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Archive for the ‘Protectionism’ Category

Last month, I explained why trade deficits don’t matter.

I make the same point in this short video from Freedom Partners.

Near the end of the video, I pointed out that unfettered trade is good, whether with your neighbors or with people in other nations.

And I also mentioned trade with people in other states, which gives us a great opportunity to look at how free trade between American states developed and what it has meant for U.S. prosperity.

Writing for the Wall Street Journal, John Steele Gordon gives us a valuable history lesson on free trade inside America’s borders.

The Constitution requires free trade, the U.S. Supreme Court held in 1824. …The court ruled unanimously…that the power to regulate interstate commerce lay exclusively with the federal government and that states couldn’t impose impediments to that commerce in their parochial self-interest. The economic effect of the ruling was immediate. …Charles Warren, the great historian of the Supreme Court, called Gibbons v. Ogden “the emancipation proclamation of the American economy.” The case made the U.S. the world’s largest free market by flattening state-imposed barriers to “commerce,” a word the court had defined broadly to include trade and navigation. Within a half-century, the American economy rose to become the mightiest in the world, due in no small part to the precedent created by that decision. Free trade allows maximal use of “comparative advantage” to minimize the price of goods for everyone. The lower the prices, the higher the demand and thus the larger the economy.

Sadly, we have not always applied the lessons we learned to trade across our borders.

The Great Depression was a very painful example of what happens when protectionists are in charge.

With its own example of the power of free trade to produce wealth for everyone, one would think that the U.S. would have promoted it world-wide. But for most of the country’s history, Americans have been anything but free traders beyond their own borders. …In 1930, hoping to safeguard the American domestic market for U.S. producers in the looming Depression, Congress passed the Smoot-Hawley tariff, the highest in American history. Despite the pleas of more than 1,000 economists, President Herbert Hoover signed it into law. The results were catastrophic. With the U.S. erecting higher tariff walls to protect its internal market, other countries naturally did the same in a game of beggar-thy-neighbor. American exports fell from $5.241 billion in 1929 to $1.161 billion in 1932, a 78% decline. World trade in that period declined from $36 billion to $12 billion—less, adjusted for inflation, than it had been in 1896.

Fortunately, policy has moved in the right direction ever since World War II, with spectacularly positive results.

After World War II, …The U.S., having learned its lesson, moved to lower tariffs world-wide. In 1947, 23 nations signed the General Agreement on Tariffs and Trade and began negotiations to lower tariffs, which then averaged 22%, as well as other barriers to trade. In a series of seven negotiations, …the average tariff had been lowered to only 5% by 1999. …The results of this long and often arduous process have been spectacular. World trade has increased exponentially. Merchandise trade amounted to about $58 billion in 1950. By the end of the century it was $5.4 trillion. Only 17 years later, merchandise trade had increased to $17 trillion. Trade in agricultural products and services has increased similarly. Even taking inflation into account, world trade since World War II has increased by a factor of about 30, making the whole world vastly more prosperous.

Last but not least, Gordon closes by pointing out that trade deficits are not a bad thing.

…there is the persistent though discredited belief that countries should strive to maintain a positive balance of trade, with more exports than imports. It is, of course, no more possible for all countries to have a positive balance of trade than it is for all people to be above average in height. Rapidly growing and maturing economies usually run foreign trade deficits, as the U.S. did throughout the 19th century while it grew into an economic superpower. The U.S. is again running large trade deficits, but those deficits are balanced by large capital inflows from foreign investors.

Amen. That’s the point of my video.

Especially the point about a trade deficit simply being the flip side of a capital surplus (now technically known as a financial surplus, but I’m sticking for now with the old terminology).

Let’s close by looking at the historical data on U.S. trade. Notice we had a trade deficit during much of the 1800s when we enjoyed very strong growth.

And also notice the miserable results during the 1930s.

P.S. While I generally don’t worry about the trade deficit/capital surplus, it can be a negative sign if foreigners are using the dollars they earn to buy government debt and prop up D.C.’s fiscal profligacy. But that’s the fault of Washington spending, not trade.

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I’m in Victoria, British Columbia today to talk about trade with some young Canadians.

