What Donald Trump Doesn’t Understand About Trade

I wrote a few days ago about Obama’s weak track record on the economy and included the relevant part of a Fox Business interview.

In that same interview, I also talked about Trump’s performance. As you might expect, I said nice things about tax reform and regulatory relief but was rather alarmist about his protectionism.

The bottom line is that Trump simply doesn’t understand trade. He thinks a trade deficit is bad when it’s really just the flip side of a capital surplus.

Investor’s Business Daily opines on the inanity of protectionist spats.

In the tit-for-tat trade war between the U.S. and China, pain is a major theme. The idea is to ratchet up the pain, through tariffs and other punishments, until one side says “uncle.” But what if no one says “uncle”? …President Trump doubled down, proposing $100 billion in added tariffs on Chinese goods, in addition to the $50 billion or so already imposed. …China, meanwhile, on Friday withdrew from trade talks and promised to “fight back with a major response,” calling Friday’s U.S. move “arrogant.” …As the rhetoric heats up, neither side feels it can back down. …China slapped tariffs on products made in states that voted heavily for Trump, including such products as soybeans, SUVs, and small commercial jet planes. …trade disputes and tariffs have a history of becoming nasty economic downturns. …the Smoot-Hawley tariffs…caused a massive contraction in global trade and output in the late 1920s and led to the Great Depression. …in 1971, President Nixon devalued the dollar, imposed a 10% “surtax” on all imports, and the 1970s stagflation began. …trade wars are hardly ever beneficial. So maybe it’s time for both countries to cool their rhetoric, step back, and return to talking. Before we add to the damage and end up with another global economic meltdown.

Amen, especially about the foolishness of copying one of the policies that contributed to the Great Depression.

In a column for the Wall Street Journal, Tunku Varadarajan shares some observations by Douglas Irwin, a prominent trade economist.

Mr. Trump may be the first openly protectionist president since Hoover, but what Mr. Irwin finds most frustrating about him is that “he never really defines what a ‘better’ trade deal is. His judgment of trade comes down to the trade balance, which he uses as a sort of ledger, as a businessman would, rather than think more broadly about the national economic impact of trade.” It is impossible for every country to run a trade surplus, but “Trump thinks about trade in these zero-sum terms, about whether there’s profits or losses, and he views exports as good and imports as bad.” …He fails to see that in international trade, imbalances “aren’t an indication that one country is beating another, or that one is ‘winning’ and the other’s ‘losing.’ ” Mr. Trump’s rhetoric and vocabulary are “not the way economists think about trade at all.”

There are two things from the column that merit extra attention.

First, manufacturing employment primarily has declined because of productivity improvements.

The U.S. has lost steel jobs, but Mr. Irwin says that’s because the domestic industry has become more productive. “In 1980, it used to take 10 worker-hours to produce a ton of steel. Today, it takes less than two worker-hours. So even though we’re producing the same amount of steel, or even more, we use many, many fewer workers to produce that steel.”

Second, Trump has botched the opportunity to create an alliance against China.

The U.S., Mr. Irwin says, needs strong allies in Europe and Asia to “counter China when it violates the letter or spirit of its World Trade Organization commitments, and the Trump administration has done little to cultivate such allies. Instead, it seems bent on alienating them.”

Moving beyond theory and history, Trump’s protectionism is a job killer.

Here are some excerpts from a Bloomberg report about steel tariffs.

Researchers at the Federal Reserve Bank of New York said… “The new tariffs are likely to lead to a net loss in U.S. employment, at least in the short to medium run,” Mary Amiti, Sebastian Heise, and Noah Kwicklis wrote in a blog post… “given the history of protecting industries with import tariffs, we can conclude that the 25 percent steel tariff is likely to cost more jobs than it saves.” …the Fed’s Beige Book…cited one unnamed company in the Boston Fed’s region as saying that “these tariffs are now killing high-paying American manufacturing jobs and businesses.” …the effects of similar tariffs imposed by President George W. Bush in 2002 led to the loss of 200,000 jobs across the U.S. labor market. That number was bigger than the total headcount of U.S. steel producers at the time.

In other words, protectionism is bad for America, even if other countries don’t retaliate (which they often do, further exacerbating the damage of bad policy).

In the New York Times, Veronique de Rugy’s column offers some essential insights about why the trade deficit doesn’t matter.

In 1776, Adam Smith observed that nothing “can be more absurd than this whole doctrine of the balance of trade.” Sadly, almost 250 years later, the president—along with his economic adviser Peter Navarro and Commerce Secretary Wilbur Ross—has elevated this economic fallacy into a pretext for protectionism. Fueling this bipartisan hysteria is the widespread failure to understand that United States trade deficits generally add capital to our economy—more factories, more R & D or more machines. …The notion that trade deficits are always bad for the economy is…simply wrong. …we mustn’t forget that the American dollars we spend on imports eventually return to America, either by foreigners purchasing American exports or making investments. Protectionists like Mr. Trump always complain about the United States’ trade deficit for goods but mention neither the surplus of foreign investment capital that we get nor our trade surplus in services. …Recessions, reduced foreign investment in the United States and a weak dollar are the most effective ways to reduce the trade deficit. I doubt any of us would enjoy these remedies.

Trump isn’t merely wrong on the basic economics of trade. He also doesn’t even understand specific examples. Consider his recent tweets about using tariffs to force Ford to build cars in the United States.

A report in the Detroit Free Press explains why that is nonsense.

Auto analysts groaned on Sunday in response to tweets sent by President Trump that touted his tariffs on Chinese imports and his claim that the trade war would inspire Ford Motor Co. to build its Ford Active crossover in the U.S. rather than overseas. …Jon Gabrielsen, a market economist who advises automakers and auto suppliers, said, “This is further evidence that neither the president nor his trade representatives have any clue of the complexities of global supply chains.”

And Trump’s protectionism will hurt exports by American car companies.

Dziczek said. “China lowered the tariff rate from 25 percent to 15 percent for most-favored nation status—which is offered to World Trade Organization members—but raised it to 40 percent for the U.S. in retaliation to the tariffs we put on Chinese goods.”

If that’s “winning,” I hate to see the definition of losing.

We’ll round out the editorial commentary with Dan Griswold’s piece in the Los Angeles Times.

The U.S.-China trade war escalated again…both sides have a lot—almost exactly the same amount—to lose from commercial warfare. …A recent World Bank study confirms that neither side will win a protracted trade war. At the current level of tariff retaliation, the World Bank estimates that each country will suffer a drop in annual exports of about $40 billion. If retaliation escalates to include all two-way trade in goods and services, Chinese exports to the United States would fall by $190 billion and U.S. exports to China by $166 billion. …a worst-case scenario would result in a $426-billion loss to the Chinese economy and a $313-billion loss to the U.S. economy. The biggest losers in the United States will be agriculture, chemicals and transport equipment. It will be cold comfort to Americans who lose their jobs and their businesses that our loss is somewhat smaller than what our government inflicts on China.

Lots of material today, so if you made it this far, your reward is this amusing remake of the famous Ben Stein clip from Ferris Bueller’s Day Off.

If you want a more substantive video on why trade barriers are bad, I included Don Boudreaux’s excellent presentation at the end of this column.

P.S. If trade policy continues to move in the wrong direction, I suspect Trump’s final “grade point average” on economic policy might be similar to Obama’s final report card.

This article is reprinted with permission from International Liberty.