President Trump has resonated with a massive base of Americans by emphasizing his commitment to lift up the forgotten men and women of this country with a collection of policies. One of these areas of policy has been trade. Donald is an economic nationalist, he likes the idea of hiring and buying American, which sounds good on paper but has a terrible track record historically speaking.
Donald’s campaign has put protectionist policies and tariff laws at the center of discussion on foreign trade relations through rhetoric that suggests we are being “ripped off” in trade, China devaluing their currency “hurts American workers,” and even further, that China and Mexico are “stealing our jobs.”
To take Donald’s economic nationalist theme in full would demand a look at comparative advantage. As Nobel Prize winning economist Milton Friedman and his wife, Rose Friedman, wrote in Chapter 2 of their 1980 book Free to Choose, “An American worker is currently more productive than a Japanese worker. It is hard to determine just how much more productive— estimates differ. But suppose he is one and a half times as productive. Then, on average, the American’s wages would buy about one and a half times as much as a Japanese worker’s wages.
It is wasteful to use American workers to do anything at which they are less than one and a half times as efficient as their Japanese counterparts. In the economic jargon coined more than 150 years ago, that is the principle of comparative advantage. Even if we were more efficient than the Japanese at producing everything, it would not pay us to produce everything. We should concentrate on doing those things we do best, those things where our superiority is the greatest. As a homely illustration, should a lawyer who can type twice as fast as his secretary fire the secretary and do his own typing? If the lawyer is twice as good a typist but five times as good a lawyer as his secretary, both he and the secretary are better off if he practices law and the secretary types letters.”
In broad terms, it is most efficient for a nation to concentrate on producing the goods which it does “the best,” and then exchange these goods with another nation that is “the best” at what they produce. A nation has a comparative advantage when it can produce a good at a lower cost than any other nation, and it is for this reason that in the realm of trade, it is not only reasonable, but also efficient, for people and nations to specialize in the production of goods for which they have a comparative advantage.
Allow an example. Let us say that it takes 25 men in the United States and 50 men in Brazil to grow one pound of wheat in the same amount of time. Also, it takes 10 men in Brazil and 25 men in the United States to produce a pound of coffee. Clearly, it would be most efficient for Brazilians to produce coffee and trade some of it for some of the wheat that the United States produces.
In simplest terms, if I have something you want and you have something I want, then trading with one another would make us both better off. An American who purchases an automobile from China, coffee from Brazil, a piano from Germany, and and a television set from Japan would not consider themselves a loser. And yet, Donald Trump would have it be believed that trade is a war, in which there are winners and losers. Trade is not a zero-sum game, in which one country must lose in order for another to win. There are winners in trade, and losers in the absence of trade.
Further, Mexico and China are not stealing our jobs. This notion suggests that there is a fixed amount of work to be done, and in order for someone to get a job, they must take it from another individual. History in this country alone provides evidence against this false notion. In half a century from 1950 to 2000, the percentage of women who participated in the labor force spiked from 32 percent to 60 percent, and 28 percent of men were not unemployed in 2000 as a result. Lost jobs become a problem when new jobs are not arising in their place, and given statistics on free trade agreements, this is not occurring.
It is important to realize that free trade does not inherently create jobs, and nor does protectionism. While protectionism raises the price of a good that the consumer pays in order to preserve an amount of jobs within that industry, international free trade loosens up resources in inefficient industries so as to allow them to be allocated into efficient industries, improving living standards, economic efficiency, and boosting wages. Donald speaks heavily on outsourcing of American jobs, yet never makes note of all the jobs outsourced from foreign nations that provide American workers with a means of income.
Further, Donald ignores the incredible efficiency of the U.S. manufacturing sector, instead choosing to attack China and Mexico on stealing our factories and great wealth.
Donald consistently cites American deficits with other nations as proof that we are being “economically crushed in trade” with high deficits. However, a deficit is not the same as debt. As of 2015, American deficits were as follows: $69 billion with Japan, $366 billion with China, and $58 billion with Mexico. Looking at China, in 2015 they acquired $116 billion of American merchandise, while the U.S. acquired $482 billion of Chinese merchandise. From this, China gained $366 billion worth of U.S. currency, which was then invested into the U.S. economy. It would do more good to view trade deficits not as losses to foreign countries, but as capital inflows from foreign investments.
Trump’s trade rhetoric focuses heavily on China, not only on them stealing American jobs, but also in their currency manipulation and unfair trade practices. But, China devaluing their currency is not a negative to America. Devaluing the yen allows the American dollar to purchase more Chinese goods. China currency devaluation hurts Chinese citizens insofar as reducing their purchasing power.
