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Archive for the ‘Trade’ 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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When Trump imposes protectionist trade barriers, he doesn’t realize that the harm imposed on other nations is matched by damage to the U.S. economy.

As I warn in this interview, something similar could happen if the federal government convinces other nations to reject the dollar because they no longer want to acquiesce to the extraterritorial imposition of U.S. laws.

This is a wonky issue, but the bottom line is that the United States benefits enormously because the rest of the world uses the dollar.

The best article I can recommend was published earlier this year by the Cayman Financial Review. It’s a good tutorial on the issue and it explains why the United States enjoys an “exorbitant privilege” because the dollar is the world’s reserve currency.

A reserve currency is a currency that governments hold in their foreign exchange reserves to settle international claims and intervene in foreign exchange markets. …Governments overwhelmingly choose one currency – the U.S. dollar… U.S. dollar-denominated assets comprised 63.79 percent of disclosed foreign exchange reserves… The Bank for International Settlements (BIS) reported that 88 percent of all foreign exchange transactions in 2016 involve the U.S. dollar on one side. …In 2014, 51.9 percent of international trade by value and 49.4 percent of international trade by volume of transactions were invoiced in U.S. dollars. …Major internationally traded commodities such as oil are priced in U.S. dollars. …The status of the U.S. dollar as the world’s reserve currency and the resulting foreign demand for U.S. dollars creates what French Finance Minister Valéry Giscard d’Estaing described in 1965 as an “exorbitant privilege” for the United States. …While difficult to measure, empirical studies suggest the privilege is worth about ½ percent of U.S. GDP (or roughly $100 billion) in a normal year.

And Peter Coy’s column for Bloomberg does a good job of explaining why the rest of the world is tempted to abandon the dollar.

America’s currency makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are priced in dollars, not euros or yen. …threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia. …Political leaders who once accepted the dollar’s hegemony, grudgingly or otherwise, are pushing back. …In March, China challenged the dollar’s dominance in the global energy markets with a yuan-denominated crude oil futures contract. …French Finance Minister Bruno Le Maire told reporters in August that he wants financing instruments that are “totally independent” of the U.S. …This disturbance in the force isn’t good news for the U.S. …As it is now, when trouble breaks out, investors flood into U.S. markets seeking refuge, oddly enough even when the U.S. itself is the source of the problem, as it was in last decade’s global financial crisis. …The most immediate risk to the dollar is that the U.S. will overplay its hand on financial sanctions, particularly those against Iran and countries that do business with Iran. …European leaders, in response to what they perceive as an infringement on their sovereignty, are openly working on a payments system that would enable their companies to do business with Iran without getting snagged by the U.S. Treasury Department and its powerful Office of Foreign Assets Control. …dissatisfaction with the dollar’s dominance…is only mounting. …Lew said in 2016, “the more we condition use of the dollar and our financial system on adherence to U.S. foreign policy, the more the risk of migration to other currencies and other financial systems in the medium term grows.”

Here’s some of what I said on the issue of sanctions in a different interview.

But notice that it’s not just sanctions.

The rest of the world is irritated by FATCA and other aspects of extraterritorial taxation.

Other nations also are irked by the pointless imposition of “know your customer” rules and other anti-money laundering policies that impose heavy costs without having any impact on actual criminal behavior.

Anyhow, let’s review some additional analysis, starting with this editorial from the Wall Street Journal.

More than any recent U.S. President, Mr. Trump is willing to use economic leverage for coercive diplomacy. He’s now targeting Turkey… Turkey is vulnerable because of Mr. Erdogan’s economic mismanagement. In the runup to June elections, he blew out the fisc on entitlements and public works. …As tempting as sanctions often are, they should be used sparingly and against the right targets. They make sense against genuine rogue states like Iran and North Korea, as well as to show Vladimir Putin that there are costs… But sanctions against allies should be used only in rare cases. They would also be less risky if they weren’t piled on top of Mr. Trump’s tariff war. …If Mr. Trump is determined to use coercive economic diplomacy, including tariffs and sanctions, then the Treasury will have to be ready to deal with the collateral financial damage.

