by Ray Keating
The Keating Files – December 10, 2020
(Editor’s Note: Much damage has been inflicted on conservatism, conservative thought, and the conservative movement in recent years. The effort to heal and rebuild conservatism promises to be a difficult, but necessary undertaking. The Keating Files will regularly weigh in to help that process. This is our second “Rebuilding Conservatism” column, and it comes from the opening to my book Free Trade Rocks! 10 Points on International Trade Everyone Should Know.)
As an economist, let me make a couple of things clear when it comes to international trade. First, protectionism sucks. Second, free trade rocks. I know – not exactly highly technical stuff from the economics profession. But both points are true. So, let’s get started backing up these bold claims.
We’ll start by talking taxes. Most politicians understand that people don’t like to pay taxes. However, many folks don’t seem to get all that bothered when someone else gets hit with a bigger tax bill. There’s an old ditty that dates back to the early 1930s that goes, “Don’t tax you. Don’t tax me. Tax the guy behind the tree.”
It’s pretty standard fare for politicians to push the idea of taxing others – especially higher taxes on high-income earners or the “rich” – in order to then promise government goodies for everybody else presumably paid for with the resulting additional revenues. It’s class warfare, and it happens to be lousy economics.
Another group sometimes targeted for higher taxes is foreigners. Indeed, higher taxes can become an even easier sell if they are called tariffs – that is, taxes on imports – and politicians mistakenly or misleadingly argue that other countries wind up paying those tariffs.
While higher tariffs have popped up here and there during the post-World-War-II period, they largely were exceptions in a long-run move toward lower tariffs and freer trade. Both politicians and the public seemed to recall the role that high tariffs played in igniting the Great Depression (more on this later). But, of course, in politics, lessons eventually get unlearned.
The first glimmers of tariffs making a serious comeback arrived via the losing presidential efforts of Pat Buchanan and Ross Perot in the 1990s – Buchanan in 1992, 1996 and 2000, and Perot in 1992 and 1996. Later, during his 2008 presidential campaign, Barack Obama struck a hostile tone toward free trade, and then in 2016, Donald Trump made protectionism a centerpiece of his run for the White House.
Unlike Obama, who largely backed off his anti-trade campaign rhetoric after taking office, President Trump did the exact opposite. He pushed protectionist measures with an array of U.S. trading partners, including Mexico, Canada, China, South Korea, and Japan. One selling point by President Trump as he ramped up a trade war with China was that China, or Chinese businesses, would pay the tariffs he was imposing, not U.S. consumers or businesses.
In reality, the cost of higher taxes always spreads well beyond the groups targeted. For example, increased taxes on upper-income earners have negative effects on the private investment that is essential for economic, income and job growth. So, lots of people and the economy tend to suffer as resources are siphoned away from productive, private enterprises, and handed over to elected officials who dole out resources according to political incentives. As for tariffs on goods from China, for example, they wind up being paid by U.S. consumers and businesses who face increased costs and reduced choices.
There is the added political factor that consumers, at least, tend not to see the direct impact of tariffs clearly. In that way, tariffs are like regulations imposed by government. The effects are significant, but they are dealt with by others, such as by the businesses that must wrestle directly with increased costs. Compare these more-hidden costs to when government takes money directly out people’s paychecks via an income tax increase, jacks up property tax bills, or hits consumers with higher sales taxes at the cash register. Workers and consumers – and yes, voters – see those costs quite clearly, and respond accordingly.
When it comes to tariffs, one might change that old-time ditty to: “Don’t tax you. Don’t tax me. Tax the guy across the sea.” In reality, we all pay the price of higher tariffs in assorted ways.
But in getting at the basics of what free trade is, five fundamentals need to be summed up at the outset as to why free trade rocks!
First, and this obvious point is often missed, it’s critical to keep in mind that governments, for the most part, do not trade; instead, individuals and businesses do. There’s no difference between trades taking place across town, across the nation or around the globe. Trade happens between individuals, between businesses, and between individuals and businesses. Those trades would not occur if the parties involved were not made better off by such voluntary transactions. Trade, by definition, makes people better off.
Second, thanks to freer trade, competition is expanded and resources are allocated more efficiently, and therefore, consumers experience a wider choice of products and lower prices.
Third, entrepreneurs, businesses and workers experience greater opportunity with freer trade, as more markets are open to their goods and services.
Fourth, as individuals and businesses specialize in those areas where they have a comparative advantage – that is, their largest advantage – and then trade with others, economic, productivity and income growth are boosted.
Fifth, international trade is increasingly important for the U.S. economy and to U.S. economic growth. Again, we’ll explore this more in an upcoming chapter, but for now, it’s simply worth noting that in 1955, real total trade (that is, exports plus imports) equaled only 6.3 percent of U.S. GDP. As of 2018, total trade had risen to 32.3 percent of the economy.
To sum up, free trade reduces costs through enhanced competition and lower trade barriers; expands choices and lowers prices for consumers; keeps U.S. firms competitive; opens new markets and opportunities for U.S. goods and services; expands economic freedom; and feeds economic growth.
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Other articles in the Rebuilding Conservatism Series…
“Rebuilding Conservatism #1: What is Conservatism?”
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Ray Keating is a columnist, novelist, economist, podcaster and entrepreneur. You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York from Amazon or signed books at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?
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