Trade and Hypocrisy, Captured in Tweets

Today’s column is about international trade, but I’m not going to regurgitate my usual arguments about the benefits of free trade or get wonky about creative destruction.

Instead, I’m going to make a point about the glib, hypocritical, and dishonest nature of politicians.

Here’s a tweet from Logan Dobson. He shows what Biden said in 2019 about Trump’s protectionism, followed by what Biden said just now said about doubling down on Trump’s policies.

In other words, Joe Biden in 2019 understood that tariffs on China are actually taxes on American consumers, but Joe Biden in 2024 has forgotten that lesson.

To be fair, I’m sure Biden does not do his own tweets, and maybe his aide who does social media today is not the same person that he had back in 2019.

But you would think there would be some attempt to avoid a complete flip flop.

Speaking of flip flops, Erica York of the Tax Foundation has a tweet exposing the hypocrisy and inconsistency of Biden’s top trade appointee.

She notes that the bureaucrats working for the United States Trade Representative have acknowledged that protectionism raises prices for consumers, but Katherine Tai then said the opposite in a preposterous attempt to defend the President’s new policy.

By the way, Biden and his Trade Representative could have made honest arguments. They could have justified their policy, for instance, by arguing that China is a special case because of that nation’s industrial policy or something like that.

But, instead, they’re doing Trump-style protectionism and pretending otherwise.

Tweedledee and Tweedledum.

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Dumb Idea of the Month: Currency Devaluation

Five years ago, I shared this video explaining why trade deficits generally don’t matter.

The most important thing to understand is that a trade deficit is the same thing as a financial account surplus (formerly known as a capital surplus), which is easy to understand when reviewing this graph.

And that type of surplus occurs when foreigners obtain dollars (by selling to Americans) and then decide that the best use of that money is to invest in the U.S. economy.

That’s generally a sign of a country’s economic strength.

Unfortunately, some people don’t grasp this relationship. And that leads them to supporting misguided ideas, such as protectionist trade restrictions.

Usually that means politicians directly imposing higher taxes on imports, as we’ve seen from Trump and Biden.

But sometimes they want an indirect approach. For instance, one of Trump’s main advisers wants to weaken the dollar. In a column for Forbes, Christine McDaniel explains why this is a very foolish idea.

Robert Lighthizer, a former U.S. trade negotiator and a potential Treasury Secretary pick for a second Trump administration, is reportedly discussing ways to devalue the dollar in order to reduce the U.S. trade deficit. But…a devaluation is a cut in a nation’s standard of living. …Currency devaluation might sound like an appealing way to trim the trade deficit: All else equal, weakening the U.S. dollar would make U.S. exports cheaper, imports more expensive, and potentially reduce the trade deficit. But all other things don’t remain constant in such scenarios, and devaluing your own currency ends up having the opposite intended effect. It makes the economy less competitive and less efficient. … Anything the United States would gain through a devaluation in terms of cheaper exports, it would lose through its relatively pricier imports. Raw materials, intermediate goods, and capital goods comprise over half of U.S. imports. …So, either American consumers and businesses would face higher prices here at home, U.S. exports would become less competitive, or a bit of both. …Currency devaluation is a race to the bottom that you can’t win. You might be able to get quick hits on the board in the immediate term, but within months, those are inevitably followed by punishing penalties.

Catherine Rampell of the Washington Post makes similar points in her column.

Trump’s policy team is reportedly scheming to devalue the U.S. dollar. …Trump’s objective…is to boost U.S. exports and reduce imports. Basically, if a dollar buys, say, fewer euros or Japanese yen than it currently does, that makes U.S.-made products look a little cheaper and potentially more attractive to European and Japanese customers (among others). …That is, until you consider everything else that might happen if we deliberately tried to weaken our currency… how would Team Trump weaken our currency? That’s not totally clear. He might try to force the Federal Reserve to cut interest rates. …a weaker dollar would likely lead to higher prices for American consumers… So much for Trump’s pledge to vanquish inflation.

Both of these columns make good points, but they’re understating the main argument. What everyone needs to realize is that devaluation is inflation.

And presumably there’s no need nowadays to explain why inflation is bad, considering the damage caused when central banks decided to devalue currencies during the pandemic.

Moreover, it’s a bad policy that won’t work. Because once the Fed’s easy-money policy leads to rising prices, that will boost the cost of American-produced goods.

So the long-run impact may be a higher trade deficit.

P.S. Ms. Rampell makes another observation that deserves attention.

Deliberately weakening the dollar, or even attempting to, also threatens its role as the world’s “reserve currency.”

If you want to know more about that issue, click here.

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The Case for Mutual Recognition

Almost exactly six years ago, I shared a column with this video of a member of the European Parliament explaining the principle of mutual recognition.

But that column was mostly about the benefits of jurisdictional competition and I only mentioned mutual recognition as a side issue.

So let’s examine today why mutual recognition is a good principle for cross-border economic relations.

Let’s start with a definition. Mutual recognition happens when two of more jurisdictions agree to have open trade and to respect each other’s laws.

So that means (as noted in the video) that, for example, Brits can buy food and other products from Germany and Germans can buy food and other products from the United Kingdom – regardless of the laws that govern production in the two nations.

For my American readers, here are three very real examples of why mutual recognition is a good idea.

• As even AOC recognizes, it would allow Americans to buy superior sunscreens from Europe that our sluggish FDA bureaucrats have not approved.
• It would prevented the 2022 baby formula crisis because American families could have purchased safe and nutritious European varieties.
• As shown by Arizona, it would allow workers to easily move between states without having to deal with costly and inefficient licensing regulations.

Another reason to support mutual recognition is that it would make trade agreements much simpler. I wrote in 2019 that the ideal free trade agreement is one simple sentence prohibiting trade barriers.

But that’s only possible with a system of mutual recognition. Ryan Young and Kent Lassman of the Competitive Enterprise Institute recently wrote on this issue for National Review.

Here are some excerpts.

The core concept behind a simple FTA is mutual recognition of one another’s regulations. Under mutual recognition, if American regulators approve a product, then it is automatically approved in partner countries, and vice versa. With that sort of regulatory trade barrier lowered, consumers can quickly benefit from wider selection, more affordable prices, and faster access to new innovations. Producers would benefit from faster approval times and lower regulatory costs for pharmaceuticals, appliances, agricultural products, electronics, and countless other industries, while gaining access to new markets and new customers. Regulators would benefit by avoiding redundant approvals in each partner country, saving agency resources. …Mutual recognition is appropriate for strong allies in developed countries… Our regulations may not be identical but will be similar enough for trade purposes. …A mutual-recognition agreement with Switzerland or another close ally could set a precedent that can lead to larger agreements that would boost economies around the world while strengthening alliances against Russia and China.

Amen.

Simple trade agreements with allied nations should be based on mutual recognition.

As you might expect, I also like this principle because it encourages jurisdictional competition.

I quoted Professor Michael Greve many years ago and he’s worth quoting again.

…the origin principle…is commonly called the principle of “mutual recognition.” …it is the only principle that is consistent with both a common economic market and political decentralization. Mutual recognition integrates member states without central intervention. …Mutual recognition, then, liberates commerce by eliminating the cost of complying with different, conflicting, and often incomprehensible rules. Beyond that, mutual recognition institutionalizes jurisdictional competition. …The ability of individuals and firms to vote with their feet, modems, and pocketbooks will liberate markets and discipline politicians. …Trade unions, environmental interests, and any other interest group whose agenda rests on redistribution consistently oppose mutual recognition: they cannot rob Peter to pay Paul if Peter is allowed to escape to more hospitable climes.

By the way, the United Kingdom seems to have some very sensible people with regards to mutual recognition, as illustrated by this Alex Tabarrok article and this tweet.

The UK has announced unilateral recognition for medicines approved overseas.

If Japan or the US approves a drug, you will be able to prescribe it in the UK.

Aiming to create fastest route to market in the world for new medicines.

— Sam Dumitriu (@Sam_Dumitriu) March 15, 2023

And we have some sensible people in the United States.

P.S. The good news is that the European Union was founded in part on the principle of mutual recognition. The bad news is that politicians are increasingly replacing that sensible approach with the dirigiste model of harmonization. Bad globalism in action.

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The Anti-Trump of Argentina Pushes for Free Trade

As I wrote just two days ago, the establishment media often alternates between bias and inaccuracy.

An example from earlier this year is when the press referred to Javier Milei, a presidential candidate in Argentina, as a “Mini-Trump.”

That was an absurd depiction. Milei is an out-of-the-closet libertarian who ran – and won – on a platform of radical (and necessary) ideas such as slashing the public sector and dollarization.

And, as illustrated by this tweet, he has wasted little time in trying to reduce the size and scope of government.

At the risk of understatement, that’s the opposite of Trump, who increased spending at a faster rate than Barack Obama.

By the way, Trump was more profligate than Obama even when looking only at domestic spending (and I didn’t even count all the money wasted during the pandemic when I did that comparison).

Now we have another example of President Milei being the opposite of Trump.

Like all sensible people (and unlike Trump and Biden), Milei is pushing for free trade.

Here are some excerpts from a story which was written for Bloomberg by Ignacio Olivera Doll.

Argentina’s government lifted import restrictions Tuesday…, advancing President Javier Milei’s free trade agenda. The tax authority replaced a red-tape import system Tuesday that forced many companies to seek manual approval for every shipment with a more data-based version. …Economy Minister Luis Caputo wrote on social media. “Government bureaucracy will no longer have the power to decide who does or doesn’t import goods.” …Import shortages damaged the real economy in recent months with hospitals saying they couldn’t bring in essential equipment made abroad. Even major international players, such as General Motors Co., temporarily suspended production at its car plant in October due to auto part shortages.

Here’s one other passage from the story that warmed my heart.

While Milei advances his free trade agenda, he took another austerity measure Tuesday, cutting by decree thousands of government jobs for people who started working earlier this year. Milei’s spokesman said the measure affects about 5,000 state employees but a labor union representing public sector workers put the figure at over 7,000.

Amen. Argentina desperately needs smaller government and Milei is on the right track.

And it also desperately needs free trade, and today’s column shows that he’s starting strong on that issue as well.

