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Who's got the trade policy delusions?
Jesse Richman, 4/12/2016

The counter-attack by the "free-traders" is under way.  It's unfortunate for them that they have little more to sell than lies, distortions, and delusions. 

Case in point is a recent piece on trade in The Daily Beast by Will Marshal and Ed Gerwin (http://www.thedailybeast.com/articles/2016/04/11/donald-trump-and-bernie-sanders-are-delusional-on-trade-policy.html).

"Take Trump’s chest-thumping threats to slap tariffs of 45 percent and 35 percent on imports from China and Mexico, respectively. These crushing duties would immediately jack up production costs for U.S. manufacturers, such as Ford, that source engines and parts from these countries, seriously undercutting their ability to compete globally."

The U.S. exports half as many cars as it imports.  Imposing tariffs on countries like China and Japan that have worked hard to exclude U.S. made cars from their markets might well move trade toward balance.  Tariffs on imports from Mexico would perhaps change Ford's calculus about its newest shipment of U.S. auto-production to that country. 

"The Trump Tariff also would be in essence a giant tax hike on U.S. consumers, amounting to $250 billion by one estimate. At current import levels, a 45 percent duty on imports from China would, for example, translate into a tax of $18 billion on cellphones, $16 billion on laptops, and $15 billion on clothing. Similarly, Sanders’s commitment to “reversing” tariff-cutting U.S. trade agreements and normal trade relations with China would lead to higher duties on a wide range of imports from 21 countries—including America’s top three trading partners—and higher costs for working Americans."

Such a tariff would also provide valuable incentives for some re-shoring of production to the US if maintained.  The United States goods trade deficit with China in 2015 was $365 billion dollars.  If some cell phones, laptops, and clothing production were brought back to the U.S. in response to trade balancing tariffs (or shifted to countries that engage in balanced trade with the U.S. rather than mercantilism, consumers in their other role -- as workers -- would gain significantly. 

"China and Mexico would surely retaliate by raising barriers to U.S. exports. China—America’s number three export destination—could, for example, impose stiff duties on such leading U.S. exports as aircraft, autos, electronics, soybeans, and corn, as well as new limits on high-value U.S. services. The tit for tat would lead to shutdowns and layoffs in all three countries, and could tip an already shaky global economy into recession."

If the tariffs were imposed by means of the balanced trade "scaled tariff" then retaliation would only further hurt these country's exports.  Their better policy would be to begin taking down trade barriers, stop manipulating their currencies, and start finding ways to buy more U.S. products. 

"Launching trade wars to “protect” the middle class makes sense only if you believe, as Trump does, that global commerce is a zero sum game. No doubt that reflects his background in real estate, where the game is to extract the highest rents from the finite resource of property, not to create new wealth. Evidently, Trump’s vaunted Ivy League education failed to acquaint him with the elementary concept of comparative advantage, by which countries rich and poor can turn trade to their mutual benefit."

"To Trump, one country’s gain is necessarily another’s loss, and he sees America as the pigeon at the table of high-stakes international trade negotiations: “China is killing us, Japan is killing us, Vietnam… [is] killing us.” To Sanders, trade is a conspiracy by Wall Street and corporations to enrich themselves at the expense of working Americans. He calls for “reversing” current trade agreements and normal trade relations with China, which would entail abandoning the lower tariffs and market-opening rules at the core of these arrangements."

This criticism may or may not be valid concerning Trump, but it is clearly overly simplistic and wrong headed.  It reflects a very simplistic understanding of international trade. The world is more complex than this Econ 101 level understanding of commerce.  Of course trade isn't a zero sum game.  But that doesn't mean that elementary comparative advantage is the last word either.  U.S. workers had a genuine stake in the prosperity of the U.S. industrial base.  When that base was outsourced out from under them, they suffered, and the country as a whole suffered.  Perhaps for starters the authors should read Global Trade and Conflicting National Interests by two authors at NYU.  While NYU is not an Ivy League institution, it is ranked in the top ten in the world for economics and business by some raters.  So it's no backwater. 

"Both Trump and Sanders rail against President Obama’s proposed Trans-Pacific Partnership (TPP), a pact among 12 Asia-Pacific nations that account for about 40 percent of the global economy. By 2030, Asia will have some 3.2 billion middle-class consumersten times the projected size of North America’s middle class. The TPP would provide a critical foothold in this fast-growing market that wants to buy what America has to sell. It would eliminate thousands of tariffs and an array of other barriers on competitive U.S. exports, including high-value manufactured goods, farm products, software, and sophisticated services. These growing exports would support good, higher-paying jobs. At the same time, the TPP would help “democratize” U.S. trade by making it easier for small, digitally enabled businesses to share in trade’s significant benefits."

The problem with this argument is that recent experience suggests that trade deals tend to hurt the U.S. balance of trade.  How much of that "foothold" in Asian markets will consist of U.S. firms outsourcing more production?  As we have noted previously past trade deals have been much better for American importers and outsourcing than American workers because they have  been associated with larger trade deficits.   

 
 .....
 

"While many Americans are angry, most recognize the futility of trying to unplug our economy from connected global markets. They understand that economic isolation and protectionism will hardly bring about a “revolution” or “make America great again.” Instead, by a significant majority, Americans see trade as an “opportunity.” It’s time to seize trade’s opportunity to stimulate economic growth that works for everyone."

The best way to seize this opportunity is to begin pursuing a policy of balanced trade. 

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]