Could-Be-Worse Trade Policy?

by Ray Keating

The Keating Files – January 21, 2020

The benefits of free trade have been well known since Adam Smith published his Wealth of Nations in 1776. Unfortunately, President Donald Trump seems to have missed the last 244 years on the issue. 

The result is that Trump stands out as a modern-day mercantilist focused on meaningless and yet deceptive “balance of trade” numbers, and using costly protectionist measures in a futile attempt to reduce the U.S. trade deficit. Make no mistake, President Trump’s trade policies amount to government interfering in markets via tariffs (i.e., taxes), quotas and other regulations. Trump trade policy has nothing to do with somehow advancing free trade, but instead is all about government managed or manipulated trade.

In fact, being against free trade stands out as perhaps the lone issue where Trump has not switched positions since the 1980s. And that’s unfortunate. After all, no matter how hard any politician tries to wish away reality, politics cannot erase or change the laws of economics.

It’s no secret what protectionism leads to, that is, reduced trade, increased costs for U.S. consumers and businesses, and less economic growth.

From pulling the U.S. out of the Trans-Pacific Partnership free trade effort on his first day in office to the recent signing of a “Phase 1” agreement with China, the Trump presidency has been waging a trade war, while failing to realize that the real attack has been primarily on U.S. businesses and workers. 

Exiting TPP meant making U.S. products less competitive in those 11 Pacific Rim nations. 

Imposing tariffs on steel and aluminum imports has meant increased costs for U.S. industries that use steel and aluminum, which, of course, far outdistance U.S. steel and aluminum manufacturers in terms of numbers of businesses and employees.

Waging a trade war against China has meant increased costs for U.S. businesses given that almost all imports are inputs to American firms, and given lost markets and opportunities for U.S. exports. This “Phase 1” deal basically pushes off, for now, future increases in tariffs, leaves higher tariffs in place (at more than six times higher than prior to the trade war, according to Oxford Economics per an NPR report), and in effect, has the United States in the very strange position of working against efforts to push China toward greater economic freedom by demanding that China hit certain targets in terms of buying U.S. goods, which can only be accomplished via greater government control over the economy.

Meanwhile, the U.S.-Mexico-Canada Agreement (USMCA), which has been approved by the U.S. and Mexico, at this point, and awaits action by Canada, largely leaves the much-maligned NAFTA (the North American Free Trade Agreement) in effect, and makes some improvements regarding, for example, the digital economy, reducing custom duties on cross-border shipments, and intellectual property protections. But it also takes serious steps back from free trade by, for example, injecting wage, labor, auto-content, and environmental regulations into the trade agreement, as well as diminished investor protections. 

Clearly, the pro-trade positives of the USMCA could have been achieved through cooperation with Mexico and Canada without going down the path of adding in anti-trade measures. Indeed, the case can be made that the biggest plus with the USMCA is that it avoided a U.S. pullout from NAFTA, as threatened by the president.

As for the results, there have been no surprises. Real exports and imports, which have each grown at an average annual real rate of better six percent since 1960, for example, have slowed to a crawl. Since the start of 2018, real export growth has managed to average a mere 0.2 percent rate, while imports have advanced by an average rate of only 1.9 percent. The result has been that trade has shaved a significant 0.5-to-0.7 percentage points off of average overall real U.S. economic growth – if not more when you factor in the reach of trade across sectors, including the role that the trade war has played in the recent decline in business investment.

Manufacturing has suffered, given the rise in input costs, reduced export opportunities and added uncertainties. Consider that manufacturing production (i.e., the physical output of manufacturing sectors) effectively moved into a recession in 2019, with the December level of output down by 1.3 percent compared to a year earlier. 

Hmmm, and I thought I heard that protectionism was supposed to help U.S. manufacturing? Go figure.

Finally, study after study, namely by Federal Reserve economists, has confirmed the negatives of recent protectionist, trade-war measures, such as increased costs for U.S. businesses (including manufacturers) and consumers, and reduced U.S. exports. (See a Wall Street Journal summary of these studies.)

The health of our economy as it relates to trade is not measured by the size of trade deficits. Instead, it’s about whether or not exports and imports are both growing robustly or not. The answer of late is that trade is suffering.

Could trade policy be worse? Well, sure, it could be worse. But as it is, it’s anti-consumer, anti-business, anti-worker and anti-growth, and that’s really bad.

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Ray Keating is a columnist, a novelist (his latest novel is The Traitor: A Pastor Stephen Grant Novel, which is the 12^th book in the series), an economist, a nonfiction author (among his recent works is Free Trade Rocks! 10 Points on International Trade Everyone Should Know), a podcaster, and an entrepreneur. The views expressed here are his own.