Argentina also desperately needs sound money, and I expect we’ll soon see inflation moving in the right direction.

P.S. I realize I’m over-using “desperately,” but that’s a very appropriate word when considering the mess that Milei has inherited.

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The Case for Free Trade, Part II

I like to think that my four-part video series on trade (here, here, here, and here) has a lot of useful facts and analysis.

But I overlooked a very persuasive argument.

Here are the world’s more protectionist and most pro-trade jurisdictions, according to the latest data from Economic Freedom of the World.

Why are these two lists persuasive?

Because IMF data shows that the average per-capita GDP of the protectionist nations is $3,212 while the per-capita GDP of the free-trade nations is $46,550.

More than 14 times higher!

At the risk of understatement, there are plenty of reasons why there is a big income gap between those two lists. The protectionist countries tend to have lots of other bad policies (weak rule of law, monetary instability, excessive red tape, etc), while the free-trade nations are likely to have good policies in those areas.

So the most accurate thing to say is that protectionism contributes to the poor performance of countries on the left list while trade freedom contributes to the prosperity of the nations on the right list.

Unfortunately, the leading presidential candidates in the United States want to be on the wrong side.

That’s a mistake. Andy Kessler of the Wall Street Journal explains that the Biden-Trump approach makes no sense.

…tariffs impose costs on all Americans to subsidize a few jobs. …You’re going to hear a lot about tariffs this election cycle. …Mr. Trump has proposed 10% tariffs on all imports. That sounds strong but it’s actually a weakling move, especially with U.S. industrial capacity already near an all-time high. …Should we put tariffs on search engines and social networks? Of course not. China blocks ours to force its citizens to use inferior products. Tariffs denote weakness, not strength. With tariffs, you get false price signals and less innovation. They misallocate capital and human resources by having entrepreneurs chase fake opportunities. Domestic manufacturers love tariffs, which allow them to raise prices, but the rest of us have to overpay for goods while manufacturers become lazy. …Tariffs steal the opportunity cost of doing something better. …The government is awful at picking winners and losers. …We have the world’s strongest economy. Tariffs are a sign of weakness. Let markets, not vote-buying politicians, decide which industries will bloom from the ground up. Tariffs and industrial policy are for losers.

Amen.

I would also add that protectionism is a playground for corruption.

I’ll close by asking anti-trade readers if they can identify a successful protectionist nation. Anywhere in the world. Just as is the case with my never-answered question, I won’t be holding my breath waiting for responses.

P.S. The United States in the 1800s is not a correct answer.

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The Case for Free Trade, Part I

I narrated this video in 2019, hoping that it would help people understand why free trade is good and protectionism is bad.

Sadly, American politicians don’t appreciate that message. Trump was a protectionist and Biden has followed the same approach.

To make matters worse, we may see even more protectionism in the future, not only in the United States, but also from the European Union.

But there is a country where lawmakers are moving in the right direction and lowering trade taxes.

It is, predictably, a very sensible nation.

Yes, I’m referring to Switzerland, arguably the world’s best-governed country.

As reported by Sonja Wind for Bloomberg, the Swiss are putting taxpayers and consumers first.

Switzerland is making a bold move in the era of trade protectionism that should make things a little cheaper: saying goodbye to industrial tariffs. Starting in January, 95% of all imports will enjoy duty-free status, promising more affordable goods like cars, household appliances and clothes. …it’s expected to boost competitiveness and moderate the elevated prices for everyday items. …The Swiss Federal Council touts an estimated welfare gain of 860 million francs ($981 million)… “It’s a good message to the world at a time when many countries are questioning the benefits of international trade and increase barriers to trade,” said Stefan Legge, head of tax and trade policy at University of St. Gallen, citing the US as an example. …From the producer’s standpoint, however, even a 1% reduction in the cost of goods sold would be welcomed, as would the reduced burden of complying with tariff schedules.

Since there will still be some taxes on agricultural imports, this isn’t quite unilateral free trade.

But it is pretty close to the very successful approach used by the United Kingdom in the 1840s and New Zealand in the 1990s.

And maybe someday in the United States (though not soon given the two leading candidates for the White House).

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The Case for (non-China) Globalization

I’m opposed to globalism (because global governance means bigger government), but I’m in favor of globalization (because free trade makes us richer).

So I largely approve of this video from the Economist.

This video is basically an endorsement of what is sometimes called the “Washington Consensus,” the late-1900s idea that free markets and limited government are the recipe to achieve prosperity.

That recipe has a good track record in the developing world.

And those policies also helped make the United States and other western nations very wealthy .

Sadly, many politicians don’t like free markets. They are opposed to this good version of globalization.

Consider, for instance, the Trump-Biden hostility to trade, the Trump-Biden support for industrial policy, and the Trump-Biden opposition to entitlement reform.

And that’s just in the United States. Politicians in other nations also want government to have more power.

And that’s what the Economist focused on in an article accompanying the video, which uses “homeland economics” as a new term for statism.

…“homeland economics”, a protectionist, high-subsidy, intervention-heavy ideology administered by an ambitious state. …when you lump them all together, it becomes clear just how systematically the presumption of open markets and limited government has been left in the dust. …these classical liberal values are not only unpopular, they are increasingly absent from political debate. …if you argue for free trade in Washington, you will be scoffed at as hopelessly naive. In the emerging world, you will be painted as a neocolonial relic from the era when the West knew best. …protectionism goes along with extra government spending. Industry is gobbling up subsidies… And, inevitably, state handouts go along with extra regulation. …This mix of protection, spending and regulation comes at a heavy cost. …Governments are losing all restraint just when they need to curtail welfare spending. Ageing populations weigh down budgets with extra bills for pensions and health care.

That’s a grim summary of what’s happening.

But the rest of the article is even more pessimistic.

Despite its flaws, homeland economics will be tough to restrain. People enjoy spending other people’s money. As government budgets get bigger, the special interests that feed on them will grow in size and influence. It is harder to withdraw protection and handouts than to grant them… Anyone doe-eyed about the arc of history bending towards progress should remember that a century ago Argentina was about as rich as Switzerland.

I agree that promoting economic liberty is an uphill battle.

Fighting against protectionism is especially difficult, but I am genuinely curious whether that fight (as well as the battle against industrial policy) would be easier if China somehow was excluded.

In other words, are people now against trade in general, or are they simply against trade with China?

Similarly, are people in favor of industrial policy, or are they just in favor of business subsidies to counter Chinese business subsidies?

More broadly speaking, I wonder if the spat between national conservatives and freedom conservatives could be smoothed over if there was agreement on decoupling from China.

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The Job-Destroying Effect of Trump-Biden Protectionism

As part of my annual “hopes and fears” column, I expressed optimism at the start of 2021 that Joe Biden would steer the country back toward free trade after the economically debilitating protectionist mistakes of the Trump era.

I’ve been bitterly disappointed. On this issue, he’s another Donald Trump.

I’m not the only one to notice. David Lynch of the Washington Post has a story about Biden’s protectionism.

He starts with a very reasonable point about Biden being way to the left of Barack Obama and Bill Clinton on the issue of trade.

But he then errs by stating that this means Biden is placing workers above consumers.

President Biden…continues a remarkable break with decades of trade policy that spanned both Republican and Democratic administrations. …the president is reshaping the U.S. approach to cross-border commerce to focus on the needs of Americans as workers rather than consumers. …The president…surprised some in the business community by retaining Donald Trump’s tariffs on Chinese imports after criticizing them during the 2020 campaign as “erratic” and “self-defeating.” …His policies are winning muted praise from some Trump allies even as they irk moderate Democrats who see expanded trade as the route to prosperity and lower prices. …Biden’s approach rejects the trade liberalization doctrine that held sway for nearly three decades after the Cold War’s end. …For pro-trade Democrats who saw the Trump era as an anomaly, Biden’s rejection of traditional negotiations and embrace of industrial policy has been a disappointment. Former treasury secretary Lawrence Summers, who served alongside Biden in the Obama White House, last month called the president’s thinking “increasingly dangerous”.

When I read the part of the story about Biden’s protectionism supposedly focusing on “the needs of Americans as workers rather than consumers,” I immediately thought of Bastiat’s wise words about the “seen” and the “unseen.”

That’s because protectionism hurts workers as well as consumers.

Yes, a tiny minority or workers (the “seen”) benefit from protectionism.

But a far greater number of workers (the “unseen”) wind up in the unemployment line because of the economic inefficiencies caused by trade taxes.

That’s confirmed by all sorts of scholarly research (not a surprise to those who have examined the horrible effect of Hoover’s protectionism in the 1930s).

And now we have some new evidence.

Erica York of the Tax Foundation shares some research on Trump’s proposed tax increase.

Former President Donald Trump’s proposed 10 percent tariff would raise taxes on American consumers by more than $300 billion a year—a tax increase rivaling the ones proposed by President Biden. …the new tax would harm the U.S. economy… Higher input costs for businesses lead to reduced production, and in turn, lower wages and profits. They can also lead to higher consumer prices… Using the Tax Foundation’s general equilibrium model, we estimate a new 10 percent tariff on all imports would reduce the size of the U.S. economy by 0.7 percent and eliminate 505,000 full-time equivalent jobs. Unfortunately, that would be the tip of the iceberg. ..If the rest of the world responded to the new tariff in kind, it would amount to $200 billion of new taxes for foreign governments. We estimate that would further reduce U.S. GDP by 0.4 percent and eliminate another 322,000 full-time equivalent jobs. Taken together, we find Trump’s proposal of a 10 percent trade tax matched with in-kind retaliation would shrink the U.S. economy by 1.1 percent and threaten more than 825,000 U.S. jobs.

More than 500,000 lost jobs, rising to more than 800,000 lost jobs if other nations retaliate.

At the risk of understatement, that’s not good news for workers.

The article notes that other economists have similar findings.

Indiana University economist Ahmad Lashkaripour estimates a global tariff war would, on average, shrink a country’s GDP…the United States would experience a GDP drop of 1.1 percent

The bottom line is that Trump was bad on trade and Biden is also bad on trade.

We can call them the Tweedledee and Tweedledum of cross-border commerce.