And finally, on a Fox News Sunday episode, Donald said, “I am all for free trade, but it’s got to be fair. When Ford moves their massive plants to Mexico, we get nothing. I want them to stay in Michigan.” One of the most common protectionist phrases, fair trade. Since fairness is a popular word these days, allow us to examine the ‘fairness’ in free trade:
In my piece I Am Told To Fear Capitalism, I wrote, “Some of the greatest trends of the last 100 years were real per capita GDP rising from $4,800 to $31,500, real hourly wages rising from $3.45 to $12.50, life expectancy increasing by three decades, air quality improving by nearly 30 percent dating back to 1977 in major cities, major life-threatening disease cases declining to less than 50 per 100,000 people. Infant mortality rates falling 10-fold, TV ownership increasing from 0 percent to 98 percent, household assets rising from $6 trillion to $41 trillion, U.S. household poverty rate declining from 40 percent to 13 percent, patents granted jumping from 25,000 to 150,000, computer ownership from 1 percent in 1980 to 44 percent 18 years later, percent of women awarded Bachelor’s degrees increasing from 34 percent to 55 percent, computer speed skyrocketing from 0.02 million instructions per second in 1976 to 700 million just 22 years later, workweek length declining from 50 hours to 35 hours, homeownership in the U.S. jumping from 46 percent to 66 percent.”
Competition stemming from market liberalization fuels innovation and economic prosperity, India and China testify to this. Both nations in recent decades have made decisions to slowly liberate their markets and as a result, have watched millions move out of poverty. 680 million people in China alone, and hunger in India was slashed by 90 percent following the replacement of four decades worth of socialist policies.
“NAFTA was one of the worst things that ever happened to the manufacturing industry. NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country,” said Donald amidst one of the presidential debates. Unfortunately, this statement does not stand up to the evidence.
NAFTA is nowhere near the worst trade deal signed anywhere. Since its signing, U.S. trade with Canada and Mexico quadrupled. Just from the span of 1993 to 1999, trade rose from $299 billion to $550 billion. In 1999, U.S. exports exceeded $2,350 billion, and since its signing, economic growth has risen as much as 0.5 percent annually. Government spending was slashed, foreign investments more than tripled, and jobs were created. In the first four years of NAFTA, 800,000 manufacturing jobs were created as a result of greater resource allocation under the boost of free trade. In 2008 alone, trade boosts from free trade agreements generated nearly 5 million jobs. And, as free trade does, it lowered prices. Oil from Mexico was imported at a cheaper price than that prior to the agreement, reducing American gas costs. Who is going to assert that Americans saving money at the pump by purchasing cheaper Mexican oil are losing in trade?
Donald’s solution to these trade imbalances has been to wage trade wars with some foreign countries by suggesting America impose tariffs on them and increase trade barriers. Despite countless cases on the failure of tariffs, which are taxes on imports, Donald has convinced many American families and politicians that this is the answer to economic well-being.
Henry Hazlitt made a case against tariffs in his book Economics in One Lesson writing, “Suppose that in our country we import woolen sweaters from country A, and the sweaters sell for $25.The local sweater industry petitions the government to impose, say, a $5 tariff (duty) on the imported sweaters. They argue that they cannot produce woolen sweaters for $25 and need this tariff in order to compete with country A. So, the government imposes a tariff. As a result, the local sweater industry is able to employ many people. However, the consumers now pay $30 for the same quality sweater. The consumers no longer have that $5 to spend on other things. Thus the local sweater industry thrives, but a hundred other industries shrink.You can see the sweater employees going to and from the factory each day, and you think, ‘The tariff was a good idea, it has given employment to people in our country.’ But you don’t see the hundred other industries that have shrunk and all the lost jobs from that.”
The Smoot-Hawley Tariff Act is a prime example of protectionist failure. In 1930, the year that the tariff was passed, unemployment stood at 9 percent. The next year, unemployment stood at 16 percent, and the year after that at 25 percent. Over 40 percent of all banks closed for good, trade declined, despair increased, and real income fell by nearly a third. Allow a more modern example of tariff failure, that of which occurred in 2009. President Obama enacted a tariff on Chinese tires, so as to get China to “play fairly.” In truth, this tariff saved 1,200 jobs at the price of $900,000 in that year, and the majority of the money lined the pockets of tire companies, both domestic and foreign, not the tire workers themselves. It ultimately comes down to whether one prefers maximum employment or maximum productivity.
As tensions between nations rise, it is more important than ever for free trade to be promoted so as to act as a necessary, although not sufficient, condition to ensuring peace between countries. Free trade and the reduction of trade barriers are crucial to ensuring political stability between countries, economic prosperity, and protection of both the consumer and the worker. Donald Trump’s trade rhetoric revolves around a misunderstanding of economics, and it is important to not blindly follow his protectionist policies, which may very well aid in nudging America into another Depression. With economic freedom and free trade lifting over a billion people out of poverty throughout history, it could not be more clear that trade barriers are not the path to prosperity. Economic liberty is.