Writing for Real Money, Mike Norman is very worried.

The United States is increasingly using sanctions as a form of warfare. …It’s a form of soft warfare that targets a country’s economy and its ability to transact business and safeguard its financial wealth in today’s dollar-based economy. Do you know what the result of these sanctions will be? The dollar will get crushed. Something like 80% of all international transactions take place in dollars. The global financial system rests on a dollar architecture. That includes funds transfer, clearing, payments, etc. …How long do you think the rest of the world will operate under such a risk? A risk that at any moment if you fall out of favor with the fools in Washington your entire economy and lifeline to the world’s financial system can be shut down? That is too much risk. No country and no citizen wants that risk hanging over them.

Professor Barry Eichengreen expresses similar concerns in a column for Project Syndicate.

…the Trump administration is eroding the dollar’s global role. Having unilaterally reimposed sanctions on Iran, it is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. The threat is serious because US banks are the main source of dollars used in cross-border transactions. …In response to the Trump administration’s stance, Germany, France, and Britain, together with Russia and China, have announced plans to circumvent the dollar, US banks, and US government scrutiny. …This doesn’t mean that foreign banks and companies will shun the dollar entirely. US financial markets are large and liquid and are likely to remain so. US banks operate globally. …But in an era of US unilateralism, they will want to hedge their bets. …there will be less reason for central banks to hold dollars in order to intervene in the foreign exchange market and stabilize the local currency against the greenback. …In threatening to punish Europe and China, Trump is, ironically, helping them to achieve their goals. Moreover, Trump is squandering US leverage.

And Michael Maharrey elaborates on the warning signs in a column for FEE.

…the U.S….weaponizes the U.S. dollar, using its economic dominance as both a carrot and a stick. …”enemies” can find themselves locked out of the global financial system, which the U.S. effectively controls using the dollar. …It utilizes the international payment system known as SWIFT…the Society for Worldwide Interbank Financial Telecommunication. …SWIFT and dollar dominance give the U.S. a great deal of leverage over other countries. …China, Russia, and Iran, have taken steps to limit their dependence on the dollar and have even been working to establish alternative payment systems. A growing number of central banks have been buying gold as a way to diversify their holdings away from the greenback. …even traditional U.S. allies have grown weary of American economic bullying. On Sept. 24, the E.U. announced its plans to create a special payment channel to circumvent U.S. economic sanctions… De-dollarization of the world economy would likely perpetuate a currency crisis in the United States, and it appears a movement to dethrone the dollar is gaining steam.

All of the above articles could be considered the bad news.

So I’ll share one small bit of good news from Coy’s column. The one thing that may save the dollar is that there aren’t any good alternatives.

The best thing the dollar has going for it is that its challengers are weak. The euro represents a monetary union… Italy’s recent woes are only the latest challenge to the euro zone’s durability. China is another pretender to the throne. But China’s undemocratic leadership is wary of the openness to global trade and capital flows that having a widely used currency requires.

I agree. Indeed, I wrote way back in 2010 and 2011 that the euro lost a lot of credibility when the European Central Bank surrendered its independence and took part in the bailouts of Europe’s welfare states.

So why jump from the dollar to the euro, especially since Europe will be convulsed by additional fiscal crises when the next recession occurs?

That being said, the moral of today’s column is that the crowd in Washington shouldn’t be undermining the attractiveness of the dollar. Here’s a chart to give you some idea of what’s been happening.

P.S. I want to close with a point about trade deficits. It turns out that being the world’s reserve currency requires a trade deficit. That was explained in the Cayman Financial Review column.

A significant part of the U.S. current account deficit and the U.S. trade deficit (whether measured as goods and services or as goods only) is attributable to the U.S. dollar’s status as the world’s reserve currency. Even if every country in the world were to practice free trade and not to engage in any currency manipulation, the United States would still record persistent current account deficits so long as the U.S. dollar remains the world’s reserve currency.