P.S. The David Lynch story in the Post contains another fundamental mistake. He thinks government can “funnel” money into the economy without first taking it out of the economy.

Biden’s three signature legislative achievements — the Inflation Reduction Act, the CHIPS Act and the bipartisan infrastructure bill — are expected to funnel several trillion dollars into the U.S. economy in coming years.

This is embarrassingly naive, sort of a kindergarten version of Keynesian economics. All government spending is financed by diverting resources from the economy’s productive sector.

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Trump Proposes Massive Tax Increase

When President Biden proposed a 10-year tax hike of about $3 trillion in 2021, I was very critical.

But my hostility was not because Biden is a Democrat. I’ve also condemned Republicans who support higher taxes (either overtly or covertly).

So it goes without saying that I’m going to be very critical now that President Trump is floating a massive tax increase (also potentially amounting to about $3 trillion over 10 years) on American consumers.

And it does not matter that Trump’s potential tax increase is on trade. His proposal is bad news (just like Biden’s tax increase is bad news) because the net effect would be to divert trillions of dollars from the private economy and give it to politicians.

Jeff Stein of the Washington Post reports on Trump’s big tax grab.

Trump’s plan to enact a “universal baseline tariff” on virtually all imports to the United States…could represent a massive escalation of global economic chaos, surpassing the international trade discord that marked much of his first administration. …On Fox Business on Thursday, the former president called for setting this tariff at 10 percent “automatically” for all countries, a move that experts warn could lead to higher prices for consumers… Economists of both parties said Trump’s tariff proposal is extremely dangerous.

As one might imagine, Trump’s idea is being ridiculed by all trade experts.

Adam Posen, president of the Peterson Institute for International Economics, a Washington think tank, called the idea “lunacy” and “horrifying”. …a 10 percent tariff would hurt the thousands of U.S. firms that depend on imports, while also crippling the thousands of U.S. firms that depend on foreign exports, Posen said. …Even former Trump economic officials were sharply critical of the idea. “A tariff of that scope and size would impose a massive tax on the folks who it intends to help,” said Paul Winfree, an economist who served as Trump’s deputy director of the Domestic Policy Council… Michael Strain, an economist at American Enterprise Institute, a center-right think tank, said international trade restrictions enacted in 1930 are widely viewed as exacerbating the Great Depression. …“It would be a disaster for the U.S. economy. It would raise prices for consumers and be met with considerable retaliation from other nations, which would raise the costs facing U.S. businesses. It would reduce employment among manufacturing workers,” Strain said. “It would be very, very bad.”

For readers who want a refresher on why protectionism is bad news, I have four short videos that cover the key issues.

• The economic analysis of trade
• Trade and creative destruction
• Understanding trade deficits
• The World Trade Organization

While I’m an ardent opponent of protectionism, I’ll close with two ways that Trump could make his ideas more palatable.

1. If he matched his $3 trillion tax hike on trade with $3 trillion of offsetting tax cuts, the fiscal argument against his plan – at least theoretically – largely would disappear (though the trade argument would remain).
2. If he proposed protectionism solely against potentially hostile nations such as China, he would – at least theoretically – have a foreign policy-based argument for the plan (though the trade argument would remain).

But I don’t expect to hear these arguments.

The problem, dating all the way back to when Trump was campaigning in 2016, is that he simply does not understand trade.

P.S. Between Trump’s awful ideas on trade (echoed by Biden) and the European Union’s proposal for massive trade taxes, it’s hard to be optimistic about future prosperity.

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The Economic Cost of Trump-Biden Protectionism

At the risk of understatement, Donald Trump’s trade policy was a miserable failure.

But the 2020 election did not lead to any changes. Biden also has been a protectionist.

In some ways, he’s been even worse than Trump. A rather ignoble achievement.

Sadly, this protectionist version of bipartisanship is the reversal of what used to exist.

James Capretta and Stan Veuger give some details in an article about the Trump-Biden approach for Foreign Policy.

The trade principles that guided U.S. international economic policy prior to 2017 were embraced to varying degrees by 12 successive administrations…the embrace of freer trade gathered force globally because the United States—as the dominant Western democracy—heavily promoted and supported it. …the old consensus was never challenged as fundamentally misguided by either major party until Donald Trump, a lifelong protectionist, became the Republican presidential nominee in 2016… The real surprise since 2021 has been that President Joe Biden not only has not repudiated the trade policies of his predecessor but also has amplified the philosophy behind them in a way that raises serious questions about the future of U.S. and global trade policy.

The authors, both from the American Enterprise Institute, explain how Biden is going astray.

…the president has made no moves suggesting even modest support for existing or new free trade agreements and many moves that point to a willingness to undermine the free trade edifice that was carefully erected over seven decades. Most especially, the administration has pushed the most aggressive direct subsidization of favored industries and companies in the entire postwar era, in apparent violation of the trade principles the United States agreed to when joining the WTO. …As matters now stand, the Biden administration’s protectionist moves will provide fuel for higher inflation. And a “green jobs” agenda comes with significant downside risk… Political connections and lobbying prowess will rise in importance, while technical competence and efficiency will fall.

That final sentence is key. Capretta and Veuger are correct to warn that protectionism enables cronyism and corruption.

And that’s bad news for the economy. We want companies to prosper based on how well they serve consumers, not on the basis of how many lobbyists they have in Washington.

The bottom line, as the authors explain, is that free trade – unlike protectionism – has a strong track record of success.

…the old consensus was not the disaster that critics claim. Quite the contrary. The historical evidence shows that expanding trade was central to the most successful run of wealth expansion and poverty reduction in history, and it delivered tremendous value to the American consumer. …trillions of dollars in economic benefits have accrued to Americans from global commerce. Further, as more countries joined the world trading system in the 1980s and 1990s, some 1 billion people were lifted out of extreme poverty.

Regarding the overall case for free trade, here’s my video on the topic.

I’ll close by stating that some defenders of the Trump-Biden approach claim that free trade is not practical in a world where China misbehaves.

That is a legitimate concern. But Trump and Biden have not targeted China. Their protectionist policies have applied to all of America’s trading partners.

No wonder the United States gets a low ranking for trade barriers. This is bad news for American workers. It’s also bad new for the rest of the world, especially poor nations.

P.S. Don’t be surprised if Biden decides to copy the European Union’s carbon protectionism.

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A Make-or-Break Test for the World Trade Organization

Back in 2019, I released this video to explain how the World Trade Organization (WTO) has been a net plus, helping to lower trade taxes and other barriers to cross-border commerce.

I’m normally not a fan of international bureaucracies. But, unlike entities such as the International Monetary Fund and the Organization for Economic Cooperation and Development, the WTO has a good track record.

Ever since it was created, trade taxes have been falling.

Sadly, though, the WTO has been weakened in recent years. Trump bears some of the blame, to be sure, but other politicians (including Biden) have caused problems because of their protectionist policies.

Foreign politicians also are pushing in the wrong direction. For instance, the European Union may be about to trigger a global trade war by pushing for carbon protectionism.

That’s the bad news.

The good news is that this could be an opportunity for a reinvigorated WTO. As reported by Reuters, India will be bringing a case to block the EU’s anti-trade scheme.

Indian plans to file a complaint to the World Trade Organisation over the European Union’s proposal to impose 20% to 35% tariffs on imports of high-carbon goods like steel, iron ore and cement from India, top government and industry sources said. …”In the name of environment protection, EU is introducing a trade barrier that would hit not only Indian exports but also of many other developing countries,” said a top government official with direct knowledge of the matter. The government was planning to file a complaint to the WTO against the EU’s unilateral decision and would seek relief for exporters, particularly small companies, the official said without disclosing further details. India sees the proposed levy as discriminatory and a trade barrier.

Some people may point out that India’s government is very bad on trade, and that’s true. But the fact that Indian politicians are hypocrites does not mean the EU’s protectionism is justified.

Blocking the EU’s awful plan is an opportunity for the WTO to reclaim its role as a protector of the interests of taxpayers and consumers.

Fingers crossed, the world needs free trade!

P.S. Today’s column is about how the WTO hopefully can stop something bad. Unfortunately, I don’t think the organization has the ability to push for anything good. If there is any progress in the future, it will probably come from bilateral and plurilateral free trade agreements.

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Ranking Trade Freedom

Free trade is good and protectionism is bad.

Assuming one agrees with those common-sense observations, the Tholos Foundation’s just-released Trade Barriers Index is a great source of data about which countries are pro-trade and anti-trade.

As you can see, Singapore has the fewest trade barriers (a lower score is good), followed by New Zealand. By contrast, India is in last place with the most trade barriers, followed by Russia.

Sadly, the United States ranks a lowly 65 out of 88 countries that were included in the report.

The Index is filled with data, so it is a treasure trove for wonks.

The part I like best, which is excerpted below, notes that pro-trade nations produce a disproportionate share of global economic output.

The 88 countries in the 2023 TBI house 72 percent of the world’s population. In the freest range, those with a score reaching between 2.5 and 3.0 or lower, only 6 countries with a combined population of 207 million, or 2.6 percent of the world’s people, enjoy the most barrier-free-trade and they produce 11 percent of the world’s GDP… In the mostly-free range, with a score between 3 and 3.5, reside 395 million people or 5 percent of the world’s population in 16 countries where they produce 14 percent of world GDP. In the next range, between 3.5 and 4.0 on the TBI, 7 percent of the world’s population produces 12 percent of global GDP. In the middle range between 4.0 and 4.5, productivity gets a boost due to the inclusion of the United States; in this range 650 million people reside and produce 28 percent of GDP. Then the inefficiencies of trade restrictions start to take a large toll. In the next 4.5 to 5.0 range, nearly 2 trillion people live, 24 percent of the world’s population, but they contribute only 22 percent of GDP. Then in the 5.0 to 5.5 range, in six countries, 8 percent of the world’s people reside and they produce a dismal 3 percent of world GDP. Lastly, in the 5.5 to 6.0 range 20 percent of the world’s population reside in 2 countries, India and Russia, where they produce 5 percent of world GDP.

Let’s close with a comparison of the United States and Singapore.

In every single category, Singapore does better. But the biggest gap is in non-tariff barriers.

