Earlier this week, Neil Cavuto asked me about the politics of trade and I warned that Trump’s protectionism may backfire on Republicans because many workers and businesses are suffering the consequences.
Needless to say, I’m not a political expert, and I think even the folks who do that for a living have a hard time disentangling the various factors that motivate voters, so we may not even know for sure after the mid-term elections.
But I do have some actual knowledge of economics, so this is a good opportunity to share some excerpts from my recent article in the Federalist. I start with the basic observation that interventionism is misguided.
…the economy grows faster when markets rather than politicians determine where labor and capital go. …Simply stated, government intervention is a recipe for cronyism, corruption, and inefficiency. It’s no coincidence that market-oriented jurisdictions such as Hong Kong are so much more prosperous than state-driven nations such as Greece. This appreciation of markets explains why conservatives should be in the forefront of the battle to defend free trade.
And it doesn’t matter whether politicians are interfering with transactions between neighbors or interfering with transactions between people who live in different countries.
We understand it would be wrong to let politicians interfere with our freedom to trade with our local grocery store. We also understand it would be a mistake to allow politicians to hinder our liberty to trade with people in neighboring states. The same argument applies when looking at our trade with people in other nations.
I then list seven reasons why free trade is desirable, starting with the fact that exchange, by definition, is mutually beneficial.
1. Voluntary Trade Is a De Facto Good – The capitalist system, based on competition and trade, is defined by voluntary exchange. There is no need for “balance” between participants. We all have trade deficits with our local gas stations. …they never buy from us. Is that bad? Of course not.
And it doesn’t matter whether people in one country are buying more than people in another country.
2. A ‘Trade Deficit’ Means a ‘Capital Surplus’ – Nations don’t trade, people do. So when people in one nation buy goods from people in another nation, the money doesn’t disappear. …Foreigners have placed trillions of dollars in America’s financial markets… This “capital surplus” boosts prosperity and should be celebrated, not bemoaned.
I also point out that trade barriers enable cronyism and corruption.
3. Protectionism Corrupts Markets – Many people unfortunately equate capitalism with big business. This is very unfortunate because large companies…manipulate the political process in order to obtain unearned profits. Trade barriers…interfere with genuine free markets…they contribute to the perception that capitalism is merely a system for the benefit of the rich and powerful.
I then share Bastiat’s wisdom about the “seen” and the “unseen.”
4. Trade Barriers Reduce Jobs and Growth – It’s easy to identify jobs that have been “saved” because of protectionism…it’s not easy to calculate the greater number of jobs that are lost because of higher prices, lost purchasing power, enforced inefficiency, and lost competitiveness.
I admit that trade of any kind can be harsh, but that’s what drives prosperity.
5. Creative Destruction Is Painful But Beneficial – Trade causes pain, but not because goods cross borders. Far more jobs are lost because of domestic trade than because of international trade. …These changes, including ones driven by cross-border trade, are painful for some people, but we all wind up much richer if markets are allowed to function.
I close with two lessons in economic history, starting with an explanation of what drove growth in the 19th century.
6. Tariffs Didn’t Create Growth in the 1800s – …the growth of the 1800s wasn’t because of trade barriers. This was an era before the welfare state. Government was very small and there were no income taxes. There was no regulatory state. …Those were the policies that helped make America an economic powerhouse.
And concluding with an observation about the success of nations with laissez-faire trade policy.
7. Protectionist Nations Lag Free-Trade Jurisdictions – …sometimes it’s easier for people to learn from real-world examples. Hong Kong and Singapore are the two jurisdictions with the world’s lowest trade barriers. Is it any coincidence that they have become rich and prosperous? …countries like New Zealand enjoyed a renaissance after dismantling trade barriers.
The bottom line is that Trump’s protectionism is bad policy. And risky policy.
I politely ask those who disagree to answer these eight questions.
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Carlton,
A few side comments. First, if a currency is truly worthless, it cannot be traded for USD. If it’s very weak, it will take a lot more local currency to buy the USD.
Second, a capital surplus can be invested in debt. That counts as investment for this purpose.
Third, I was only explaining the process, not justifying trade deficits. However, I don’t think a trade deficit is as bad as you apparently think. The US used to run trade deficits all the time in its first century. If the imports lead to value added activity, then it’s probably a good thing. Imports are a benefit, as someone chose to buy those goods. Items not available locally, sub-components to support a global supply chain, cheaper goods that allows specialization in other goods.