Likewise, here’s the relevant portion from the Real Money column.

Since most of of the world’s commerce is denominated in dollars and because oil was priced in dollars, it necessitated that the rest of the world ran trade surpluses with the U.S. in order to get dollars. Therefore, our trade deficits were an expression of high demand for dollars, not vice-versa. …We never understood, or at least our policy makers never understood, that we had the better part of the deal. When the rest of the world labors for low wages to build finished goods that they send to us for our paper currency, that is a benefit to us, not a cost.

Last but not least, here are excerpts from Peter Coy’s column.

…for the U.S. to supply dollars to the rest of the world, it must run trade deficits. Trading partners stash the dollars they earn from exports in their reserve accounts instead of spending them on American goods and services. …the U.S. gets what amounts to a permanent, interest-free loan from the rest of the world when dollars are held outside the U.S. As Eichengreen points out, it costs only a few cents for the U.S. Bureau of Engraving and Printing to produce a $100 bill, but other countries have to pony up $100 worth of actual goods and services to obtain one.

I share all these excerpts to reinforce my oft-made point that there is nothing wrong with a trade deficit. Not only does it represent a financial surplus (formerly known, and still often referred to, as a capital surplus), it also reflects the benefit the U.S. enjoys from having the dollar as a reserve currency.

P.P.S. This issue also reinforces my oft-made point that laws should not extend beyond borders.

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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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I’m happy to discuss theory when debating economic policy, but I mostly focus on real-world evidence.

That’s because my friends on the left always have a hard time answering my two-question challenge, which simply asks them to name one success story for big government.

They usually point to Sweden and Denmark, but get discouraged when I point out that those nations became rich when government was relatively small.

And I’m embarrassed to admit that some of my fellow economists once thought that communist nations grew faster than capitalist nations.

But let’s not digress. I raise this topic because there are many critics of capitalism who admit that free markets generate more wealth, but they assert that society would be better off if incomes were lower so long as rich people suffered more than poor people.

This strikes me as morally poisonous. But it also gives me an opportunity to cite a new study from the International Monetary Fund that allows us to further analyze this issue.

The IMF report starts by noting that globalization (free trade, liberalization, etc) has been good for global prosperity.

Over the course of the last decades the world economy has witnessed rapid integration. Most countries have opened up their economies and experienced an unprecedented rise in the flow of goods and capital across borders. This phenomenon – now widely known as economic globalization – was coincident with rising living standards in a large number of countries. Many developing countries have experienced episodes of strong economic growth and substantial poverty reduction as they integrated their economies with the rest of the world.

Sounds like good news, right?

It is good news, but those who fixate on inequality are worried.

…while globalization might on average be good for growth, more might not always be better for all. …When we shift the analysis to how income gains from globalization are distributed within countries, we also find globalization to have different effects on different incomes…gains are, however, distributed unequally both across and within countries. …Within countries, income inequality increases as a consequence of globalization. The income gains resulting from globalization tend to go primarily to the top of the national income distributions.

In other words, rich people are getting richer at a faster pace.

This phenomenon is captured in these two charts, which show that globalization is associated with more growth and more inequality.

But what’s important is that poor people also are getting richer.

In the subsample of developing countries where the gains from globalization are generally larger, however, they also reach the bottom of the income distribution and reduce poverty. … We find…some evidence of a poverty reducing effect of globalization in developing countries.

Consider, for example, the remarkable data I shared about China. Income inequality increased at the same time that poverty dramatically declined.

And those results seem to hold for the rest of the world, especially in developing nations.

So now let’s look at the most important chart from the IMF study, which shows that all income groups enjoy more prosperity with globalization.

Yes, rich people benefit the most, so official inequality numbers will increase.

But put yourself in the shoes of a poor person. Would you be willing to forego your additional income in order to deny additional income for a rich person? I suspect the vast majority of poor people would think that’s a crazy question.

But, as Margaret Thatcher pointed out, there are plenty of folks on the left who think that’s a perfectly reasonable position. Including, incidentally, some of the people at the IMF.

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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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