When commenting on Gary Cohn’s resignation as his chief economic advisor, President Trump said that Cohn was a great guy, but a “globalist.” So what is a “globalist”? Among Trump and many of his supporters, it seems to be disparaging shorthand for people who don’t put “America first” (another term with rather nebulous meaning). In Cohn’s case, his sin was objecting to the increasingly protectionist rhetoric and actions, particularly the blanket tariffs on steel and aluminum imports, of Mr. Trump, and touted by anti-trade members of the president’s inner-circle like Peter Navarro (who not that long ago ran for mayor of my home town, San Diego, as a Bernie Sanders-like Democrat).
It is unclear why being in support of free trade makes someone like Gary Cohn a “globalist”, or why such supposed globalism is bad for the United States. To confound things even further, the term is often used, as it was by Trump would-be controller Steve Bannon, to describe a large ideological movement led by some mysterious coterie of “Davos” people, the Trilateralists, or maybe The Smoking Man, who are the authors of an interconnected policy of world-wide military adventures, the Iran nuclear deal, the Paris climate accords, unchecked immigration, and international free trade agreements — all engineered for the benefit of “global elites” at the expense of average people. But again, it is unclear in this very murky construct, why free trade is linked up with all of this, other than that free trade involves economic activity with foreigners.
I propose that we step back from the confusing labeling and get back to a fair evaluation the costs and benefits of international free trade.
Let’s start with the very basics. President Trump uses the merchandise trade deficit with any country as the yard stick to measure whether a country is “winning” or “losing” from trade. When you are so wrong about such a basic thing, it is hard to get anything else right. First, countries do not trade with each other (for the most part). The trading is between individuals (or individual businesses). And why do individuals and businesses trade with each other? Trade happens when both parties of the transaction believe such a trade is beneficial. It is the foundation of market economics. So, if one party buys more from some other party, is the buyer getting, as Trump has put it, “raped”? If trade between individuals is a win-win, then trade deficits between nations are immaterial.
Adam Smith, nearly 250 years ago, explained how division of labor, specialization, and regional comparative advantages, not just within an industry but across the globe, are primary factors in the growth of “the wealth of nations.” The Libertarian thinker, Leonard Read, is famous for his essay “I, Pencil” which teaches the concept that trade, including international trade, is responsible for creating things we would not otherwise have. And, as Milton Friedman was fond of pointing out, if we are running a merchandise trade deficit, the party receiving our dollars for its goods is going to then use those dollars that will eventually find their way back to the U.S. — perhaps in the purchase of services (like financial products and insurance which are not included in the merchandise trade numbers, and in which the U.S. routinely runs a surplus), or in direct investments in businesses or real estate in the United States, or in purchases of that very sought after U.S. export, U.S. Treasury securities.
We import things that either are not made, not well-made, or relatively expensively made in our home country. And the reasons we tend to buy more from other nations than they buy from us has, typically, little to do with unfair trade practices, but more from the rather simple fact that we are a much more populous country with far more total discretionary income than most of our trading partners. Assuming two nations have the ability and capacity to produce goods for which there is demand in the other country, all other things being equal, who will buy more — the country of 325 million people with a per capita income of $58,000 (the United States), or the county of 128 million people with a per capita income of $17,740 (Mexico)? Using the merchandise trade deficit as the prime indicator of whether one is “winning” or “losing” from trade is beyond absurd.
When I explain this to people, I sometimes in response get an incredulous stare and the response, “Don’t you think we’d be a whole lot better off in this country if we made all the things here that we import?” The answer is, sure we would, if we could make all those things, and we could make them as well, and as inexpensively. But that isn’t reality. If it were, we wouldn’t be importing them, would we?
But what about all the closed steel mills, factories, etc. that are supposedly the victims of international trade? The “factory towns,” where generations made their livelihood at the old steel mill, or assembly plant, but which are now virtual ghost towns, are a staple of the salacious Trump dossier on free trade. Yes, with competition and free markets, market forces drive producers to reduce prices and produce better products. And even without unfair trade practices, high labor costs and costly regulations often put U.S.-based companies at a competitive disadvantage to many foreign producers, and as a result many U.S. producers are under great pressure to either cut wages, invest in cost saving technology, find new niches where they can compete better, or shut down operations.
These market dynamics will result in lost jobs in some industries, not just from the direct result of competition, but from indirect ones, such as advances in technologies which allow certain industries to use less labor, or which make certain industries obsolete. But in the case of heavy industry such as steel making, it is simply untrue that American companies have all been defenseless victims, unable to meet the challenge. By investing in new production technologies and offering many specialized steel products, America’s largest steel producer, Nucor has actually done rather well, with pre-tax earnings of $1.3 billion in 2016 and $1.75 billion in 2017. Does it really make a lot of sense to “protect” the 140,000 workers in the U.S. steel industry by increasing the cost of production (and thereby reduce the competitiveness) of U.S. steel consuming industries that employ more than 2,000,000 workers?
And though trade critics point to a “lost decade” in which real (inflation adjusted) earnings have barely moved, given that that “lost decade” includes the financial induced “Great Recession” and eight years of retarding economic policies under Obama, such as tax increases and expansion of the regulatory state with Obamacare and Dodd-Frank, putting the blame for anemic wage growth during this period on increased foreign trade seems a stretch. The fact is, despite the Obama years, average inflation-adjusted earnings in 2015 were significantly higher than they were in 1985, and average unemployment rates, other than during Obama’s first term, have been very low, all while foreign trade (and for the most part, our merchandise trade deficit) has expanded.
It is not news that free markets — either within a country or across countries — produce some “losers,” at least in the short term, and the pain felt is concentrated, rather than evenly spread. On the other hand, the lower prices from competition benefit all consumers (as well as producers whose input costs are lowered), and the entire country benefits from the drive for innovation, and the development of new and better products. While some Americans have lost traditional manufacturing jobs, millions of Americans have found good employment in companies, and in some industries, that didn’t even exist 30 or 40 years ago. The empirical evidence — not just the economic theory — has shown definitively that relatively free markets create far more wealth, technological advancement, and higher standards of living, than has any government scheme of protected, favored industries, and other attempts at government planning and control.
All this is not to say that there is not a place for targeted tariffs or other measures to combat “unfair” practices. In fact, despite Trump’s rhetoric to the contrary, previous administrations have imposed targeted tariffs to combat alleged foreign abuses, including tariffs on Chinese steel and tires put on by the Obama administration, with the blessing of the much-maligned World Trade Organization. Some of my more libertarian friends will argue that if some government is going to subsidize our consumption by dumping goods here at below cost, more power to them! But the government does have a responsibility to provide justice, and we should step in to protect our industries from truly predatory practices, and we should prod other governments to lower barriers to our goods (as we did do with NAFTA and would have done with TPP). And that has, in fact, been the policy of the United States for the last 70 years, though at various times swerving a little more protectionist (though always under the banner of “free but fair trade”) or a little less so. But to hear many commentators, presidential advisors, and a president proclaiming, “trade wars are good, and easy to win,” and blithely talking about destroying the “globalist” system of world trade, is frightening. That is a recipe for economic destruction that we haven’t seen in this country since the 1930s.
So far, with exceptions and waivers, Trump’s tariffs have been characteristically incoherent and effectively sound and fury signifying (almost) nothing. But his ignorance-based enthusiasm for protective tariffs and tearing up free trade agreements is one of the very few policy areas in which he has demonstrated consistency over the years and is a cause for serious concern.