Weighing Trump’s Trade Apologists

In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.

But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade. 

Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.

Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs.  They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could.  But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade.  But just close your eyes and imagine.

Why We Trade

Imagine life in isolation, waking every morning before sunrise to make your own clothes, build and repair your meager shelter, hunt and harvest your own food, concoct rudimentary salves for what physically ails you, and attend to the upkeep of your brutish existence engaging in other difficult and tedious tasks. Forget leisure or luxuries; all of your time would be consumed trying to produce basic necessities merely to subsist.

Trade Is Not a Trade-Off: The Stronger Case for Free Trade

Too many advocates of trade liberalization don’t really understand the case for free trade. Consider this sympathetic interview by Steve Inskeep of NPR with U.S. Trade Representative Michael Froman, the chief negotiator of the Trans-Pacific Partnership:

INSKEEP: Froman argues the TPP, the Trans-Pacific Partnership, will give U.S. industries more access to foreign markets. Granted, there’s a trade-off. Other nations get more access to the U.S. for their products. Froman contends that, at least, happens slowly as tariffs or import taxes drop.

FROMAN: The tariff on imported trucks from Japan, as an example, won’t go away for 30 years. On apparel and textiles, we worked very closely with the textile manufacturers in the U.S. to come up with an outcome that they could be comfortable with, so that we’ll let in clothes coming that are made Vietnam or made in Malaysia, but they’ve got to use U.S. fabric.

Inskeep refers to the lowering of U.S. tariffs as “a trade-off,” and Froman accepts that characterization. Both operate from the premise that Americans want other countries to reduce their barriers to our exports, and that the “trade-off” for that benefit is that we must reduce our own trade barriers.

That’s backwards. The benefit of trade is that we get access to goods and services that we might not get otherwise, or we get to pay lower prices for the goods we want. More broadly, we want free – or at least freer – trade in order to remove the impediments that prevent people from finding the best ways to satisfy their wants. Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale.

The Benefit of Free Trade Is Not Exports, It’s Lower Prices on Things We Want

In the news this morning, Sen. Orrin Hatch (R–UT), author of the Trade Promotion Authority bill, makes the usual case for trade agreements and TPA:

We need to get this bill passed. We need to pass it for the American workers who want good, high-paying jobs. We need to pass it for our farmers, ranchers, manufacturers, and entrepreneurs who need access to foreign markets in order to compete. We need to pass it to maintain our standing in the world.

It’s certainly good that the chairman of the Senate Finance Committee supports freer trade. But I fear he’s as confused as most Washingtonians about the actual case for free trade.

This whole “exports and jobs” framework is misguided. Thirty years ago in the Cato Journal, the economist Ronald Krieger explained the difference between the economist’s and the non-economist’s views of trade. The economist believes that “The purpose of economic activity is to enhance the wellbeing of individual consumers and households.” And, therefore, “Imports are the benefit for which exports are the cost.” Imports are the things we want—clothing, televisions, cars, software, ideas—and exports are what we have to trade in order to get them.

And thus, Krieger continues, point by point:

Cheap foreign goods are thus an unambiguous benefit to the importing country.

The objective of foreign trade is therefore to get goods on advantageous terms.

That is why we want free—or at least freer—trade: to remove the impediments that prevent people from finding the best ways to satisfy their wants. Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale.

I write about this in The Libertarian Mind (buy it now!):

Washington Post Half-Heartedly Seeks Clarity About Export-Import Bank Jobs Claims

It was good of the Washington Post Editorial Board to raise questions yesterday about the veracity of the “jobs-created-by-Export-Import-Bank-policies” claims proffered by the Bank’s supporters. I just wonder whether the editorial pulled its punches where a reporter on assignment or a more inquisitive journalist would have delivered an unabashed blow to the credibility of the Bank’s primary reauthorization argument: that its termination will lead to a reduction in U.S. exports and jobs.

Kudos to the Post for raising an eyebrow at the Bank’s claims of “jobs created” or “jobs supported” by Ex-Im financing:  

[W]hen it comes to jobs, well, just how rigorous are [Ex-Im’s] estimates, really? Congress ordered a study of that very question when it last reauthorized Ex-Im in 2012. In May 2013, the Government Accountability Office (GAO) produced its verdict: Meh.”

“GAO noted that Ex-Im must speak vaguely of “jobs supported,” rather than concretely of jobs created, since its methodology cannot really distinguish between new employment and retained employment. To get a number for “jobs supported,” which includes both a given firm and that firm’s suppliers, Ex-Im multiplies the dollar amount of exports it finances in each industry by a “jobs ratio” (calculated by the Bureau of Labor Statistics).

Using that approach, Ex-Im estimates an average of 6,390 jobs are “supported” by every billion dollars of exports financed. The Post is right to note the GAO’s conclusion:

These figures do not differentiate between full-time and part-time work and, crucially, provide no information about what might have happened to employment at the firms in question, or others, if the resources marshaled by Ex-Im had flowed elsewhere in the economy.

Damning Trade with Faint Praise

A Washington Post editorial today pushes back against the argument that a Trans-Pacific Partnership agreement would exacerbate income inequality. Amen, I suppose. But in making its case, the editorial burns the village to save it by conceding as fact certain destructive myths that undergird broad skepticism about trade and unify its opponents.

“All else being equal,” the editorial reads, “firms move where labor is cheapest.”  Presumably, by “all else being equal,” the editorial board means: if the quality of the factors of production were the same; if skill sets were identical; if workers were endowed with the same capital; if all production locations had equal access to ports and rail; if the proximity of large markets and other nodes in the supply chain were the same; if institutions supporting the rule of law were comparably rigorous or lax; if the risks of asset expropriation were the same; if regulations and taxes were identical; and so on, the final determinant in the production location decision would be the cost of labor. Fair enough. That untestable premise may be correct.

But back in reality, none of those conditions is equal. And what do we see? We see investment flowing (sometimes in the form of “firms mov[ing],” but more often in the form of firms supplementing domestic activities) to rich countries, not poor. In this recent study, I reported statistics from the Bureau of Economic Analysis revealing that:

Nearly three quarters of the $5.2 trillion stock of U.S.-owned direct investment abroad is concentrated in Europe, Canada, Japan, Australia, and Singapore. Contrary to persistent rumors, only 1.3 percent of the value of U.S.-outward FDI [foreign direct investment] was in China at the end of 2011.

Time to Lose the Trade Enforcement Fig Leaf

During his SOTU address last week, the president declared it a national goal to double our exports over the next five years.  As my colleague Dan Griswold argues (a point that is echoed by others in this NYT article), such growth is probably unrealistic. But with incomes rising in China, India and throughout the developing world, and with huge amounts of savings accumulated in Asia, strong U.S.

21st Century U.S. Trade Policy Should be Pro-Market, not Pro-Business, Pro-Labor, or Pro-Lobbyist

The difference between the trade policy we have today and the trade policy we should have is like the difference between crony capitalism and free-market capitalism. The sausage grinder that is U.S. trade policy serves politicians and rewards lobbyists and gate-keeper bureaucrats, who have the gall to presume entitlement to limiting Americans’ options and picking winners and losers.

In a country that exalts freedom, the default trade policy should be free trade. But it’s not. Why?

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