In doing some research about how to present the best case for free trade and against protectionism, I found some excellent commentary on why trade deficits don’t matter.

Here are some excerpts from a column by Don Boudreaux, a professor at George Mason University.

…the president’s trade policies are dreadful; they’ll reduce U.S. economic growth and diminish Americans’ spending power. …No myth about trade is more widespread than is the belief that imports reduce domestic employment. …trade is a two-way street. Non-Americans sell stuff to Americans only to acquire the dollars needed buy American exports and to invest in the U.S. — and each of these activities creates other particular jobs in America to offset those that are destroyed. …The reason trade deficits don’t reduce overall employment is that, in fact, trade deficits are not really deficits at all. Every cent that does not return to the U.S. as demand for American exports returns instead as investment in America. In economists’ lingo: the trade deficit (or, to be precise, the current-account deficit) is matched by a capital-account surplus of equal size. …Why should we be upset if foreigners continue to think highly enough of our economy to want to invest here?

And here’s some of what Greg Mankiw of Harvard wrote for the New York Times.

…the president’s overall approach to international trade is so confused. …When Mr. Trump discusses our trade relations with another nation, he often points to the bilateral trade balance — the difference between the value of our exports to that nation and the value of our imports from it. If imports exceed exports, we are running a bilateral trade deficit, which Mr. Trump interprets as a sign that we are the relationship’s losers. …consider some of the many bilateral trade deficits that I run. Whenever my family goes out to dinner, the restaurateur gets some money, and we get a meal. In economics parlance, the Mankiw family runs a trade deficit with that restaurant. But that doesn’t make us losers. …I can run persistent trade deficits with restaurants because I run trade surpluses elsewhere. Take The New York Times, for instance. It pays me more for my columns than I pay it for my subscription. That’s a bilateral trade surplus for me and a bilateral trade deficit for The Times. But nonetheless, we both gain.

I tried to incorporate these insights into my presentation, which has more than 30 slides.

Here are the ones that deal with the trade deficit, starting with some elementary observations.

I then pointed out that all of us have trade deficits in our daily lives.

Yet we understand this doesn’t hurt us.

Using trade with China as an example, I explain that money we send overseas only has value because foreigners can use it to purchase things in America.

Including investments.

And I recycled this chart from a column back in March.

For what it’s worth, understanding that a trade deficit is merely the flip side of a financial surplus is the key to recognizing that trade deficits (generally) don’t matter.

I’ll close with an important caveat.

I’m a big fan of foreign investment in the U.S. economy. Indeed, it’s one of the reasons why I’m happy America is a tax haven for citizens of other countries.

That being said, not all inbound investment is created equal. I’m delighted when foreigners buy stock and bond. I’m very happy when they make direct investments (one of the reasons I like the EB-5 visa program).

It’s not good news for our economy, though, when foreigners buy government bonds. But that’s the fault of our ever-expanding welfare state, not trade.

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I don’t want to write about Trump’s new NAFTA deal (which now has the clunky acronym of USMCA), largely because not much changed since the partial deal with Mexico was unveiled.

Also, it’s hard to get too worked up about the new agreement since it largely tinkers with the status quo. And since I was a fan of NAFTA, I’m relieved Trump didn’t eviscerate that pact.

But several experts have produced very good summaries, which means I can be lazy and share their good work.

Let’s start with Jeffrey Schott of the Peterson Institute, who is underwhelmed by the revised NAFTA.

NAFTA’s benefits had always been primarily through the strengthening of economic integration of the three economies. Contrary to President Trump’s claims, the new pact moves backwards in this critical regard and imposes new restrictions that will impede regional trade and investment, stifling the potential for economic growth. On autos, the deal is innovative in a perverse way: It is the first free trade agreement (FTA) negotiated by the United States that raises rather than lowers barriers to trade and investment. It adds layer upon layer of costly new regulations that producers must follow to qualify for NAFTA’s low tariffs—layers virtually certain to drive up costs of autos for consumers and very likely reduce US jobs in the auto sector. …these steps add up to a step backwards on trade and investment in the United States and the region as a whole that, while not as damaging as it could have been, will do little or nothing to help workers, consumers, and the economies of North America.

Veronique de Rugy of the Mercatus Center is similarly dour, though thankful that the deal isn’t as bad as Trump wanted.