Needless to say, both Trump and Biden have contributed to America’s unimpressive score.

P.S. You’ll notice that trade balances are not part of the Trade Barriers Index. That’s because the authors understand trade deficits are irrelevant (or even a positive sign if a nations is attracting a lot of foreign investment).

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The European Union Threatens Global Prosperity with Carbon Protectionism

Recent years have been very depressing for supporters of free trade.

Trump pushed protectionist policies.

Now Biden is pushing protectionist policies.

And the European Union is pushing protectionist policies using global warming as an excuse.

More specifically, EU politicians and bureaucrats in Brussels have rammed through a so-called Carbon Border Adjustment Mechanism (CBAM), which is euro-speak for a new protectionist tax on imports that are not sufficiently green.

The Wall Street Journal‘s editorial summarizes some of the problems.

The European Parliament this week pulled the trigger on the opening shot in a new climate trade war. …Foreign companies that haven’t paid for carbon emissions at home will have to pay a tariff when exporting goods to Europe. …Climate coercion advocates say a tariff is needed to avoid “carbon leakage,” which is their term for the flight of manufacturing to countries with less onerous emissions restrictions. This is a tacit admission that Europe’s climate policies are failing. …European consumers won’t pay higher prices for greener goods unless the Brussels tax man forces them to. …Foreign companies and governments have raised concerns about the European carbon border tax, which imposes complex and costly compliance burdens and then imposes steep default tariffs on companies that don’t play along. China and India are in the crosshairs of this border tax, although companies from any country that doesn’t impose emissions taxes will have to pay. That includes U.S. firms. …Consumers will be the big losers, first in Europe and then elsewhere.

In his Bloomberg column, Professor Tyler Cowen pointed out some practical problems with the EU’s scheme.

There is a right and a wrong way to encourage the world to use greener energy. Unfortunately, the European Union’s move toward a carbon tax on imports — essentially a tariff on products made using too much dirty energy — is the latter. …Economic changes take place at the margin, and currently the EU is engaged in substitution toward coal, a very dirty energy source. …The tariffs will lead to more coal use and a dirtier energy supply. Be suspicious of green energy policies which at first make the problem worse. …So, despite about as strong an incentive as possible — a war — the EU made the harmful rather than the beneficial adjustment. Now it is expecting that much poorer nations, often with worse governance structures, to do better. Not only is this naïve, but it is also protectionist….it’s easy to imagine China and India not improving their energy policies as a result of EU tariffs. They, like the EU, have domestic pressure groups… In general, Western attempts to shape those nations have failed more than they have succeeded. So again the negative short-term results of the policy — more European coal use — could outweigh any longer-run benefits. Even the positive long-run effects are up for grabs. …the tariff hike…makes the exporting nations poorer than they otherwise would be. Poorer nations tend to be less interested in improving their environments… And extreme poverty worsens other global problems… Should EU policy make it more difficult for Africa to industrialize? …Once protectionist measures are in place, they are hard to reverse. The EU would be reaping tariff revenue, and domestic EU industries would be receiving trade protection. Any reclassification of the imports as fundamentally “greener” would require an investigation across borders and clearance through multiple levels of bureaucracy. Such changes will not be easy to accomplish, especially in an era increasingly enamored of trade restrictions. …the most likely scenario will play itself out: The EU will spin its wheels, indulging in protectionism and feeling good about itself — all at the expense of our planet’s future.

The part about “reclassification of imports” is especially worrisome. For all intents and purposes, the EU will have a corruption-enabling process where industries on all sides will have incentives to hire lots of lobbyists.

That will line the pockets of bureaucrats who “retire” and become facilitators, but it won’t be good for anyone else.

Last but not least, Tori Smith explained for American Action Forum that the EU’s protectionist approach is a violation of trade commitments.

International trade law and WTO experts such as Joel Trachtman of Tufts University and Jennifer Hillman of the Council on Foreign Relations have examined at length the areas where a CBAM might trigger a WTO violation… there do seem to be three principles to follow to have a “reduced risk of violating WTO law” when considering a CBAM: (1) the carbon tax must apply to domestic goods and imports; (2) imports from all WTO members must be treated the same; and (3) rebates for exports cannot exceed the carbon tax. …The EU’s CBAM could run afoul of these commitments because it gives special treatment to countries that already have a carbon price. … Compliance with WTO commitments should be a top priority when considering any new tariff or tax.

Sadly, the World Trade Organization already has been weakened, so I won’t be surprised if officials somehow decide to give a green light to the EU’s protectionism.

Which will be a shame since the WTO for many years actually did a good job.

P.S. You won’t be surprised to learn that the Biden Administration also is interested in carbon protectionism. Indeed, there was plenty of green protectionism is his misnamed Inflation Reduction Act.

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The Case for Free Trade

I narrated a video making the case for free trade back in 2019.

This new video from Kite & Key builds on that effort.

Indeed, it also incorporates many of the lessons that were in my video on the benefits of creative destruction.

If you don’t have six minutes to watch the video, here are the four main takeaways.

• Protectionism has a terrible track record in the real world.
• The world has become much richer as trade has expanded.
• We are richer when we focus on our comparative advantage.
• Poor people are hurt the most by protectionist policies.

Allow me to briefly elaborate on the first bullet point.

I’m a big believer in citing real-world examples. When I make my arguments for spending restraint, I share various case studies.

I do the same when debunking Keynesian economics. And when showing the superiority of markets over dirigisme.

So my challenge to protectionists is do the same thing. Show me (and everyone else) the successful examples of trade barriers.

• It wasn’t under Herbert Hoover.
• It wasn’t in Argentina.
• It wasn’t in India.

I’ll preemptively note that the United States in the 1800s is not a good example. The U.S. economy did well during that century, but it was because of policies such as no income tax and no welfare state.

In other words, Trump was wrong on that issue.

P.S. If you like my two trade videos cited above, I also have ones about the trade deficit and the World Trade Organization.

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The Threat – and Soon Reality – of Climate Protectionism

For the first 50-plus years of my life, free trade was in the ascendancy.

Policy makers had learned a big lesson from the Great Depression about how protectionism was economic poison, and various trade agreements after World War II helped reduce trade taxes and other barriers to cross-border commerce.

It also helped that there was a “Washington Consensus” in the late 1900s that supported pro-market reforms in the developing world.

Unfortunately, trade liberalization has ground to a halt. In part, this is the fault of the United States, thanks to the protectionism of both Trump and Biden.

But let’s also make sure the European Union gets a a share of the blame as well. For instance, the one good thing about the EU (free trade among members) also happens to be one of the many bad things about the EU (protectionism against the rest of the world).

But being a protectionist bloc is a trivial problem compared to what is on the horizon. As reported yesterday by the Wall Street Journal, the EU has unveiled a scheme to use climate as an excuse to increase global trade barriers.

The European Union reached an agreement to impose a tax on imports based on the greenhouse gases emitted to make them, inserting climate-change regulation for the first time into the rules of global trade. …The EU is expected to adopt it in the coming weeks as part of a sweeping package of legislation… The plan…has rattled supply chains around the globe and angered the EU’s trading partners, particularly in the developing world… It has also unsettled manufacturers in the U.S. who are concerned the measure would create a new web of red tape to export to Europe. …Europe’s carbon border tax aims to protect European manufacturers from competitors in countries that haven’t regulated carbon-dioxide emissions. …The legislation would require importers to register with authorities and seek authorization to import goods covered by the tax.

Today, the editorial page of the WSJ weighed in on the proposal.

Christmas came early to Europe’s tax accountants this week, although companies might think the occasion feels more like April Fool’s Day. …Europe is…pushing ahead with a carbon border adjustment mechanism, or CBAM, to tax imports on their carbon intensity. Europeans say this border tax is necessary to “level the playing field” for manufacturers that must pay for carbon emissions credits under the Emissions Trading System (ETS). The ETS already makes it less economical for some industries to operate in Europe, leading green activists to note a rise in imports from countries that don’t impose the complex tax. Imagine that. The CBAM would apply to imports from countries that don’t tax carbon emissions. …The biggest losers will be beleaguered European consumers. …carbon tariffs show how climate policy has become an anti-growth project. A better U.S. Administration would fight this, but the Biden White House and Treasury are fellow travelers.

I explained last year why this was a bad idea, noting that it was bad economics and also that it would advance cronyism and be a windfall for lobbyists (especially once the EU tries to calculate the about of untaxed carbon in every product).

But I also wondered if the Biden White House would be on the right side. After all, the US (thankfully) does not have a carbon tax, so you would think that American officials would be fighting against this EU proposal.

Unfortunately, I was being naive. As noted in the WSJ’s editorial, Biden and his team are fellow travelers. Indeed, the nightmare scenario (perhaps even worse the the nightmare scenario of the Trump years) is that Biden will unilaterally impose a version of climate protectionism on the US economy.

P.S. Is anyone surprised that the French were early advocates of this approach?

P.P.S. I’m a fan of the World Trade Organization, but I doubt that the WTO has the will or the ability to save the global economy from climate protectionism.

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Biden’s Very Bad Trumpian Trade Policy

At the start of 2021, shortly before Biden was inaugurated, I expressed hope that he would reverse Trump’s self-destructive protectionism.

Alas, I’ve been disappointed.

On trade issues, Biden has been just about as bad as his predecessor, (he’s also been as bad as Trump with regards to spending, but that’s a topic for another day).

The Wall Street Journal editorialized last month about this unfortunate similarity. Here are some of the highlights…or lowlights would be a better term since the net result of protectionism is to hurt taxpayers and consumer.

President Biden has rolled back some of Donald Trump’s destructive tariffs, but not enough, and they’re still doing economic harm. New analyses of Mr. Trump’s Section 232 steel and aluminum tariffs show how consumers and manufacturers are still paying for the border taxes that benefit only a few companies. A study by Harbor Aluminum for the Beer Institute finds that the 10% tariff on imported aluminum cost U.S. beverage manufacturers $1.7 billion from March 2018 through August 2022. About 93% of the $1.7 billion has been pocketed by domestic aluminum producers and smelters in the U.S. and Canada. …By raising the cost of production, tariffs constrain manufacturers, who cut jobs and pass costs to consumers. …Repealing the Trump Section 232 tariffs could reduce prices at the margin. The longer they stay in place the more they deserve to be called the Biden-Trump tariffs.