John Michael Wagner,
I understand the benefit to the US since the American dollar is not only a reserve currency but American assets are considered safe havens for investors; so American dollars are reinvested here which inure to our benefit. But in the case of countries with weak currencies and little valuable assets that need to buy American dollars to pay for imports, the local currency used to buy those dollars often become worthless paper. So it may technically create a capital account surplus, but in the extreme cases those surplus Zimbabwean or Venezuelan dollars, are often worthless even though they are in the zillions. And even in cases like Jamaica where the local currency is far from worthless, the local currency used to buy US dollars for import stays in Jamaican banks or with currency traders. Some is used for currency trading or speculation; and some is invested in government or corporate debt, which use the surplus local currency to buy more US dollars to fund more imports since everything has to be imported. Very little then goes into productive investment that grow the economy and create jobs since no investor wants to build a shoe factory when people can import shoes cheaper from China. Eventually this becomes a vicious cycle where the local currency loses value with each cycle since nothing is being produced to buttress the currency; there is a gap between the value of what the country produces and the value of what the country consumes. This deficit then has to be funded with american dollar debt from international lending institutions.
So I still do not see how a unilateral trade deficit/capital surplus by itself can benefit a country UNLESS or before there is an equal measure of free market medicine. That is – lower taxes and smaller government, less red tape, rule of law and strong property rights- all of which should militate to create the environment for an investor to build a shoe factory and produce good quality shoes that can be sold for less than the Chinese imports. Only then can I see a capital surplus work to benefit countries that do not have the luxury of a reserve currency like the US. But I dont believe a country can remain prosperous for long if it continually runs a massive trade deficit even if the flip side is a massive capital surplus, since both probably are symptoms of an uncompetitive economy requiring a larger dose of free market medicine. Dan can correct me if I am wrong, but I venture to guess that his free market champions Singapore and Hong Kong, though they import almost everything, probably have never in recent decades run a trade deficit.
…and a total net account deficit /capital surplus to the entire world means that on balance, even though most of the world may dislike you, they still trust that your country is and will remain dynamic enough to deliver superior returns to the net money borrowed — an assumption at could be quite wrong if unbeknownst to foreigners your electorate plans to propel people like Bernie Sanders and Elizabeth Warren into high office. In a way, socialist countries and social democracies will be shooting themselves in the foot if their very own socialism comes to America.
Carlton,
This is not my area of expertise, but think it works like this.
Current account deficit (mostly trade deficit) always matched by capital account surplus applies to any country, not just the US. It’s like an accounting balance thing.
US Dollars paid out for imports return to America as either payment for US exports or as investment in the US. I think Jamaican dollars return to Jamaica, in the same way. But it wouldn’t be China ‘returning’ the Jamaican dollars, but whoever ends up with them after Jamaica exchanges them for US dollars.
Are your reasons to support free trade meant to apply universally to all countries or just to America? I ask because for example your #2 reason -that “Capital Surplus” is the flip side of a “Trade Deficit” – may not always be true. This is especially so as it relates to countries that do not have the benefit of having a reserve currency that is accepted for trade all over the world, as the US dollar is. For example, a country like Jamaica has to buy US dollars to trade with China. China has no great incentive to re-invest those dollars in Jamaica since it can be used to buy more lucrative and less risky assets elsewhere in America or the world since the US dollar is accepted for trade in almost every corner on earth. Though China does invest in infrastructure projects in Jamaica, the value of those project I suspect is far less than the amount of dollars Jamaica spends on buying Chinese goods. As Jamaica has little natural resources to sell to China and hence runs a perpetual trade deficit, where is the flip side “capital surplus” for Jamaica or any other resource poor country that has to buy dollars to trade with China?
You may know something about economics but you don’t know much about negotiating.
Sent from my Verizon, Samsung Galaxy smartphone
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Reblogged this on James' Ramblings and commented:
Reblogging for future reference:
>>>1. Do you think politicians and bureaucrats should be able to tell you what you’re allowed to buy?
As Walter Williams has explained, this is a simple matter of freedom and liberty. If you want to give the political elite the authority to tell you whether you can buy foreign-produced goods, you have opened the door to endless mischief.<<<
The conflict between Globalism and Nationalism is not about whether there will be government and politicians and bureaucrats telling us what to think and how to live. The issue is whether that control will be centralized and cover the Globe or if separate entities called Nations will be allowed to exist to protect the interests of the various diverse Peoples on the Globe. A centralized Global locus of control is far more likely to be megalomaniacal and psychotic.
