Brux column: The economics of trade
This opinion column will address the economics of current policy issues. Writer Dr. Jackie Brux is an emeritus professor of economics and founder/director of the Center for International Development at UW-River Falls; and author of the college textbook, “Economic Issues and Policy.”
Let's consider the range of economists' opinions about trade. Oops — well, there isn't really a range of opinions, it's a single opinion. Economists support free trade, and they oppose trade restrictions (e.g. tariffs). Yes, they all do. Period. It's that easy. Let's think about why.
Imagine that instead of two countries, we consider two individuals. I'm better at teaching economics, and you're good at baking bread. Even if I'm better than you at both tasks, I will give up a lot of time (and money) if I split my time between teaching economics and baking bread—better for me to specialize in teaching economics and use some of my income to buy bread from you. This reflects the law of comparative advantage, and forms the basis for greater efficiency, productivity and benefits to both "trading individuals;" or more broadly speaking, to both trading countries.
Greater efficiency means higher production, income and employment for all trading countries. In other words, the U.S. benefits from free trade and from free trade agreements. Our country gains (higher production and income), our consumers benefit (lower prices), and our workers benefit (more jobs). Economists all agree on this.
Nevertheless, there is a small group of unemployed blue collar workers that does suffer from free trade, and this disadvantaged group is part of Donald Trump's base. These workers have unfortunately been ignored by previous presidents of both parties. These are the people for whom Trump speaks, regardless of whether his policies actually help them.
This group shouldn't be ignored or left to the vagaries of free markets. Their suffering is real.
However, economists agree that we need to assist them directly (retraining and education, income support, trade adjustment assistance) rather than succumb to populist cries for trade restrictions. This is because everyone else in our country will suffer from trade restrictions.
These are the very real people in the U.S. who will suffer from Trump's trade restrictions:
• U.S. consumers: will face higher prices,
• U.S. manufacturers: will pay more for their inputs, which again drives up prices and also creates job loss,
• U.S. farmers: will lose export sales (we don't need to wait for this - other countries have already found new sources for their agricultural imports),
• U.S. exporters: will lose, as even aside from retaliation, our trade restrictions raise the value of the dollar, which reduces foreign demand for our exports,
• Our overall economy: will suffer in the same way that I individually would suffer if I insisted on being self-sufficient in teaching economics and making my own bread.
So, let's take stock. Trump has consistently called NAFTA a "disaster." (We've benefited greatly from it.) He pulled us out of the proposed Trans-Pacific Partnership (leaving other Pacific-Rim countries to reap potentially huge benefits from it). He threatened tariffs at the G-7. In Helsinki, he charged that our biggest foe is "the European Union," adding that "we have a lot of foes."
He was referring to our trade partners (not our adversaries).
Trump is profoundly ignorant of economics and he relies on his non-economist economic advisor Larry Kudlow to advise him. (Kudlow has neither a Ph.D. nor a master's degree in economics.) Trump believes that trade is a zero-sum game (wrong). He says that "trade wars are good and easy to win." They are neither. He says we are treated unfairly if we have a deficit in traded goods. We are not. [Our trade deficits in goods are offset by trade surpluses in services (banking, shipping, insurance, information technology...) and by foreign investment in U.S. financial markets.]
Trade is not a zero-sum game. This is not a situation where we benefit from Trump "talking tough." This is not a situation in which we become better off by making others worse off, or that others become better off by making us worse off. Trade benefits all trading countries, and trade restrictions make all of us worse off. Even when there are truly unfair practices, such as China stealing copyrights, there are much better ways to deal with this than to use trade restrictions. We are now seeing that U.S. tariffs are met with Chinese retaliation. No one wins from trade restrictions.