Since the above column mentioned the Section 232 tariffs, this would be an opportune moment to cite the Tax Foundation’s research on the topic.

…economists have reached…negative conclusions regarding the impacts of the recent Section 232 tariffs on the economy. Lydia Cox and Kadee Russ, using an estimate derived from a Federal Reserve Board paper, calculated that the Section 232 tariffs reduced manufacturing employment by about 75,000 jobs. Kyle Handley and other economists looked at the impacts of the import tariffs on export growth in the U.S. and found that companies exposed to the Section 232 tariffs experienced reduced export growth. This occurred because the cost of their inputs rose due to the tariffs, which hindered firms’ ability to increase their exports. For each 1 percent increase in the tariffs on steel and aluminum, export growth fell by 0.11 percent. …The aluminum tariffs in particular have disproportionately harmed certain industries. …Ford and General Motors estimated that the tariffs cost them about $1 billion each the first year they were in effect—roughly $700 per vehicle produced.

And here’s the Tax Foundation’s estimate of how the economy would benefit if these taxes on trade were repealed.

Since I’ve been criticizing Biden for being a protectionist, I’ll close by speculating whether Republicans have learned from Trump’s protectionist mistakes.

Here are some excerpts from a column in the Wall Street Journal by former Congressman Jeb Hensarling.

Numerous studies have shown that almost all the costs of tariffs initiated under the Trump administration were paid by American consumers and businesses. …According to the American Action Forum, Mr. Trump’s tariffs combined have increased consumer costs by approximately $51 billion a year. …Republicans love to talk about “draining the swamp” in Washington. But the tariffs imposed by the Trump administration empowered hundreds of bureaucrats at the Commerce Department and the Office of the U.S. Trade Representative to grant waivers under what can at best be described as an opaque process with discretionary standards. …A schedule of tariffs doesn’t drain the swamp. It fills it with well-connected lawyers and lobbyists who know how to work the system.

The bottom line is that protectionism does not work if Republicans do it, and protectionism does not work if Democrats do it.

Both parties should have learned from Hoover’s horrible mistake.

P.S. A big problem is that politicians genuinely don’t understand that a “trade deficit” is automatically and necessarily offset by a capital surplus. Helping them to understand this fact is key to renewing support for free trade.

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Defending International Trade

As a fan of globalization – but not globalism, I endorse this new video from Reason, which punctures myths from protectionists such as Donald Trump and Bernie Sanders (and Joe Biden).

If you don’t have a spare seven minutes to watch the video, it addresses three specific points.

1. Does cross-border trade destroy manufacturing jobs?
2. Did liberalizing trade with China take American jobs?
3. Does trade make us vulnerable because of supply chains?

Plenty of good material, but I also would have challenged protectionists to provide a successful example of protectionism. Today or in the past.

Did protectionism work for Herbert Hoover – or anyone else – in the 1930s?

Did protectionism work for Juan Peron in Argentina in the 1940s and 1950s?

Is protectionism working for India’s economy in the 21st century?

Did protectionism work for Donald Trump between 2017 and 2020?

The answer is no in every single case. So it is no surprise that scholarly research (see here, here, here, here, here, here, here, here, and here) shows that free trade is a better approach if a nation wants more jobs and higher income.

But protectionists make one accurate point. While free trade increases overall employment, that does not mean every worker in every industry benefits.

In his New York Times column, Peter Coy explores this topic.

The skepticism about free markets…has gotten only stronger…only 44 percent of Republican voters…viewed free trade mainly as an opportunity for growth through increased exports. …the standard Econ 101 argument for free trade… First, assert that trade increases prosperity by allowing each country to specialize in what it’s best at. …Second, acknowledge that not everyone wins from free trade… Third, state that this problem can be easily solved: Everyone in society can be made better off if the winners share some of their gains with the losers. …In reality, the winners from trade rarely share much of their gains with the losers. The losers remain losers, and they often vote for candidates who put up tariff walls. …the free traders have failed to deliver on their promises to make free trade and open markets work for all.

A reasonably fair article, but I don’t think “free traders have failed” for reasons I explained in one of my videos from earlier this year.

If you don’t want to spend three minutes watching the video, I explain that all trade destroys jobs. And that includes trade within a nation.

It’s part of “creative destruction,” which I’ve labeled as the best and worst part of capitalism.

Millions of jobs get destroyed every year, in part because new technology, new competitors, and new innovations.

That’s bad news for many people, but it’s also the process that creates even more new jobs.

And it’s the process that has made all of us so much richer than our ancestors. And that includes the ancestors of people who lost jobs because of domestic or international trade.

P.S. Click here, here, and here for some very sound observations from America’s best post-WWII president.

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Help the World’s Poor with International Trade

I support free trade for selfish reasons. I want my life to be better and I want my country to be richer.

But I also support free trade for selfless reasons. I want other people in other countries to be richer as well.

And rejecting protectionism usually is a way to achieve both my selfish and selfless goals.

But not always. Let’s look at some new evidence about the selfless benefits of open trade and globalization.

In an article for VoxEU, Maksym Chepeliev, Maryla Maliszewska, Israel Osorio Rodarte, Maria Filipa Seara e Pereira, and Dominique van der Mensbrugghe summarize their new research on global value chains.

The authors look at the economic consequences if some or all companies are told they have to rely solely on domestic suppliers (“reshoring”) compared to a world where they engage in cross-border trade.

As you can can see from this chart, you get bad results from some protectionism (reshoring leading economies) or more protectionism (reshoring all economies). Liberalization, by contrast, leads to good results.

Here’s some of what they wrote about their results.

A possible reshoring of production by the leading economies and China would have a negative impact in most regions, with real income decreasing by 1.5% worldwide. A localised world takes the biggest toll on developing countries with the Middle East and North Africa, Rest of East Asia and Pacific, and Europe and Central Asian regions being hit the most severely (Figure 1). However, countries subsidising domestic production would also be worse off as reshoring decreases trade and income, limits the variety of products available to producers and consumers, and increases prices.

If you look closely at Figure 1, you will notice that the United States and other rich nations suffer relatively small income losses from protectionism.

So this is a case where the selfish argument for free trade does not play a big role.

But the selfless argument is very strong. The authors point out that poor nations are the ones that reap big rewards with expanded trade.

Or suffer big losses in a world with more protectionism.

Under the ‘Reshoring all’ scenario, 51.8 million additional people would fall into extreme poverty by 2030, the equivalent to a 0.6% increase in the global extreme poverty headcount ratio. …The ‘GVC-friendly’ scenario, on the other hand, could lift 21.5 million people from extreme poverty by 2030. …In addition, we find that 56.2 million would graduate to global middle-class status, measured as individuals with a per capita consumption of more than PPP $10.00 a day.

Figure 4 shows that protectionism produces more extreme poverty while expanded trade saves people from that awful fate.

Let’s close with two simple observations.

• First, free trade is a way for those of us in rich countries to help improve the lives of people in poor countries. Foreign aid, by contrast, has a long track record of failure since it mostly lines the pockets of the political elite and often actually subsidizes bad policy.
• Second, some people argue that there are geopolitical reasons to restrict trade with misbehaving nations such as Russia and China. That certainly may be true (not my area of expertise), but such restrictions should be imposed only if the geopolitical benefits exceed the economic costs.

Also, any discussion about trade is incomplete without an acknowledgement that not everyone benefits in the short run from changing patterns of trade.

But that’s true whether the trade is between countries or within countries.

We should acknowledge that new competitors, new technologies, and new products are part of “creative destruction,” which can cause pain for some people in the short run.

The key thing to understand, however, is that this is the process that makes societies far more prosperous in the long run. Moreover, when politicians interfere, they will cause more pain for more people in both the short run and the long run.

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Trade, Jobs, and Wages

I’m a knee-jerk supporter of free trade, which simply means I don’t think politicians and bureaucrats should be able to interfere with my freedom to buy good and services from people who happen to live in other nations.

But my support for free trade is not just based on ideology. I also cite data on how trade taxes and other restrictions make nations poorer.

Simply stated, trade barriers (like other forms of government intervention) make an economy less efficient.

And the negative effects go beyond overall economic output. Researchers also find job losses, lower productivity, and increased inequality.

Today, let’s look at some new research on this topic. The IMF earlier this year released a new working paper authored by Kim Beaton, Valerie Cerra, and Metodij Hadzi-Vaskov.

Here are the main results.

…firms in countries and industries experiencing greater competition from imports reduce employment slightly. …Even so, the low elasticity of employment growth to imports indicates a limited adverse impact. …Contrary to popular belief and anti-globalization sentiment, import competition is associated with higher average wage growth across the global sample of firms…, driven by the EMDEs… Taking employment and wages together, import growth in an industry leads to a rise in the wage bill of domestic firms in the same industry. Thus, while import competition generates some job dislocations, the overall impact on earnings of workers in the same industry is positive.

Here’s a chart that was included with the study.

One unexpected finding from the study is that rich nations are more likely to enjoy job gains.

The job loss associated with import competition appears to be dominated by the behavior of firms in emerging and developing economies… In contrast, the import shock provides a statistically significant positive boost to firms’ employment in advanced economies.

And here’s a finding that should not surprise anyone.

…we find relatively positive outcomes of import competition on exposed firms, including higher sales, profits, wage growth, and investment. Moreover, the import shock to exposed firms, and the ensuing employment changes, do not take place in isolation. Import growth often goes hand in hand with export growth, which spurs job creation.

But I didn’t like everything I found in the paper. In some circumstances, trade reduces inequality, but by hurting those with high incomes rather than helping those with low incomes.

Our results also show that firms experiencing higher imports shocks are those with higher average wage levels. Thus, to the extent that employment growth is lower in these more exposed firms, it could lead to lower inequality.

For some of our friends on the left, this is a good outcome. Crazy.

Fortunately, trade generally helps everyone, so this quirky result is an exception rather than the rule.

The bottom line is that free trade is an overall winner for the economy. Does that mean that everyone benefits in short run? Of course not.

Jobs always get destroyed when there’s competition. And that’s true whether the competition comes from inside a country or outside a country.