2. If trade barriers between nations are good, then shouldn’t we have trade barriers between states? Or cities?
This is a very straightforward challenge. If protectionism is good, then it shouldn’t be limited to national borders.<<<<
The US Constitution granted power to Congress to regulate trade for the nation as a whole and prohibited restraints of trade between the several States in order to strengthen the existence of the USA as a unified Union of States and make it a Nation. So, yes there is a difference between trade barriers with foreigners and trade barriers within one Nation if it is to be a Nation.
I can see how a doctrinaire Globalist faux "Libertarian" might be blind to the distinction.
3. Why is it bad that foreigners use the dollars they obtain to invest in the American economy instead of buying products?
Little green pieces of paper have little value to foreign companies. They only accept those dollars in exchange for products because they intend to use them, either to buy American products or to invest in the U.S. economy. Indeed, a “capital surplus” is the flip side of a “trade deficit.” This generally is a positive sign for the American economy (though I freely admit this argument is weakened if foreigners use dollars to “invest” in federal government debt).<<<<
Foreigners are foreigners who have interests divergent from the citizens of a nation. Duh.
4. Do you think protectionism would be necessary if America did pro-growth reforms such as a lower corporate tax rate, less wasteful spending, and reduced red tape?
There are thousands of hard-working Americans that have lost jobs because of foreign competition. At some level, this is natural in a dynamic economy, much as candle makers lost jobs when the light bulb was invented. But oftentimes American producers can’t meet the challenge of foreign competition because of bad policy from Washington. When I think of ordinary Americans that have lost jobs, I direct my anger at the politicians in DC, not a foreign company or foreign workers.<<<
Of course all the onerous and unreasonable regulation and high taxes are damaging and costly to the economy of the Nation and make us uncompetitive. But it turns out that a lot of the regulation and taxes are imposed on the US by the stinking Globalists in order to keep us down, man. Duh.
The politicians in DC are traitors to America; their loyalty is to the Satanic Globalist Brave New World Order. There is a demonic madness to their methods.
5. Do you think protectionism would help, in the long run, if we don’t implement pro-growth reforms?
If we travel down the path of protectionism, politicians will use that as an excuse not to implement pro-growth reforms. This condemns America to a toxic combination of two bad policies – big government and trade distortions. This will destroy far more jobs and opportunity that foreign competition.<<<<
No, even a balanced Neo-Protectionism is not a panacea. The closest thing to a panacea would be getting rid of the treasonous traitorous demon infested winged monkey politicians who sabotage the Nation in myriad ways.
6. Do you recognize that, by creating the ability to offer special favors to selected industries, protectionism creates enormous opportunities for corruption?
Most protectionism in America is the result of organized interest groups and powerful unions trying to prop up inefficient practices. And they only achieve their goals by getting in bed with the Washington crowd in a process that is good for the corrupt nexus of interest groups-lobbyists-politicians-bureaucrats.<<<<
The idea of Neo-Protectionism is not to protect specific industries, it is to tax the consumption of foreign crap that the Nation does not really need. If people want to buy useless crap that needs to be imported and paid for with debt then they can pay a tax on it. What's wrong with that?
7. If you don’t like taxes, why would you like taxes on imports?
A tariff is nothing but a tax that politicians impose on selected products. This presumably makes protectionism inconsistent with the principles of low taxes and limited government.<<<<
Why do so-called "Libertarians" fight so hard against taxes on the consumption of foreign crap, but only pay pathetic lip service against the income tax, which is far more intrusive and evil and wicked and onerous and a much bigger drag on production. Does not a tax on income discourage the production of income? Is that not worse than a tax that discourages the consumption of foreign crap that has to be paid for with debt?
8. Can you point to nations that have prospered with protectionism, particularly when compared to similar nations with free trade?
Some people will be tempted to say that the United States was a successful economy in the 1800s when tariffs financed a significant share of the federal government. That’s largely true, but the nation’s rising prosperity surely was due to the fact that we had no income tax, a tiny federal government, and very little regulation. And I can’t resist pointing out that the 1930 Smoot-Hawley tariff didn’t exactly lead to good results.
We also had internal free trade, as explained in this excellent short video on the benefits of free trade, narrated by Don Boudreaux of George Mason University and produced by the Institute for Humane Studies.<<<<>>>My closing argument is that people who generally favor economic freedom should ask themselves whether it’s legitimate or logical to make an exception in the case of foreign trade.<<<<<
I favor economic freedom, but I also desire the political and social and religious and spiritual freedom that is best preserved, protected, and defended by National identity.
Even though I've turned against "Free Trade," I still consider my self a small "l" libertarian because I cherish small government in general. The essence of liberty in my opinion is the limitation of government. So it is not inconsistent for me to oppose the unlimited kind of government we're getting with the Brave New World Order Globalist regime who push "Free Trade."