-alternatives approach.

Thus in the end, planet B on planet Beta, which resorted to domestic production of product B, through its self-reliance, created a positive impact on planet Beta's economy, which outweighed the negative impact on planet Beta's economy, caused by the adverse impact on the planetary income vs prices ration equation.

Planet A on planet Alpha, by way of contrast, loving low prices, imported product sigma instead of producing product sigma domestically, and thereby created a negative impact on planet Alpha's economy; this negative impact outweighed the advantage produced for planet Alpha's income vs prices ratio equation, which derived from nation A choosing to utilize the lowest price source of product sigma.

@2009 David Virgil Hobbs