The United States has advocated free trade policies of unrestricted imports and exports since the Bretton Woods Conference in 1944.
This principle of refraining from imposing tariffs or quotas remained the case even after America began running substantial trade deficits during the Nixon administration.Now, however, the administration of President Donald Trump has vowed to abandon free trade policies and is threatening a trade war with China.
From the classical British economist David Ricardo to the legendary American Nobel Laureate Milton Friedman, economists have argued that free trade has done more to improve world per capita income than government aid and charitable works have. Under free trade, countries increase their overall consumption by exporting the goods with which they have a comparative advantage and importing the goods with which they have a comparative disadvantage. In 1997, Friedman and his wife, Rose, wrote in “The Case for Free Trade” that protectionist policies drown out the consumer’s voice. The Friedmans also contradicted the notion that exports are good and imports are bad. They wrote: “Our gain from foreign trade is what we import. Exports are the price we pay to get imports.” World economies have benefitted enormously from the integration of global supply chains that have enabled companies to produce and distribute goods more cheaply.
The president argues that our trade policies have cost millions of U.S. jobs and hobbled our industries. But America’s economy has grown 20-fold since the onset of significant trade deficits in the 1970s and the U.S. also is enjoying very low unemployment.
Recently, the United States and China have imposed tariffs on products from steel to frozen pork. These represent less than 0.5 percent of the gross domestic product of either country but, unfortunately, leaders in both countries have threatened to impose many billions of dollars more in tariffs.
Goldman Sachs analysts estimated that the steel tariffs could reduce the operating earnings of Ford and General Motors by $1 billion each. The International Energy Agency cautioned that trade tariffs will reduce global oil demand.
A Barron’s article, “How Trade Tensions Will Test Companies and Investors,” quoted Elana Dugger, a Moody’s economist, on her concerns: “We worry about the direct impacts of tariffs on the economy but also the impact of rising uncertainty and rising political risk that are likely to hurt sentiment in financial markets, business investment and efficiency.”
China’s theft of U.S. company’s intellectual property, a problem the president also mentions, is a serious problem. Dennis Blair wrote in The New York Times that Trump is right to take a hard line on this because intellectual-property theft costs America up to $600 billion a year, the greatest transfer of wealth in history. But Trump’s trade policies have widespread consequences. The best-case scenario would be a prosperous negotiation with China. The worst would be a trade war that would be an enormous drag on our economy, resulting in unfulfilled transactions, higher unemployment and billions in lost revenue for our businesses.
In 2017, the U.S. racked up a $566 billion trade deficit, most of it — $376 billion — with China. While not as monumental, America runs significant trade deficits with all of its major trading partners, including Japan, India, Canada, Mexico and Germany.
But Trump needs to understand that blocking Chinese exports will not reduce our trade deficit significantly. American companies would produce only a fraction of the goods now made in China. Other countries, such as Thailand, Vietnam, Indonesia, Taiwan and Bangladesh, will make them instead.
To paraphrase the Friedmans, it does not, in the long run, benefit U.S. consumers to “protect” our steel and aluminum industries. In 2016, 95 percent of U.S. consumers shopped at Walmart stores, followed by Target, at 84 percent, according to NPD, one of the largest market research firms in the world. The reason is clear: They wanted to get the most they could for their money, something these companies ensure by taking advantage of global supply chains made possible by free trade.
Originally published in the Sarasota Herald-Tribune
