Few areas of life are as poorly understood as trade. This is remarkable because each of us engages in trade every day. We buy our groceries, clothing, electronics, etc. from other people rather than making them ourselves. If we didn’t think trade was worthwhile, we wouldn’t do it. But we do—because we know how poor we would be if each of tried to make all the things we want.
At one level, then, trade is understood.
Put the word foreign in front of the word trade, however, and it’s a whole new ballgame. Suddenly an obviously great idea strikes many people as a recipe for disaster.
How can that be? If almost no one is concerned when an Arkansan trades with a Oregonian -- even if that means that a factory might close in Arkansas and another one might open in Oregon -- why should it matter if an Arkansan trades with a Mexican? Would people worry about trade with Mexicans if Mexico were a state? If not, why should that make a difference? In economic terms -- in terms of human welfare -- there are no “exports” and “imports.” There are only things I produce and things other people produce.
President Trump has made trade restrictions a pillar of his program. Trump told a joint session of Congress, “I believe strongly in free trade but it also has to be FAIR TRADE.” But he contradicted himself: “The first Republican President, Abraham Lincoln, warned that the ‘abandonment of the protective policy by the American Government [will] produce want and ruin among our people.’”
Are we to have free trade or protectionism? Trump is trying to square the circle. Free trade is fair trade.
The White House website criticizes government trade agreements “that put the interests of insiders and the Washington elite over the hard-working men and women of this country.” Does that mean Trump believes individuals should be free to trade with anyone anywhere without interference by the elite? Alas, no. He merely wants a different elite to negotiate the agreements.
Trump promises “tough and fair agreements [under which] international trade can be used to grow our economy, return millions of jobs to America’s shores, and revitalize our nation’s suffering communities.” He promises that the agreements he negotiates will reverse the current situation in which “blue-collar towns and cities have watched their factories close and good-paying jobs move overseas, while Americans face a mounting trade deficit and a devastated manufacturing base.” The website adds, “By fighting for fair but tough trade deals, we can bring jobs back to America’s shores, increase wages, and support U.S. manufacturing.
Trump has it all wrong. Americans don’t need government agreements. Americans need freedom -- what a novel idea! -- to trade with whomever they want under terms they find advantageous. That is the essence of free enterprise. It’s also necessary for prosperity.
What about the things Trump attributes to free trade? He says America’s manufacturing base has been devastated. But America's real manufacturing output is at historic high levels. Exports are also at record heights. Moreover, although Americans import lots of goods, a substantial portion are producer goods -- things Americans use to make other things, often for export. Tariffs would raise costs for American producers and make them uncompetitive.
The frequent lament that “we don’t make anything anymore” is wrong. This should be obvious. If we made nothing, who would sell us anything?
The grain of truth in Trump’s story is that many manufacturing jobs have disappeared. But they have been declining since the 1970s, before NAFTA (1994), the WTO (1995) and China’s inclusion in the WTO (2001). Manufacturing jobs have disappeared for the same reason that farm jobs disappeared generations ago: technology, which enables us to produce more goods with far fewer people. Like America, China is also turning manufacturing jobs over to robots. The lesson is that Trump’s promise to bring back manufacturing jobs -- even if he could do it -- would not make Americans wealthier. It would make them poorer because the price of goods would rise.
Contrary to what Trump says, job destruction is a good thing. Imagine the stagnation we would have suffered had the government saved farm jobs by outlawing modern machinery. What amazing things wouldn’t we have today because farm workers were not freed up to produce them?
What the protectionists forget is that while labor and resources are scarce, our desire for goods and services is unlimited. We want more things, including things we don’t even know about yet. Our living standard cannot rise if jobs are not destroyed by technological progress.
Of course, a dynamic and prosperous economy creates hardship because people have to adjust to change. But nothing can minimize the hardship and ease the adjustment like a free economy. Government need only get out of the way.