The goal, of course, is to have a vibrant economy that regularly produces plenty of new jobs to offset any job losses.

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Don’t Sweat the Trade Deficit

When the Commerce Department announced in February that the United States had a record trade deficit for 2021, I shared this video to help make the point that those trade numbers were that year’s “least important economic news.”

The main thing to understand is that a trade deficit is simply the flip side of an investment surplus.

When Americans use dollars to buy goods from other nations, those dollars are only valuable to foreigners because they can use them to buy things from America.

In many cases, they buy American goods and services. But they also use many of those dollars to invest in the U.S. economy.

That’s generally a positive thing. It’s a vote of confidence about America’s economic future.

Jeff Jacoby of the Boston Globe shares my viewpoint. He recently opined on this issue, echoing the important insight about the link between trade flows and investment flows.

The US trade deficit hit an all-time high in March, widening to nearly $110 billion as the nation imported considerably more goods than it exported. That can’t be good, right? Actually, it’s fine. …It’s not an indication of actual economic weakness. …Quite the contrary: All things being equal, imports are usually evidence of economic vitality and success. …The dollars Americans spend on imports aren’t “lost.” They are exchanged for desirable and affordable goods, services, parts, and commodities that strengthen Americans’ economy while elevating their US lifestyle. Better still, those dollars then come back to the United States, where they are used to invest in American assets or buy American exports, creating even more value and putting even more Americans to work. …a trade “deficit” isn’t a debt we owe. It is an accounting entry that tells us how much more we were enriched by foreigners than they were by us. ..the US economy has some real problems. Happily, the trade deficit isn’t one of them. Imports are good. And more imports? They’re good too.

This does not mean, however, that everyone is a winner.

As I explain in this video, jobs are destroyed when there is trade between nations. But I also point out that jobs are destroyed by trade inside a nation’s borders.

That’s bad news for workers in sectors that are dying (such as typewriter makers after personal computers hit the market).

What’s important is whether the new jobs that are created exceed the number of jobs that are lost.

This is what is called “creative destruction.” It’s painful, but it is why we are much richer today than we were in the past.

The good news is that this usually happens…at least if politicians resist the temptation to over-tax, over-spend, and over-regulate.

The bottom line is that free trade is much better for long-run prosperity than protectionism.

Unless, of course, you think it’s a good idea to copy the policies of Herbert Hoover.

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The Economics of War, Part II: Trade Restrictions Make a Nation Weaker

Way back in 2010, I explained that Paul Krugman was wrong to think that wars were good for the economy.

Indeed, he was more wrong than usual. The additional spending for the military isn’t “stimulus,” so his usual Keynesian argument was misguided.

Moreover, he didn’t seem to understand that wars also destroy existing wealth.

Today we are going to look at how war can teach us another economic lesson.

The United States and other major nations have responded to Russia’s assault on Ukraine by imposing trade restrictions with Russia.

If protectionists are correct, these steps (effectively imposing an extreme Russian version of Biden’s “buy America” policy) should strengthen Putin.

Yet that’s obviously not the purpose of the sanctions.

Instead, officials from western nations understand that these trade barriers will weaken Russia’s economy.

By the way, this isn’t the only example of nations using trade restrictions to hurt their enemies.

The U.S. trade embargo with Cuba is a prominent example, and there are also restrictions on trade with Venezuela.

Why? Because limiting trade is bad for a nation’s economy.

Moreover, during the Vietnam War, the United States mined North Vietnam’s harbors.

Why? Because limiting trade is bad for a nation’s economy.

And don’t forget the British navy’s blockade against France during the Napoleonic wars.

Why? Because limiting trade is bad for a nation’s economy.

So why, then, do politicians like Donald Trump and Joe Biden support imposing the same policies on the United States?

P.S. Imposing sanctions on Russia is not good for the U.S. economy (or the European economies, the Japanese economy, etc), but such policies are strategically sensible if the damage on the Russian economy is much greater.

P.P.S. There is now discussion about kicking Russia out of the World Trade Organization. Once again, the purpose would be to hurt Russia’s economy. Which should raise uncomfortable questions for people who think the United States would benefit by choosing to give up membership.

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The Failure of Bidenomics, Part III

In Part I of this series, I pointed out that Biden’s plethora of proposed handouts and subsidies would lead to higher prices and more inefficiency. And in Part II, I explained that his discussion of inflation was embarrassingly inaccurate.

In today’s column, we’re going to analyze his strident support for protectionist “Buy America” provisions, which drive up costs for taxpayers by making it harder for foreign firms to compete for government contracts and thus give American firms the ability to charge higher prices.

How much of a burden are these policies? How much more are taxpayers having to pay because governments can’t opt for the lowest qualified bidder?

According to research shared by the Peterson Institute for International Economics (PIIE), American taxpayers lose $94 billion per year.

The good news (if we have a very generous definition of “good”) is that procurement protectionism “only” pushes up costs in the United States by 5.6 percent.

Our dirigiste friends in the European Union suffer much more. Their procurement protectionism results in average markups of 17.6 percent, costing European taxpayers a staggering $471 billion.

But taxpayers are not the only losers.

In a 2017 study for PIIE, Gary Hufbauer and Euijin Jung explain that nations also lose exports because of procurement protectionism.

Buy American provisions are often enacted because politicians associate the patriotic slogan with the creation of domestic jobs. In fact, these laws are counterproductive: They are costly for taxpayers, they curtail exports, and they lose more jobs than they create. “Buy American” was bad policy in 1930 and does even more harm today. …Buy American dulls competition for everything that federal, state, and local governments purchase. Consequently, taxpayers pay inflated prices for new infrastructure, the latest information technology, and routine maintenance of subways, bridges, and airports. …Quantification is difficult, but the major federal Buy American laws probably equate to tariff equivalent barriers of at least 25 percent on federal purchases. State laws vary in scope and protective degree, but on average they probably entail at least 10 percent tariff equivalent barriers. …When Buy American policies are championed at home they are emulated abroad—in the form of Buy European, Buy Mexican, Buy Japanese, and other local content laws and policies. Consequently, US goods and services face severe barriers in foreign procurement markets. …US exports could expand by $189 billion annually if OECD countries all repealed their existing local content laws.

The Heritage Foundation’s Tori Smith authored a report when Trump was pushing his version of procurement protectionism. Here’s some of what she wrote.

Domestic content requirements, like those found in the Buy American Act, the Berry Amendment, and various other laws, result in additional regulatory burdens for producers, and increase costs for American taxpayers. All for little or no gain: The policies are unlikely to stimulate job growth in target industries. …Existing laws and provisions regarding domestic content requirements…are extremely onerous and complicated burdens. They have three main effects: (1) creating additional regulatory hurdles for producers; (2) costing American taxpayers more than they would otherwise pay for government projects; and (3) they are unlikely to yield job growth in target industries like the steel sector.

Here are the most important passages from her report.

…to eliminate all existing domestic content requirements….would create hundreds of thousands of American jobs across the country and contribute billions of dollars to U.S. gross domestic product.

And this chart shows how various states would benefit if there was open competition for government procurement.

I’ll close with three additional points.

First, it’s disappointing that Biden is continuing Trump’s protectionist policies. It’s even more disappointing that he wants to expand upon them. This is one area where people thought Biden might move policy in the right direction.

For some historical perspective on the failure of the Trump-Biden approach, the National Taxpayers Union helpfully shared the views of Harry Truman and Dwight Eisenhower.

Second, some national security experts make a very reasonable argument that the Pentagon should not make itself dependent on purchases from nations such as China.

But this is at most an argument for “Buy from Allied Nations,” not an argument for “Buy America.”

Third, Biden is perversely consistent. Everything he is doing will increase costs for taxpayers and consumers in order to bestow undeserved benefits on special-interest groups.

P.S. The argument for competition in the market for government procurement is the same as the general argument for free trade. And since we’re on the topic of trade, remember that dollars sent overseas as part of a procurement contract will come back to the United States, either to purchase American exports or as part of investment in the U.S. economy.

P.P.S. None of this changes the fact that the public sector should be much smaller. In a libertarian society, there would be far lower levels of government procurement.

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The Least Important Economic News of 2021

Three years ago, I unveiled this video to help explain that trade deficits are nothing to worry about.

The most important thing to understand from the video is that the flip side of a trade deficit is a capital surplus.

To be more specific, foreigners earn dollars by selling products to Americans. They then use those dollars to buy goods and services from American producers, or they use those dollars to invest money in the American economy.

And when foreigners choose to invest their dollars, that necessarily is accompanied by a trade deficit.

At the risk of understatement, it’s not bad that foreigners want to invest in the United States.

Why am I discussing this topic today?

Because we have final data on trade flows for 2021. Here are some excerpts from a report by Ana Swanson for the New York Times.

The U.S. trade deficit in goods soared to record levels in 2021, topping $1 trillion… The overall trade deficit in both goods and services also hit an annual record, rising 27 percent as the country’s imports far outpaced its exports, according to data released by the Commerce Department… Imports surged by $576.5 billion, or 20.5 percent, rising sharply from a slump at the onset of the pandemic, as both the quantity and the price of the foreign products that Americans purchased increased. Businesses spent heavily on equipment and machinery… Exports grew 18.5 percent, or by $394.1 billion.

The correct reaction to this story is a big yawn.

Simply stated, I don’t care if Americans bought more from foreigners than foreigners bought from Americans. Just like I don’t care that I have a trade deficit with my local grocery stores (I’m always buying food from them and they never buy anything from me!).

Here’s another sentence from the story that deserves some attention.

Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said the ballooning trade deficit last year mostly reflected the country’s continued strong economic growth.

To elaborate, if the United States economy is growing, that means Americans can afford to buy more stuff, regardless of where those goods and services originate.

And if other places in the world are growing slower (such as Europe), that means people from those areas can’t afford to buy as much stuff that originates in the United States.

P.S. A few years ago, I criticized Trump’s trade deal with China.

At the risk of patting myself on the back, I was right. Here are a few more sentences from the NYT story.

