This year, we heard three grand predictions from the U.S. administration that turned out to be completely false.
First, they said there would be no retaliation for tariffs.
Second, they said that trade wars are an easy win.
Third, they said that American exporters and domestic producers would be the victors.
None of this has happened. In each case, in fact, the results were the opposite. The great 2018 experiment in reviving medieval mercantilism and realizing interwar dreams of national autarky has been a major flop, just as the thousands of merchants who begged Washington not to do this had predicted.
The last several months have been dominated by various face-saving tactics. The new Nafta is a great example. It includes more bureaucracy, higher costs, and more mandates than what it replaces, but at least it is something other than all-out war. As for steel and aluminum tariffs, in addition to raising costs all around, it only ended up raising costs for producers and diverting trade flows.
As we approach the end of the year of the great war, there are dark economic clouds on the horizon. Financials are suffering. There is no relief in sight for American exporters. Instead of creating a glorious economic boom, there are predictions of a recession on the way.
Export markets in agriculture have taken a huge hit. Iconic American companies are leaving U.S. shores. More than anything else, the announcement from General Motors that it is closing factories sent shock waves through the Trump administration.
“Wait, our policies were supposed to achieve the opposite!”
What to do? The Trump administration finds itself backed into a corner on every front. In this case, the best path is to stop the crazy rhetoric, pull back on plans for more suffering, and find some symbolic victory and call it a day.
Peace Is What Matters
That’s the best possible interpretation of the reapprochment between President Trump and President Xi Jinping and the agreement to push the pause button. There’s not much substance to the agreement, but that’s fine; the symbols of smiles, handshakes, and delays of new tariffs actually matters more.
For “trade hawks” — people willing to inflict maximum damage on their own people for purposes of political aggrandizement — the specifics of the agreement are unimpressive, despite Trump’s claim that this is a historic deal. China agreed to lower tariffs on American cars. But it’s not tariffs that are stopping the export market. It’s economic reality.
Only 2 percent of Ford cars sold in China are made in the United States; the rest are made in joint ventures in China itself. It’s generally true for BMW, Mercedes, and General Motors too: the overwhelming number of cars sold in China are made in China. In the same way, most German and Korean cars sold in the United States are made in the United States. Even if China lowered its tariffs to 0 percent, nothing much is going to change. It makes more sense for the manufacturer from any country to build in the country of purchase.
The bureaucratic demand for every good to have a “country of origin” stamped on it is what creates the confusion here. This is where misleading “trade deficit” numbers come from. It’s a remnant of an age gone. These days everything is made everywhere, and that’s wonderful. This approach to economic globalism spreads prosperity to the world while providing more opportunities at home.
So what have we learned during this great experiment of 2018? Nothing we didn’t know already. Despite the rhetoric, we’ve learned that tariffs on China are not actually paid by China. They are paid by American producers and consumers. So a pullback on the trade war is a boon to Americans. As Donald Boudreaux has written, “During truces in trade wars, each side agrees to temporarily stop inflicting damage on itself…. Trade-war negotiations are ones that the people of each belligerent country should ardently hope their government loses.”
Kindness to Others
There’s another factor to trade that gets no attention these days but should. It is good for foreign peoples. Now, I know that in an age of nationalism, this isn’t supposed to matter, but as humanitarians who want the best for the world, this aspect of trade should lift your heart.
Here’s a story to make my point. I needed to change a plane ticket, so I got on the phone with a call center contracted by my flight website. The agent was very helpful and changed my ticket. I was driving and had some time, so I asked where she was. She said she is in the Philippines. I asked how big the call center is. She said there are several hundred people located in her Manila office.
She was pleased that I asked, so I pressed her for details. She is one of five children, from a poor family, and just starting out her career. She is thrilled to have this job. She works all day, every day, and makes enough money to have her own apartment. Her parents are very proud of her, and she is delighted to have this job, and especially grateful for the American company that makes it possible.
Her highest hope is to save enough money to travel and see the world. We talked further about life in Manila and the traffic problems and city life and so on. We ended the conversation. I was left with a tremendous feeling of happiness. In some way, my ticket purchase from this Manhattan-based enterprise financially assisted a person in a country I’ve never been where economic opportunities were once scarce. It’s a sustainable job, not just some one-time charity. That knowledge makes me happy.
I’m thrilled to participate in markets in part for this reason. I also like the idea that Chinese workers, once suffering under a socialist regime like few others in history, now have a chance to work in factories for great companies. They have access to a better life because of free trade and international cooperation. These people are not our enemies; they are human beings who have a right to live a better life, just like you and I do.
Do you desire the well-being of all peoples in the world? Free trade is a wonderful way to see this realized. Tariffs only end in spreading misery, a classic case of man’s inhumanity to man. The sooner the U.S. administration realizes this, the better off everyone will be.