To Trade or Not to Trade…

Economic Nationalism and the Trump Trade Agenda

According to Steve Bannon, the second prong of the Trump Administration’s policy focus is “Economic Nationalism”. The obvious first question is: what, exactly, does Bannon have in mind when he refers to Economic Nationalism? An important subsidiary question is whether the Trump Administration considers Economic Nationalism to be a distinct area of policy focus, or does the Administration consider it to be an integral part of an integrated policy agenda.
Steve Bannon

The term Economic Nationalism is certain to provoke well-deserved eye rolling among the vast majority of professional economists. The term sounds like one of those focus group inventions that sounds good to the untutored, but is actually bereft of substantive economic meaning. Proof of the pudding is Obama’s use of similar rhetoric, as when he referred to “Economic Patriotism” and attacked what he called corporate “deserters”.


Barrack Obama

That said, this type of thing has to be taken seriously for a few reasons. First, terms like Economic Nationalism have a distinctly unpleasant historical odor, one might say stench, about them, as the terms are associated with the likes of Juan Peron and Hugo Chavez, not to mention Adolf Hitler. (Fans of this bunch need to read no further, they are all pretty much beyond saving). Secondly, leaving aside its linguistic associations, Economic Nationalism is often (correctly) seen as a form a mercantilism, which though noxious, doesn’t reach the depravity of fascism or totalitarianism. But mercantilism is no day at the beach either. It (incorrectly) sees trade as a zero-sum game and can easily lead to resource wars and empire building, as it did in the past.


Third, to the extent that Economic Nationalism represents some kind of resurgent mercantilism, protectionism or isolationism, it is bad economic policy whose imposition would almost certainly harm economic growth in the United States and abroad leading to economic misery. Ironically enough, the bulk of the economic harms would fall mostly on the people who seem to be most enthusiastic about it.


Finally, Trump seems to mean what he says, and he and strategist Bannon seem to be on the same page.
Donald Trump

No matter how you slice it, it is hard to see how Bannon / Trumpian Economic Nationalism is different from old-fashioned protectionism.



Trade and Protectionism


It is important to understand what free trade is and what free trade agreements like NAFTA actually do. In a nutshell, free trade refers to the free exchange of goods and services across national borders. Free trade agreements make this possible by removing trade barriers between people and companies residing in different countries. The trade barriers that are removed or reduced are typically tariffs and regulatory schemes designed to give the importing country’s home producers an advantage over foreign rivals. Consumers pay for all this through higher prices.


Discussions about free trade and trade agreements are often phrased in language that obscures more than it reveals. For example, when speaking of trade, it is typical to hear someone say something like this. “The U.S. bought $10 billion worth of goods from Mexico, but only sold Mexico $6 billion worth of goods in return. Therefore the U.S. has a trade deficit of $4 billion with Mexico. Moreover, that’s $4 billion worth of goods that American workers could have made. Therefore trading with Mexico cost Americans to lose jobs.”


Let’s take this one piece at a time. It is true but misleading to say that America bought $10 billion worth of Mexican goods, as if America is an undifferentiated whole. It is more accurate to say that millions of individual Americans in the aggregate bought $10 billion worth of stuff that came from Mexico and that millions of Mexicans bought $6 billion worth of stuff made in the U.S. The reason that Americans bought the $10 billion worth of stuff (and vice versa) is that they got a better deal buying the Mexican goods, whether in quality, price or both. In short, American consumers are better off because they can buy better quality and / or lower priced goods made in Mexico and shipped to the U.S.


It is not in any meaningful sense true that Mexico “stole” American jobs through trade. The first reason is that apart from a small number of political jobs that require U.S. citizenship, there is no such thing as an American job. There are jobs that Americans do, just as there are jobs that Frenchman do. But there is no particular reason to think of any job as American, or French or Mexican.


Second, it is without doubt the case that some jobs that were formerly performed in America are now performed in other countries resulting in the temporary displacement of some American workers. But American consumers are better off because more goods and services are available at lower cost and better quality than were available previously.


