How Free Traders Can Improve Their Case

By Veronique de Rugy

On Thursday, Fox Business had a piece about our president’s latest change of mood. According to the article, Mr. Trump is now willing to blow up the whole NAFTA replacement agreement, known as USMCA, in order to impose a 25 percent national-security tariff on Mexican cars. The reason has nothing to do with trade but is about the fact that the president believes that such a tariff is a rational means of forcing the government in Mexico to do more “to stem the illegal flow of drugs and people into the U.S.”

As the Fox report explains, once the USMCA is in place the president won’t be able to use auto tariffs as a threat to bully Mexico and Canada to do more of what he fancies they should do:

Known as the United States–Mexico–Canada Agreement (USMCA), the deal would effectively prevent the U.S. from imposing new auto tariffs on the other two nations. A side-agreement would allow Mexico and Canada to each export 2.6 million passenger vehicles tariff-free should Trump impose duties on the industry on national security grounds. Pickup trucks would be entirely exempt from any new tariffs.

And crazy as it is, this new threat is a little less crazy than the one before that:

The comments mark a de-escalation from his threats to close the entire U.S.-Mexico border, but will likely raise concerns within the auto industry, as well as among supporters of the new trade agreement.

For decades we had a fairly established consensus, not just among economists but also among policy makers and pundits, that tariffs are a bad idea, that free trade is a win-win for the countries that practice it, and that bullying other countries by threatening them with tariffs and other protectionist barriers is not okay.

Then walks in President Trump, who for decades has described multilateral free trade agreements as the worst, as job killers that are responsible also for the decline of manufacturing in America, and free trade as a naïve destructive position. As soon as he got into office, Trump withdrew from the Trans-Pacific Partnership. And since then he has been threatening for months to withdraw from NAFTA (which is still the law of the land and will be until the USMCA is adopted by Congress). To get an agreement from Mexico and Canada to amend NAFTA he imposed steel and aluminum tariffs on everyone, and while he has gotten his way in convincing officials in the two countries to agree to the more protectionist USMCA, these tariffs have remained in place.

Trump has allies in the administration such as U.S. Trade Representative Robert Lighthizer, Commerce Secretary Wilbur Ross, and economic advisor Peter Navarro. More distressing, however, is the fact that in the span of a mere two years many former free traders have changed their position in order to embrace the president’s protectionist policies and strategies.

How did we get here? The sad truth may be (emphasis on the may) that the responsibility for this nightmare is ours — by which I mean us, the true free traders.

Hear me out: For decades our main way of achieving freer trade has been through the adoption of free trade agreements. The dramatic drop in tariffs around the world over the past three-quarters of a century attests to that success. In a paper forthcoming at the Mercatus Center, I write the following:

They [trade agreements] have led most countries to lower their tariffs. Since the end of WWII the average world tariff for major industrial nations dropped from nearly 22 percent to just 2.59 percent today for all countries, an 88 percent reduction. In 1994, prior to the creation of the World Trade Organization (WTO), the average world tariff rate was 8.57 percent. Just since 1994 the average world tariff has fallen by 70 percent, from 8.57 to 2.59 percent.

For a great explanation of free trade agreements and how they work, check out this paper by my colleague Dan Griswold on the threat of so-called “reciprocal” tariffs.

But here is the thing: as effective as free trade agreements have been at lowering trade barriers, there’s one way in which they have impaired the fight for a world of even freer trade. They suffer from the weakness of fundamentally being rooted in mercantilist misunderstanding.

Indeed, trade negotiations and the agreements that they produce rest on the mistaken belief that the ultimate benefit of trade is exports, while imports are the unfortunate but necessary price to pay in order to export more. The multilateral and bilateral trade treaties “worked” to make trade freer in practice because each government was willing to allow its citizens to import more as the necessary condition for persuading other governments to allow their citizens to do the same. Each government, in short, agreed to lower import barriers only as a means of increasing its country’s exports.

But this entire approach is backwards. The economic case for free trade is fundamentally a unilateral one. Tariffs imposed in the U.S. are a tax on American consumers. It’s not that we wouldn’t love it if other countries stopped hurting their consumers with tariffs on U.S. goods, but their idiocy is no reason to “retaliate” by inflicting an identical harm on our consumers. Besides, the truth of the matter is that it is not our place to tell other governments how to govern their countries.

I can’t be sure, but it could be that we free traders haven’t bothered fighting for the truth because, in spite of the wrongheaded theory underlying trade agreements, they were getting the job done. Don’t get me wrong, as flawed as they are, I support them given that they, for now, remain the only politically feasible means of making trade freer, both for us in America and for non-Americans.

Yet, faced with the current resurgence of protectionist thinking prevalent in the United States, we free traders must fight back by more clearly, boldly, and frequently stating the truth about free trade. Doing so will help to raise the popular understanding of trade to a level higher than it was even before the spread of Trump’s mercantilist notions.

The truth about free trade must come to be understood by more than economists because restoring the so-called “Washington Consensus” isn’t enough. We must erect a consensus that is more durable and more correct — a consensus built on the correct understanding that the ultimate goal of trade is to raise the standard of living of consumers and not to expand the sales of existing domestic producers.

As we fight this battle we must also tackle other serious idiocies that we hear all the time, such as “If China wins, we lose.” No nation — be it rich, poor, growing, or stagnant — with whom we trade is an economic threat to us. All trade increases our prosperity. There may be national-security issues, but these should be addressed with national-security means, not tariffs and other economic policies.

Finally, if I were allowed a last wish, I would want people to once and for all understand that international trade is not different than domestic trade. The gains from trade are the same whether Chinese and American people are trading with each other or Virginians and New Yorkers are trading with each other.

We have our work cut out for us. But we should feel energized by the knowledge that we stand on the shoulders of giants going all the way back to Adam Smith.

Sign up here to be notified of new articles from Veronique de Rugy and AIER.

Veronique de Rugy

AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.