Trump, Trade, Tariffs
“There are no solutions. There are only trade-offs. ”
This seemingly simple quote illustrates one of the truths of life. People, our lives, our world are all imperfect; there is no nirvana, at least not in this world, and life’s decisions are a series of trade-offs. This idea is given to us by economic concepts because of what underlies this axiom on the reality of scarcity: our needs and wants are infinite yet our resources are finite. Everyone wants; thus we must ration. Pricing, therefore, becomes the system in which we ration in a market. From that foundation, we experience the mutually beneficial exchanges that stem from supply and demand. Obviously, as conservatives, we concede that the free enterprise system can only operate with free individuals; it must.
If we define the free enterprise system as private individuals or entities freely exchanging their own goods with one another, then it would be safe to assume that free trade is just another aspect of the free enterprise system (a large aspect in fact). Free trade, therefore, is beholden to the effects of supply and demand. Any attempt to manipulate this process artificially rather than organically will have its consequences, and consequences can be measured empirically.
President Trump’s approach to trade is unorthodox, to say the least. He promised to renegotiate trade deals that were “bad” for the U.S. (whatever bad means is subjective to his psyche, and I will not try to attribute what he means by ‘bad’ or ‘good’). In response, many people have taken very principled positions, criticizing the president for such enamored talk of tariffs; others have withheld judgment until they see the results of his tough trade talk and whether or not the president will actually make good on his statements that he wants free trade (on both ends). Still, others actually take the position that tariffs are in fact good for our nation, as they protect the jobs (especially in manufacturing) we have in certain parts of our nation.
It’s this third position, described above, which does deserve heavy criticism. ‘Protection’ of some industries neither protects our interests nor helps people’s jobs in that industry. To ‘protect’ industry completely disregards the idea of comparative advantage (which we know has been thrown around in much of today’s talk). As with different economic agents, different countries have comparative advantages in productive activities, i.e., they can produce at a lower opportunity cost. This naturally leads to specialization.
So, what would be the best thing for a rich country like ours to do?
Engage in trade to increase our overall welfare. By buying some goods from abroad that are cheaper and better than what we could produce at home, we increase our overall welfare and allow ourselves to keep more of our hard-earned money to invest in business ventures, innovations, and whatever we find economically and/or socially beneficial. ‘Protecting’ jobs by using trade barriers and tough talk is not conducive to economic growth and is only effective insofar as popular political jargon goes.
As conservatives, our desire should be to stick to the facts and propagate truth. This does not change with economic principles. Economic growth is not in and of itself about jobs, but rather jobs are a byproduct of economic growth. Economic growth’s purpose is to increase the welfare of a society by making much of life’s needs and problems more bearable, such as hunger, shelter and other basic necessities. We now have items we never knew we wanted, and that comes from technological advancement and the sharing of that advancement through trade. By appealing to both first principles of freedom and empiricism, we can conclude that free trade is superior in theory and in practice than any other system.
As for President Trump’s approach to trade and tariffs, it is hard to tell where this will lead. The Guardian reported, “China’s president, Xi Jinping, has called for Donald Trump to reach a compromise on trade, as discussions continue in an attempt to avert the imposition of heavy tariffs on goods.” On the surface, this seems good; tough talk has brought China to the table for renegotiation and could lead to freer trade as a result. But let’s not forget Milton Friedman’s analogy of trade: if we think of two nations as two groups, Group A & Group B, in a boat (the boat being the trade system) with one engaged in protectionist policies, it would be like the leader of Group A taking a gun and shooting the bottom of the boat. It hurts both groups. Similarly, retaliating with tariffs would be like the leader of Group B taking a gun and shooting the bottom of the boat; they would only accelerate the process of sinking to the bottom of the sea. Now let’s say the leader of Group B threatens to shoot more holes in the bottom of the boat unless Group A stops. Group B would then ensue panic as well as uncertainty if the leader continues to threaten the other group, all the while telling their own group that they do not, in fact, want to do what they say to the other group. It would only confuse their group and make them take precautionary measures. Trump’s style of trade talk works the same way. With talks of tariffs, companies that import materials used to make a final product will panic, and markets will take a hit.
The website MarketWatch reported on this very instance when tariffs were mentioned again in September. They observed that the Nasdaq and the S&P 500 stocks took hits in the market. Yes, correlation is not causation and the market is driven by a myriad of factors but political talks and threats are large factors when it comes to expectations. With uncertainty comes lack of investment, as the risk for investing increases. With less investment comes less economic growth, assuming it will be in products that will help the overall welfare. And with less economic growth comes fewer jobs.
So yes, in essence, his tough trade talk has ‘worked’ to bring China to the high possibility of conceding to our trade wants (whatever we ‘want’ as a nation may be an entirely different question but that is another issue). However, these means of coming to negotiation have come at a cost at home, namely uncertainty in our domestic markets, resulting in a downward hit on our industries (using the stock market as a proxy). Has President Trump accomplished what he said he would? Yes, but at a cost.
Moreover, will we get the President Trump that wants freer trade as he has told us at times, or will he be the “Tariff-Man” who says that we will bring manufacturing jobs back through current account surpluses, like export surpluses? Those two directions will have entirely different results. One will lead to economic growth, rooted in freedom; the other will lead to less investment and less growth at the expense of the many, for the special interests of a few. Government is not the solution here, freedom is.
In the end, the data would seem to suggest that deficits do not even matter. In fact, a natural deficit may be good, as it shows that a country may be getting richer. Take Hong Kong, for example. They have the freest trade in the world and this has resulted in immense growth patterns. The same is true for our nation, as we have had current account deficits: we import more than we export. Yet we are still the richest nation in the world and have been, even with the deficits. On the other hand, we have capital account surpluses which means that the nations we trade with take our dollars that we freely give them and invest them in our investment-friendly climate, as Walter Williams reported in an article.
Basically, it is a double-win for us: we get good, cheap products while still having more money to spend on other items domestically. Additionally, those who have our dollars invest in our markets. This, in fact, helps the poorest among us as they need these better and cheaper products from abroad. Following this, we see jobs increase because of the extra spending and outside investment.
Therefore, the talks of deficits and surpluses are nothing but a farce used for political popularity. Conservatives should focus on what matters and not engage in economic and political fallacies. Popularity is not an ally when it lacks truth.