There is no proposition in economics more universally accepted than the benefits of free trade. Yet, when the Republican President puts tariffs on steel and aluminum, pulls out of the TPP, attacks NAFTA and KORUS, and complains about German car imports, he is applauded by the leadership of the Democratic Party. It seems that the old parties can only agree when they are both wrong.
Only the Libertarian Party supports free trade.
President Trump claims to be protecting jobs with his tariffs. But he ignores that roughly half of our international trade is in intermediate goods. These are goods that are bought by a US manufacturer and incorporated into its products. If you put a tariff on these products, you harm the industrial consumers which usually vastly outnumber the producers.
For example, there are about 6 million employees of companies than consume steel in the United States, versus only about 140,000 steelworkers. So, in the interest of trying to protect one steelworker, the tariff puts at risk the jobs of almost 43 other workers. This does not even count the jobs put at risk in the event of retaliation or simply because, if foreign countries sell less to us, they will have less money with which to buy US products.
Tariffs put the jobs of industrial consumers at risk. But the bigger problem is what they do to consumers generally. A “tariff” is nothing but a fancy word for a tax on US consumers. Whenever tariffs have been studied, the results are always the same: US consumers pay an enormous price for the few jobs that are saved (usually temporarily).
For example, in 2009 President Obama put a tariff on Chinese tires. Afterwards, economists estimated that the tariff saved about 1,200 jobs. But the annual cost to consumers for each job saved was about $900,000. This money didn’t go to the workers. It went to the owners of other tire-producing companies, primarily foreign.
The steel industry has been a repeat offender, requesting tariff protection multiple times since the 1980s. The estimated cost to consumers of each job protected has been between $200,000 and $2,300,000 per year. The tariffs have also not led to greater investment in the industry nor greater long-term employment, which has steadily declined. The recurring requests for protection demonstrate that tariffs are not a permanent solution.
The cost of this consumption tax is also not spread evenly. Poorer people spend a larger percentage of their income on food, clothing and other basic goods. Wealthier people spend more of their money on services, like restaurants and yoga classes. Food, clothing and basic needs are traded internationally; restaurants and yoga classes are not. This means that tariffs fall disproportionately on the working class. This is precisely the group that Trump and the Democrats claim they are trying to help with these policies!
There is a last element of ignorance in these policies. The reason that America runs a foreign trade deficit is simple: as a country, we consume more than we produce, which shows up as a deficit in our foreign trade. Currently, this figure is about $400-$500 billion per year.
Consuming too much is another way of saying that we save too little. A major source of this lack of savings is our government, the deficits of which are a form of dissaving. Under President Trump, the federal government ran a deficit of almost $700 billion in 2017. With the recently enacted tax plans and spending increases, the deficit for 2018 is projected to be over $800 billion, with deficits greater than $1 trillion for future years. Things were no better under President Obama.
The inevitable result of the growing fiscal deficits will be to increase trade deficits by further depleting savings. The foolish attempts to reduce trade deficits by increasing tariffs will be swamped by irresponsible fiscal policies.
The general case for free trade is compelling, but it has to be acknowledged that China has been a bad actor for a long time and action should be taken against its abusive trade and industrial policies. But, as so often happens with the Trump administration, this kernel of truth is buried beneath a pile of bad policy and rhetoric. Trump is more interested in “appearing tough” than solving the problem.
By attacking all directions, including countries like Canada, Germany, Mexico and South Korea, the Trump administration gives the (probably accurate) impression that it is against all trade and not just China’s policies; this also alienates countries that should be our natural allies in this battle.
Trump also refuses to use the multiple mechanisms that exist in the World Trade Organisation to address China’s bad behavior, despite the fact that the US has initiated over 100 actions in the WTO against unfair trade practices (including many against China) and has been successful over 90% of the time. In these cases, the countries found to have violated international trading norms (including China) almost invariably comply with the WTO rulings.
Finally, the demands of China made by the Trump administration, including numerical targets for trade and deficits, are grossly ignorant of trade economics. They do not represent “free trade” or even Trump’s oft-repeated desire for “fair trade,” but rather “managed trade” which, like all forms of central planning, can only fail. These aggressive and high-profile demands are also virtually guaranteed to generate a domestic political backlash in China in a way that low-key WTO negotiations and litigation would not. Once again, it appears that Trump is more interesting is pandering to his base voters than solving the very real issues that we should have with China’s policies.
It is not enough to identify problems. You must also have effective policies for solving them. Only the Libertarian Party has these.