…the Trump administration gave up on its worst demands, including one for a minimum of 50 percent mandatory U.S. content to benefit from the new NAFTA duty-free treatment, a ban on student visas for Chinese nationals and an every-five-year sunset clause. If the U.S. hadn’t dropped these poison pills, I doubt we would have had this new deal. Let’s all be grateful for the willingness to compromise on the part of the U.S. trade negotiators. …in spite of the tiny trade-liberalization measures in the deal, tariffs overall remain significantly higher than they were before president Trump started “negotiating.” …The auto section of the deal is not as bad as what the Trump administration had hoped for, but it is still really ugly. For automobiles to enter the U.S. duty-free from North America, at least 75 percent of their content must originate in the U.S., Mexico, and Canada, up from the current 62.5 percent. It doesn’t take a rocket scientist to understand that this requirement will increase the price that Americans pay.

Ryan Young of the Competitive Enterprise Institute piles on.

Given the Trump administration’s emphasis on government-managed trade, it could have been much worse. Now President Trump can claim a political victory and hopefully turn his attention to non-trade issues, while actual trade policy remains mostly unchanged. …The 1,812-page agreement leaves intact the mostly tariff-free relationship between the U.S., Canada, and Mexico. It even has a few improvements, such as a slight liberalization of Canada’s dairy policy. U.S. agriculture policy will remain heavily subsidized and insulated from competition, however. Among the downsides are new wage and country-of-origin rules that will make cars more expensive… Also troubling is a general NAFTA/USMCA ethos under which some countries determine other countries’ regulatory policies for them. This is generally due to trade-unrelated policies in trade agreements, mostly on labor, environmental, and intellectual property issues. …In short, NAFTA has a new name, but it’s still NAFTA. …a major bullet has been dodged between America and two of its largest trading partners. That the Trump administration is calling it a victory means that a major economic loss has been avoided for the time being. It would have been better to leave well enough alone, but under the circumstances, this may be about the best possible outcome.

Simon Lester and Inu Manak grade the new deal, citing good news on agriculture and bad news on labor regulation and autos.

In terms of liberalization in the USMCA, the most important component is the liberalization of Canadian agriculture imports, such as dairy products, eggs, wheat, poultry, and wine. Dairy market access was a key concern for the United States, which has long complained about Canada’s strict supply management and quota system. …In addition, Canada agreed to give up a pricing system for certain types of milk, as well as expanding the U.S. quota for chicken, eggs, and turkey. …The labor rights provisions go further than past U.S. trade agreements. For some people on the left, this could offer a reason to support the agreement. If you are skeptical about including labor provisions in trade agreements, as we are, this is a negative aspect to the agreement. …The new rules of origin are extremely restrictive, raising costs for auto production in North America. This could lead to more production being done outside of North America, or higher costs for consumers. This is the most negative part of the new agreement.

Speaking of all the new command-and-control regulation in the USMCA, this tweet from Scott Linicome sums up one of the great ironies of the NAFTA revision.

William Reinsch of the Center for Strategic and International Studies adds his two cents, mostly noting that we’re lucky Trump didn’t make things that much worse (a common theme from all the experts).

It is somewhat comforting to see that one of the worst things you can say about U.S.-Mexico-Canada Agreement (USMCA) is that the new trade agreement replaces a term that everyone knows and can say with an unpronounceable acronym. …the business communities in all three countries dodged a serious bullet. …no one had to swallow many of the so-called poison pills. …The fact that many of its efforts to build an economic wall around the United States did not make it to the finish line is also good news, although the Canadians and Mexicans probably deserve more credit for that than our administration does.

Let’s close with some optimism. Dalibor Rohac of the American Enterprise Institute writes for CapX that the new pact shows that Trump’s protectionist instincts can be sidetracked.

…considering the range of possible outcomes, a sigh of relief is in order. President Trump’s zero-sum view of the world and his penchant for grand gestures and publicity stunts created a real risk that NAFTA – one of the great successes of trade liberalisation around the world – would follow the fate of other agreements from which his administration decided to withdraw. Forcing higher wages and labour protection standards on a relatively poor country such as Mexico will have unintended consequences, but that is likely an acceptable price for keeping trade in North America tariff-free. …USMCA shows how President Trump’s protectionism can be constrained by other world leaders: by letting the US President score easy headline-grabbing victories, which will allow him to claim that he has ‘fixed’ previously ‘horrible’ trade deals, while leaving the substance of policies mostly unchanged.