When it comes to Americans who lose jobs as a result of foreign competition, it really doesn’t matter that the competition comes from abroad or the next town over. It could come from anywhere. Eastman Kodak, for example, did not ultimately fail because of foreign competition. It failed because it resisted innovation and the advent of digital photography and was competed out of business. The lesson here is that to survive and thrive, workers and businesses need to remain dynamic and competitive.


By encouraging—or at least not impeding—the free flow of labor and capital across national boundaries, free trade facilitates the spread of knowledge, innovation and economic dynamism. It correctly treats trade as a plus sum game of shared gains. In so doing free trade allows resources to be matched to their highest and best uses, thereby promoting economic efficiency and wealth creation.


Opposition to free trade is often rhetorically disguised. One of the more popular dodges is to be for “fair trade” as opposed to free trade. Politicians routinely claim they are in favor of trade, but that it has to be “fair”. But what could be fairer than two counterparties exchanging goods and services for a freely negotiated price? And what could be less unfair than a transaction in which the police power of the State (in the form of tariffs and regulations) is used to tip the scales to favor one side?


We often hear that trade is unfair because a foreign producer’s government subsidizes them, or that their currency is being manipulated to lower prices below the market level. And in some cases this is undoubtedly correct.


So what?


If a government wants to subsidize a domestic producer directly or through currency manipulation, that government is taxing its own citizens to benefit the citizens of the importing country. Let them do it all day long. It is simply self-defeating. To see this, let’s do a thought experiment.


Suppose Korea, in an effort to guaranty large exports of Korean cars, decided to subsidize the manufacture of Hyundai and Kia cars such that the companies could sell their cars in the U.S. for a mere $1 dollar apiece. We would soon see lots of Hyundai and Kia cars on the road. And sales of other brands would dive. But American consumers would be richer and Korean taxpayers poorer because Korea would be effectively shipping products over to the U.S. and getting almost nothing in return.


Obviously, that wouldn’t last long because it would be so costly to Korean taxpayers that they would revolt. They would revolt because the favoritism (and corruption) of the arrangement is so transparent. But in principle there isn’t any real difference between the example given in this thought experiment and real world subsides and trade barriers. The only difference is that the thought experiment is clear and real world arrangements are opaque.


The Trump Trade Agenda


The Trump Trade agenda gives every indication of being old-fashioned protectionism implemented through tariffs and regulation, and gussied up as “Economic Nationalism”. The Trump argument is that it will increase employment and wages in America. Except that it won’t.


To the extent that people in protected industries keep jobs they do so at the price of higher costs and lower quality for consumers. It necessarily means that inefficiency is being subsidized, which in turn means that the dollars being shoveled into inefficient enterprises are being denied to innovative and efficient businesses that represent the growth of the future.


The path to increased economic growth and with it, higher wages, is one that recognizes the importance of achieving productivity gains through innovation and Schumpeterian creative destruction. It does not come through subsidizing failure; nor does it come by taxing consumers to privilege the industries with the best lobbying efforts.


Trumpian protectionism does not just fail to make the case in its own right; it is also undermines his stated intention to roll back the Regulatory, or Administrative State. Any serious effort to impose trade protectionism would entail massive increase in the power of the Administrative State. How are we to distinguish what is and is not an “American” product. How far back do we have to follow the supply chain to see whether a car manufactured in South Carolina counts as American or foreign. Are BMWs made in South Carolina foreign or American? How about Volvos? And who makes that determination and how?


Should we consider iPhones to be American products? There are about 750 or so parts suppliers, of which 69 are in the U.S. About 85% of the “rare earth” elements in the iPhone come from China. But the intellectual property of the iPhone has its home in Steve Jobs from California. And, by the way, Jobs’s biological father was a Syrian immigrant to the United States.


The Politics of Trade


Unfortunately, the current political environment does not favor trade. Trump has bought into the illiberal if not bizarre idea that Americans need to be protected from the freedom to trade. Bernie Sanders, Sherrod Brown and Elizabeth Warren have been there all along. Free traders dominate the Republican Congressional leadership, so perhaps they can limit the damage that Trump seems intent on inflicting in concert with Democratic Progressives. Trump has already moderated on some things; perhaps Paul Ryan will talk some sense into him and provide a fig leaf for a decorous retreat.


Paul Ryan
One can only hope.





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