It’s not easy talking trade with Donald Trump.
Readers of Bob Woodward’s “Fear: Trump in the White House” will come away with the same sense of frustration that the president’s “globalist” economic advisers felt when they tried repeatedly to explain to him that a tariff is a tax on American consumers.
“You’re wrong,” is typical of the president’s case-closed response to his aides.
The president would be well advised to pick up a copy of economist Pierre Lemieux’s new book, “What’s Wrong with Protectionism?” (OK, we know Trump doesn’t read and, when it comes to trade, isn’t open to learning, but I needed a good way to introduce the book!)
This concise, 100-page book exposes the common myths about free trade for what they are, using simple, sound arguments to make the case, both economic and moral, that free trade is fair trade, and vice versa.
For starters, countries don’t trade with one another; individuals and businesses do. While the statistical agencies report the balance of trade by country, it is individuals who decide what to export and what to import.
If the voluntary exchange between individuals is a basic tenet of a market economy — allowing each of us to specialize in producing certain items and to buy (”import”) everything else — why is that principle no longer relevant when applied to international commerce? And if the U.S. government slaps a tariff on cheap foreign goods, making them more expensive, how is that fair to consumers?
“How could free trade harm the country if it benefits the individuals who compose it?” Lemieux asks.
Lemieux, who is an associate professor of economics at the University of Quebec and an affiliated scholar with George Mason University’s Mercatus Center, explains that the benefits of trade derive from imports; exports are the cost.
Why a cost? Because a country is using scarce resources to produce goods for foreign countries. Access to cheap imports, on the other hand, makes American paychecks go further. Because low-income households spend a larger share of their earnings than the rich, tariffs favor special interests at the expense of the national interest.
Lemieux challenges the traditional protectionist complaints that free trade destroys jobs, shutters factories and lowers wages. While it is true that the total number of manufacturing jobs in the U.S. peaked in 1979 — as a share of total employment, the peak was 38% in 1943 compared to 8.5% today — real manufacturing output is almost back to its 2007 all-time high.
In other words, the U.S. is producing more (output) with less (labor), thanks to capital deepening, which is another way of describing productivity growth. And increased productivity delivers a higher real wage to workers over time.
To be sure, there are temporary disruptions when a factory shuts down or relocates overseas. (Domestic competition often has the same effect.) And labor inflexibility may hamper the adjustment process. But the solution is not to impede free trade. That would be tantamount to restraining technological progress because of its short-run costs, according to Lemieux.
Many more jobs have been created in other sectors of the economy than have disappeared in manufacturing. And retraining workers for the jobs of tomorrow is a lot smarter than imposing trade restrictions in a vain attempt to recreate the past.
Besides, the nature of manufacturing has changed in the U.S., as it has in other advanced economies. Trump may long for a bygone era of smokestacks, coal-burning plants, and dirty, manual labor — not for him, of course — but the production and assembly of components for a finished good are now performed by low-wage workers in developing countries.
Those nations have a comparative advantage in low-skilled work while the U.S.’s comparative advantage is in areas such as research and development and high-tech manufacturing. To the extent that trade increases labor productivity by allowing workers to specialize in the nation’s most productive industries, it raises real wages.
As for Trump’s contention that trade is a zero-sum game — they win, we lose — the president should try to answer a question Lemieux poses. Why would two parties agree to a voluntary exchange if only one party stood to gain?
Trump thinks trade deficits, not to mention a bilateral trade deficit with a particular country, are bad. (His aversion to deficits clearly does not extend to the federal budget or his personal finances.) He also is fond of saying that America is “open for business,” now that Congress has lowered the corporate income tax rate to 21% from 35%.
Those are opposite sides of the same coin. If a trade deficit is bad, then a capital account surplus — the dollars flowing into the U.S. as foreign direct investment or to buy U.S. stocks and bonds — must be bad as well. Trump can’t have it both ways.
The U.S. runs a trade surplus with the rest of the world in services. But for some reason, Trump ignores services, even though they constitute the lion’s share of U.S. output: almost 69% in 2017 versus less than 12% for goods. (The residual is government.)
Trump likes to incite his base at campaign-style rallies by claiming that “the system is rigged” against ordinary Americans. Nothing is more system-rigging than trade protections.
Take steel producers, who have received some form of protection — tariffs, quotas, relief through anti-dumping cases — for decades.
Or sugar producers, who got their first fix in 1789, shortly after the birth of a nation. With some temporary interruptions, they are still protected by price supports, quotas and production controls today. The result has been to raise U.S. sugar prices well above the world average.
“Protectionism does not aim to maximize income or welfare but to protect the special interests of certain producers,” Lemieux writes.
Just this week, Trump imposed 10% tariffs on an additional $200 billion of Chinese goods, on top of earlier tariffs on Chinese washing machines, solar panels and $50 billion of other goods. The tax rate — yes, a tariff is a tax that is paid largely by the consumer — will rise to 25% in January, after the Christmas shopping season. China was quick to retaliate with tariffs on $60 billion of U.S. goods.
Will Americans paying higher prices to purchase any of these items judge the tariffs to be fair? I doubt it. Trump may say he is leveling the playing field, the common refrain of protected industries, but for American consumers, that field sits on an increasingly steep hill.
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