Needless to say, this doesn’t cast Trump in a positive light.

I’ll close by restating a point I made in August about, “The process of NAFTA began under Reagan, negotiations finished under the first President Bush…, and the pact was approved under Clinton.”

And American workers were beneficiaries, though Trump put 1.8 million jobs at risk by threatening to deep six that achievement.

Thankfully, it looks like NAFTA will largely survive Trump.

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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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When President Trump proposed zero trade barriers among major economies, I applauded. Government-imposed barriers to commerce hurt prosperity, whether those restrictions hinder voluntary exchange inside a country or across national borders.

There’s a debate over Trump’s sincerity, and I’m definitely with the skeptics (look at his supposed deal with Mexico, for instance), but let’s set that issue aside and investigate the merits of free trade.

But let’s go one step farther. Instead of looking at whether multiple nations should simultaneously eliminate trade barriers, let’s consider the case for unilateral free trade.

In other words, should the government abolish all tariffs, quotas, and other restrictions so that buying products from Rome, Italy, is as simple as buying products from Rome, Georgia.

The global evidence says yes, regardless of whether other countries do the same thing.

Consider the examples of Singapore, Macau, and Hong Kong. According to the World Trade Organization, trade barriers are virtually nonexistent in these jurisdictions.

Have they suffered?

Hardly. According to the World Bank, all three jurisdictions are among the most prosperous places on the planet. Indeed, if you removed oil sheikdoms and tax havens from the list, they would win the gold, silver, and bronze medals for prosperity.

To be sure, there are many reasons that Singapore, Macau, and Hong Kong are rich. They have low taxes and small government, as well as comparatively little red tape and intervention.

But free trade definitely helps to explain why these jurisdictions have become so rich at such a rapid pace.

Let’s also look at the example of New Zealand. It doesn’t have absolute free trade, but average tariffs are 2.02 percent, which means it is the world’s fifth-most pro-trade nation.

Have the Kiwis suffered from free trade?

Nope. I shared a remarkable video last year that explains the nation’s remarkable turnaround coincided with a period of unilateral trade liberalization.

Today, let’s look at a column on the same topic by Patrick Tyrrell.

New Zealand…is one of the champions of economic freedom around the world. But it wasn’t always so. In the mid-1980s, New Zealand was facing an economic crisis, with its domestic market and international trade both heavily regulated. Unemployment had reached 11 percent… In response, the government of New Zealand began implementing revolutionary economic reforms, most significantly related to trade policy. It announced in 1987 a program that would reduce the tax on imports to under 20 percent by the year 1992. By 1996, that tax was reduced further to under 10 percent, and by the end of 1999, about 95 percent of New Zealand’s tariffs were set at zero.

Was that a successful policy?

Extremely beneficial.

New Zealand’s adoption of less restrictive trade policies has corresponded to its climb up the trade-freedom scale…and with a huge boost in per capita gross domestic product. The United States could take a page out of New Zealand’s trade-policy book and implement the same type of reductions in tariffs… That would enhance innovation and economic freedom—and grow our economy.

Here’s the chart from Patrick’s column.

Once again, the obvious caveat applies. New Zealand has adopted many pro-market policies in recent decades, so trade is just one of the reasons the country has moved in the right direction.

Now let’s go back in history and peruse Professor Peter Cain’s analysis of what happened when the U.K. adopted unilateral free trade in the mid-nineteenth century.

The trend to freer trade began in the late eighteenth century. …it was the 1840s that saw the beginning of a true revolution in policy. Earlier moves towards freer trade had been conditioned by an insistence on reciprocity (i.e. agreements with other states on mutual tariff reductions), but from the 1840s policy was determined unilaterally. The most dramatic instance of this was the Repeal of the Corn Laws in 1846. …It also reflected a growing belief that cheap imports were the key to prosperity because they would benefit the consumer as well as reduce business costs… Free trade certainly became a hugely popular cause in Britain… It was attractive not only because it guaranteed cheap food, but also because it supported the belief, widespread amongst both the business class and their workforce, that the state should be kept out of economic life.