The data also revealed the shortcomings of a trade deal that Mr. Trump signed with China in 2020. …China committed to buying an additional $200 billion worth of American goods and services above a 2017 baseline by the end of 2021. But those purchases did not materialize. …China actually bought none of the additional $200 billion of exports that the trade deal had promised. …the trade deal Mr. Trump signed in 2020 “did not address the core problems” with China’s state-led economy.

P.P.S. While it is generally a good thing when foreigners invest in the U.S. economy, that’s only true if they investing in the private sector (stocks, bonds, real estate, etc). By contrast, if foreigners are using dollars to buy government bonds, that obviously doesn’t help growth.

But the problem isn’t that foreigners are buying government debt. That’s merely a symptom of the actual problem, which is excessive spending by politicians in Washington.

The moral of the story is that free trade is desirable…and small government is desirable.

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Hopes and Fears for 2022

It’s an annual tradition (2021, 2020, 2019, 2018, etc) to list a handful of things that I hope might happen in the upcoming year, as well as the things I fear may happen.

Sadly, since I understand the economics of “public choice” (something Thomas Jefferson also implicitly understood) it’s always easier to envision the latter category.

But it’s good to begin a new year with optimism, so here are the good things that hopefully will happen in 2022.

Biden’s So-Called Build Back Better Stays Dead – The President squandered money on a fake stimulus and an infrastructure boondoggle, but we dodged the biggest bullet when Democrats couldn’t get all 50 of their Senators to support a multi-trillion dollar, growth-sapping expansion in taxes and spending.

The Supreme Court Ends Civil Asset Forfeiture – This was on my list last year, but the odious practice of “theft by government” continues. That being said, I still think it won’t survive if the Supreme Court has a chance to make a ruling (especially since America’s best Justice is very aware of the problem).

Republicans Win Congress in 2022 – I don’t have much faith in Republicans to do the right thing (especially when a Republican is in the White House), but I hope they win the House and Senate in November because they will oppose big tax increases while Democrats control the White House – even if only for partisan reasons.

In the “honorable mention” or “runner-up” category, I also hope to see further progress for school choice in 2022.

And I used to list a collapse of Venezuela’s reprehensible socialist government as one of my annual “hopes,” but I’ve largely given up (particularly since Latin Americans seem foolishly susceptible to “leftist saviors“).

Now let’s shift to the bad things that I fear will happen over the next 365 days.

Biden’s BBB Budget Plan Springs Back to Life – The President’s “Build Back Better” plan may be on life support, but sadly it’s not quite dead. I fear a scaled-down (but still horrible) version of the legislation may get approved this year. Senator Manchin of West Virginia, for instance, says he is willing to support a $1.5 trillion package and I fear the left eventually will decide that 50 percent of a (moldy and weevil-ridden) loaf is better than none.

Biden’s Remains a Protectionist – I hoped last year that Biden would reduce government trade taxes. Not because he believes in economic liberty, but simply because he wouldn’t want to continue a Trump-era policy. But that didn’t happen, and I now fear he’ll continue with protectionism in 2022. I don’t even have much hope that he’ll resuscitate the World Trade Organization.

New Tax Cartels – One of last year’s big defeats was the creation of a global tax cartel by governments. Barring some sort of miracle that prevents implementation, greedy politicians have set up a system that will require all nations to have a minimum corporate tax of 15 percent. That’s very bad news for workers, consumers, and shareholders, but I’m even more worried about the precedent it creates for additional tax cartels and ever-higher tax rates.

I’ll close by noting that last year’s list included the possibility of Kamala Harris becoming president.

But Biden has been so bad that it’s unclear that Harris would make things worse.

P.S. For the “fears” category, I could – and probably should – list entitlements every single year. Simply stated, the country is in deep long-run trouble because of an aging population and poorly designed tax-and-transfer programs. Years ago, I was semi-hopeful that we would get Medicaid and Medicare reform.

Now that seems like a distant dream and the real battle is preventing further entitlement expansions such as Biden’s per-child handout.

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Biden’s Trumpian Trade Policy

For self-interested reasons, I obviously like my video on the merits of free trade and the downside of protectionism.

But now I’ll also be recommending this new video from Liberty International.

It has some great examples, such as Washington’s corrupt trade barriers to sugar (as well as other examples of foolish agriculture subsidy programs).

And there’s some excellent analysis of how developing nations are hurt by the double-edged sword of protectionism and foreign aid.

What happened to Haiti is especially tragic.

My only criticism (and this is a sin of omission) is that there wasn’t enough time to explain why people shouldn’t fixate on the trade deficit – which is, after all, simply the flip side of a capital surplus.

For purposes of today’s column, though, I want to focus more on the politics of trade rather than the economics of trade.

That’s because Trump and Biden are basically the Bobbsey Twins of protectionism.

In his New York Times column, Binyamin Appelbaum explains why Trump’s China tariffs backfired.

I obviously agree, but Appelbaum only mentions in passing that Biden has not done much to reverse that policy.

Tariffs on imports from China have refilled the employee parking lot at Stoughton Trailers in Evansville, Wis. …the rest of us are paying for those jobs. The tariffs have contributed to a shortage of chassis in the middle of an import boom, one reason that American ports are gridlocked. Tariffs also drive up prices. American chassis are beginning to roll off production lines, but they cost more than pretariff Chinese chassis, which raises the price of everything that travels by chassis. …the government has decided to limit competition, a lazy approach that is both expensive and counterproductive. Taxing imports from China gives the appearance of punishing China, but the cost of the tariffs is paid by Americans. …Mr. Biden should make a clean break with Mr. Trump’s destructive tariffs. The right recipe is simple…, maintain an environment in which companies can flourish, ensure workers reap the benefits.

So at what point do Trump’s tariffs become Biden’s tariffs?

Technically, we hit that point in late January of 2021.

To make matters worse, Biden is also imposing new trade taxes on American consumers and businesses.

The Wall Street Journal opined today on Biden’s latest protectionist initiative.

President Biden says he feels your pain regarding inflation… Too bad his Administration’s policies reveal different priorities. Witness the Commerce Department’s decision to raise tariffs on lumber, which will raise building costs in an already strained housing market. The Commerce Department said last week that it will double the average tariff on Canadian softwood lumber to 17.9% from 8.99%. …There’s rarely a good time for trade restrictions, but the timing of this one is tragicomical. The same month Commerce revealed its tariff plan, lumber hit a record price of $1,650 per thousand board-feet, more than three times the level before pandemic supply shortages began. …The Biden Administration’s tariff resumes the U.S.-Canada lumber war where President Trump left off. …President Biden campaigned against his predecessor’s tariffs, but his trade policy in office has been nearly as protectionist. He’s kept most tariffs in place.

Kept most in place…and now adding more.

This is very sad, particularly since I had hoped that was one area where Biden might actually move policy in the right direction.

No, I didn’t think Biden actually understood why free trade is good (he’s always been a proponent of bigger government, after all).

But I hoped he would do the right thing simply to show he differed from Trump. Those hopes have been dashed.

P.S. If you want more reasons to be concerned, Biden also hasn’t done much to resuscitate the World Trade Organization and he isn’t pushing back on his party’s embrace of carbon protectionism.

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Reduce Poverty with Free Enterprise

I’ve shared several videos (here, here, here, and here) that use rigorous data to show that grinding poverty and severe material deprivation was the norm for humanity – until capitalism gained a foothold a few hundred years ago.

Fortunately, as free enterprise has gradually spread around the world, there’s been a remarkable increase in living standards, leading to a stunning drop in poverty.

For today’s column, let’s look at some new academic evidence about the link between capitalism and poverty reduction.

Here the abstract of a new study by Colin Doran and Thomas Stratmann of George Mason University.

We study the relationship between economic freedom and poverty rates in 151 countries over a twenty–year period. Using the World Bank’s poverty headcounts of those living on less than $1.90 per day, $3.20 per day, and $5.50 per day, we find evidence that economic freedom, measured by the Heritage Foundation’s Index of Economic Freedom, is associated with lower poverty rates. We also test the effect of various components of the Index of Economic Freedom. We find that a government’s integrity and a country’s trade freedom are associated with lower poverty rates.

Keep in mind that this study is looking at the relationship between free markets and extreme poverty (not the relatively comfortable type of poverty that exists in the United States).

More specifically, the authors were investigating the impact of public policy on people who live on between about $700-$2000 per year. In other words, poor people in poor nations.

And the big takeaway is that capitalism leads to less poverty, but what really makes a difference is to have open trade and less corruption.

The good news is that we know how to get free trade. Just get rid of protectionist policies.

The bad news is that corruption in government is a much more challenging topic. Yes, shrinking government would mean less opportunity for graft, but that doesn’t solve the problem of delivering “public goods” in a competent and honest manner.

P.S. Foreign aid makes things worse rather than better.

P.P.S. Click here is you want to learn about poverty reduction in rich nations.

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Democrats Embrace Protectionist Tax Hike on Lower-Income and Middle-Class Americans

I’ve been warning, over and over and over again, that a European-style welfare state means huge tax increases on ordinary people.

Simply stated, there are not enough rich people to finance big government (even Paul Krugman agrees).

This means Joe Biden and Democrats need to make a choice: What matters most, their desire to make government bigger, or their promise not to impose higher taxes on families making less than $400K per year?

We now have the answer to that question, and I hope nobody is surprised to learn that they picked government over taxpayers.

But what is surprising is that they picked the Trump approach of protectionist taxes on global trade.

Here are some excerpts from a report by the New York Times.

Democrats have agreed to include a tax on imports from nations that lack aggressive climate change policies as part of a sweeping $3.5 trillion budget plan… The move to tax imports was made public Wednesday, the same day that the European Union outlined its own proposal for a similar carbon border tax, a novel tool that is designed to protect domestic manufacturing. …skeptics caution that a carbon border tax, which has yet to be implemented by any country, would be difficult to carry out, and could anger trading partners and face a challenge at the World Trade Organization. Unlike the Europeans, who outlined their plan in a 291-page document, Democrats released no details about their tax proposal on Wednesday. Calling it simply a “polluter import fee,” the framework does not explain what would be taxed, at what rate or how much revenue it would expect to generate. …verifying the amount of carbon…produced by foreign manufacturing is tricky, experts say.

It’s always a bad idea to give politicians a new source of revenue.