What was the impact of this shift to unilateral free trade?

…free trade, in combination with heavy foreign investment, certainly helped to change the shape of the British economy in the late nineteenth century. …the long run effect of unilateral free trade had been to increase competition for British agriculture and industry, lower profits and stimulate capital exports. …this regime had yielded great benefits. British capital, pouring into foreign railways and other industries overseas, had helped to reduce agricultural commodity prices, shifting the terms of trade in Britain’s favour and raising national income. Dividends and interest payments on foreign investments had also increased greatly and these returns were realised by importing cheap foreign produce freely. Furthermore, …this unilateral free trade-foreign investment system had provided a strong boost to Britain’s commercial and financial sector.

Here’s the Maddison data on per-capita GDP in the United Kingdom between 1800-1914.

Looking at this chart, I’m wondering how anyone can possibly argue that unilateral free trade hurts an economy.

Once again, many caveats apply. Most important, many other policies play a role in determining national prosperity. It’s also worth noting that a handful of tariffs on products like wine and tobacco were maintained. Most troubling, the era of unilateral free trade coincided with the imposition of the income tax (though it didn’t become a money machine for bigger government until the 1900s).

The bottom line is that every example of unilateral free trade (or sweeping unilateral reductions in trade barriers) tells a positive story. Trade liberalization isn’t everything, but it’s definitely a huge plus for growth.

Yes, the best of all worlds is for trade liberalization to happen simultaneously in all countries, and negotiations have produced considerable progress since the end of World War II, so I’m somewhat agnostic about the best strategy.

But there’s no ambiguity about the ultimate goal of ending protectionism.

P.S. Sometimes bad things happen for good reasons. The income tax in the United States also was adopted in part to offset the foregone revenue from lower trade taxes.

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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.

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Remember the big debate about whether Trump was a closet free trader or a crude protectionist?

Some people claimed he was imposing tariffs and threatening other nations in order to get them to reduce trade barriers.

From the beginning, I was skeptical of this argument, but also acknowledged that we wouldn’t know for sure until we saw a Trump-negotiated deal.

Well, I point out in this interview that my skepticism was warranted. Trump unveiled a quasi-deal on NAFTA yesterday, and it unquestionably will reduce economic liberty.

There’s a lot we still don’t know. Especially about whether this new agreement will actually get approved.

But Claude Barfield of the American Enterprise Institute has a very succinct explanation of the good and bad. He agree with me that it’s good to remove uncertainty.

(1) The best thing about the agreement — if it holds — is that it will remove the extreme uncertainty for businesses in all three NAFTA economies.

And I’m guessing he also agrees that a weakened NAFTA is better than no NAFTA.

By the way, Administration officials have told me that there are a few good provisions, involving matters such as digital goods and property rights.

But Barfield’s list of bad provisions easily trumps (no pun intended) any positive changes.

(2) The tentative “rules of origin” provisions for autos are an abomination — so complex and anti-competitive that they invite endless litigation and corruption (rules of origin govern what percentage of a final product must come from the three NAFTA nations).

(3) The old NAFTA dispute settlement system for investors has been gutted, leaving US industry and Congress with a huge dilemma as to whether to support the new pact.

(4) The auto/labor provisions (forcing Mexico to pay workers $16/hour for a number of jobs in Mexican auto plants, or four times the average hourly pay in Mexico) is a terrible precedent for mandating changes in domestic policy through a trade agreement.

Point #4 is especially terrible. It basically seeks to set wage levels above productivity levels in Mexico, which is a recipe for more unemployment in that already shaky economy (by the way, someone should tell Trump this will lead to more illegal migration from Mexico to the U.S.).

This is the same theory that the French and Germans use when trying to undermine tax competition. It’s supposedly unfair, they argue, when other countries have lower tax rates.

The bottom line is that Trump is hurting America. NAFTA has been good news for the United States, producing more jobs, more exports, and higher living standards.

When grading Trump’s overall economic policy, we just got a big chunk of bad policy to offset some of the good policy.

Sad!

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