But it’s a worse idea to give them a new source of revenue that will require bureaucrats to measure the amount of carbon produced by every imported good. As I pointed out a few days ago when discussing the European Union’s version of this protectionist scheme, that’s a huge recipe for cronyism and favoritism.

P.S. I’ll be very curious to see how different international bureaucracies react to these anti-trade proposals. The OECD and IMF, while usually bad on fiscal issues, historically have favored unfettered trade. And the World Trade Organization exists specifically to protect global commerce. But will these organizations now change their position to curry favor with the nations that control their purse strings?

The theory of “public choice” suggests we shouldn’t be optimistic.

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The European Union’s Carbon Protectionism

Over the past four years, Donald Trump presumably was the biggest threat to global trade.

His ignorant protectionism hurt American consumers and businesses – and undermined the competitiveness of the U.S. economy.

Over the next four years (and beyond), it’s quite likely that the biggest threat to global trade will be the European Union.

More specifically, politicians and bureaucrats in Brussels want to toss a hand grenade into cross-border commerce by imposing trade taxes on nations that don’t impose carbon taxes.

The Wall Street Journal has a must-read editorial about this threat to world commerce.

Western politicians have failed to persuade their own voters to commit economic suicide by banning fossil fuels, and forget about China, Russia or India. The climate lobby’s fallback, which is starting to emerge, is to punish the foreigners and their own consumers with climate tariffs. Bureaucrats at the European Commission are due to unveil the proposed Carbon Border Adjustment Mechanism (CBAM) later this month… Brussels wants to impose tariffs to bring the cost of carbon-dioxide emissions tied to an imported good into line with what a European producer would pay to produce the same good. …a carbon tariff would impose an enormous burden on companies seeking to sell to the EU—even the low-emitting firms—and as a result probably will trigger a trade war. …Under the leaked plan, foreign firms would have to undertake detailed carbon audits to report emissions to EU regulators, and then would have to work out what proportion of the emissions attributable to goods shipped to the EU already were covered by carbon taxes elsewhere. …The choice between costly compliance or a punitive default tariff risks deterring smaller foreign companies from trying to navigate this system.

Needless to say, the so-called carbon audits will create big openings for cronyism and favoritism.

Lobbyists will be fat and happy while businesses and consumers will get hit with higher costs.

The editorial’s conclusion wisely warns that it would be a big mistake for Europeans to trigger a trade war.

Western elites haven’t convinced their voters to pay the price of their climate obsessions. Like Donald Trump, they now want to blame foreigners. In the process they’ll force their consumers to pay more for imports and domestic goods, and they’ll harm their own exporters if countries retaliate. The last thing the world economy needs as it recovers from a pandemic is a climate-change trade war.

Writing for Forbes, Tilak Doshi speculates whether the United States will copy the Europeans.

…the European Parliament overwhelmingly endorsed the creation of a “carbon border adjustment mechanism” (CBAM) that would shield EU companies against cheaper imports from countries with “weaker” climate policies. …Now that the Biden administration has elevated climate change to its highest priority across the whole of government, it would seem that the EU and the US working together with like-minded governments in Canada and the UK would be in a position to set up a “trans-Atlantic climate club”  and thereby impose a global cost on carbon emissions. …Australian Trade Minister Dan Tehan labelled carbon tariffs “a new form of protectionism.” …For most developing countries, “worries of an increasing carbon footprint generated by economic growth are second to worries that growth many not happen at all.” …What sets off this new protectionism from its predecessors is the sheer scope of its application.

I’m actually hopeful on this issue.

Biden and his team doubtlessly are sympathetic to the E.U.’s initiative, but I don’t think Congress will approve a carbon tax on the American people.

And if the U.S. doesn’t have a carbon tax, there wouldn’t be any reason to impose discriminatory taxes on other nations that also don’t have that levy.

That being said, the Biden Administration would have some leeway to cause problems. For instance, would they push for the World Trade Organization to accept the E.U.’s attack on free trade?

When dealing with politicians, I always hope for the best, but assume the worst.

P.S. Here are my seven reasons to support free trade, as well as my eight questions for protectionists.

P.P.S. You shouldn’t be surprised to learn that the French were early advocates of carbon protectionism.

P.P.P.S. Some American politicians have pushed for regulatory protectionism.

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Biden’s Failure on Trade

Biden campaigned for higher taxes and a bigger welfare state, so I haven’t been surprised by his misguided fiscal agenda.

That being said, I was modestly hopeful that he would move trade policy in the right direction after four years of Trump’s protectionism.

To be sure, I didn’t think he would do the right thing because of some long-hidden belief in sound economics. But I figured he might reduce trade barriers simply to do the opposite of his predecessor.

We should be so lucky. Regardless of the policy, we’ve been getting statism.

Catherine Rampell of the Washington Post is not impressed by Biden’s protectionism.

Several months after he left office, some of President Donald Trump’s most foolish economic policies remain in place: his sweeping trade restrictions. …Trump began waging a series of trade wars three years ago — not primarily with U.S. adversaries, mind you, but with friends. Among the dumbest and most self-sabotaging measures were global tariffs levied on nearly $50 billion of imported steel and aluminum. …the countries most affected by Trump’s move were our close economic and military allies, including the European Union, Canada and Japan. …Despite Trump’s claims otherwise, the cost of the tariffs was primarily passed through to American consumers and companies. Downstream firms that use steel or inputs made of steel, which employ about 80 times more workers than the steel industry does, faced higher costs. One estimate found that Trump’s steel tariffs alone cost U.S. consumers and businesses about $900,000 for every job created or saved.

Getting rid of taxes on imported steel and aluminum would be a positive step for the economy.

But the real goal should be getting rid of all Trump’s taxes on global trade. Garrett Watson from the Tax Foundation recently shared estimates of how this would benefit the American economy.

…repealing the tariffs imposed under President Trump’s administration would be one of the simplest ways policymakers could boost economic growth. …About $460 billion worth of goods were subject to the tariffs, raising prices for consumers. In fact, we estimated the tariffs were about an $80 billion annual tax increase, reducing consumer purchasing power. …According to the Tax Foundation model, repealing tariffs imposed since 2018 would raise long-run GDP by 0.1 percent, long-run incomes (gross national product) by 0.2 percent, and create about 83,000 full-time equivalent jobs. This growth would boost after-tax incomes by about 0.3 percent for people across the income spectrum, helping low-income and middle-class taxpayers. …Repealing the tariffs would be a simple option to boost growth because it can be done without congressional authorization by President Biden, and would provide timely relief to businesses and households.

The last sentence is key. Trump had lots of unilateral authority to impose bad trade policy, and Biden has lots of unilateral authority to undo bad trade policy.

The fact that he hasn’t exercised that authority makes him just as guilty of anti-market trade policy as Trump.

The next thing to watch for is whether he continues Trump’s bad policy of sabotaging the World Trade Organization.

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Equality, Efficiency, and Trade

When I was first learning about economics in the 1970s and 1980s, Arthur Okun’s equality-efficiency tradeoff was part of just about any discussion of public policy.

Folks on the left acknowledged that their policies would lead to less prosperity, but they argued that result was acceptable because the benefits of a more-equal society would offset the cost of reduced economic output.

Needless to say, there were vigorous debates about how much additional equality could be achieved and how much economic damage might be caused by any particular policy, but few if any economists pretended that more government was actually good for growth.

Unfortunately, that has changed. A growing number of people on the left (especially those with tax-free jobs at international bureaucracies) now claim that bigger government actually is the way to get more growth.

Here’s their theory.

This illogical hypothesis is so absurd and so anti-empirical that I now get excited when I find economists who still use Okun’s framework when analyzing various reforms.

For instance, there is a new study from the European Central Bank that looks at whether a pro-growth policy (free trade) leads to less equality.

The working paper, authored by Roland Beck, Virginia Di Nino, and Livio Stracca, specifically measures the impact of membership in so-called “globalisation clubs.”

The mounting criticisms against globalisation…have sparked a lively debate about whether the narrative of the benefits of free trade and capital flows is still intact. …In this paper, we reconsider the effects of globalisation on income and inequality studying the consequences of quasi-natural experiments like accessions to “Globalisation Clubs”. …Our list of Globalisation Clubs includes the World Trade Organisation (WTO), the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD), which all require their members to pursue some form of either liberal trade or investment policies or a combination of both. …The main purpose of our study is to shed light on the hypothesis that globalisation leads to an efficiency-equity trade-off which is a fundamental concern in economics dating at least back to Okun (1975). In other words, is the hypothesis that globalisation increases economic efficiency to the detriment of cohesion and equality supported by the data?

Here are the key results.

The analysis leads to three main findings. First, with the exception of financial liberalisation we find that all our “globalisation shocks” lead to a significant increase in trade openness – a prerequisite for considering them globalisation shocks in the first place. Second, the effects on per capita income are mixed; positive for WTO accessions and trade openness shocks, insignificant for OECD accessions and even negative for EU accessions and financial liberalisations. …Finally, we find little evidence that globalisation shocks lead to more inequality. The Gini coefficients (market and net) tend not to change or even to fall, and the labour share of income to be unchanged or even rise, in the wake of a globalisation shock.Taken together, our results point to mostly positive effects for countries following globalisation shocks and challenge the view that globalisation is necessarily an efficiency-equity trade-off.

I’m not surprised by these findings.

There’s no reason to think that OECD membership will lead to better policy and there are good reasons to think EU membership might push policy in the wrong direction.

The WTO, by contrast, has a good track record of trade liberalization. So these results from the study make sense.

The primary takeaway from this research is that free trade is good for prosperity. Not only does it lead to more growth, but low-income people enjoy above-average gains.

Though I would argue that free trade would be just as desirable if rich people were the ones who enjoyed above-average gains. The key point is that all groups benefit when there are reforms to shrink the size and scope of government, and we shouldn’t get worked up if some people benefit more than others.

But there’s a secondary takeaway. This European Central Bank study also is an example of methodologically sound research (i.e., recognizing that more government is not a free lunch).

P.S. While I applaud the honesty of left-leaning economists who use Okun’s framework, that doesn’t stop me from criticizing some of their crazy conclusions.

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