Since the dawn of civilization, trade has been a central pillar of man’s experience that binds peoples from far away places together in a common goal, to gain for himself through the labor of others. While borders have been fluid and ever-changing, and men have waged wars for millennia, trade has persisted in peacefully bringing people who may never see each other into a free marketplace of goods where all gain in seeking what they demand, and in supplying what they have.
From Neolithic farmers to the Silk Road civilizations, to the World Trade Organization, governments have constantly intervened to try and control and manipulate the international free marketplace of goods and services that naturally occurs, often with negative consequences.
Over the past century, much progress has been made in removing government intervention and controls from international trade, yet many authoritarian nations still cling to failed protectionist policies and even developed, free-market-oriented countries still protect certain industries and demand “free” trade deals riddled with semi-protectionist policies.
Despite the overall attitude towards free trade liberalization being positive due to its wide gains, the sharp losses felt by certain industries and special interests often are more politically powerful than the gains felt by the rest of society.
While generally accepted, free trade in the United States and across the developed world is under fire, despite its near-universal support from economists across the political spectrum, due to the rise of nationalistic populism and the apparent collapse in the popularity of free markets, and action must be taken to preserve open trade and to remove its status as a controversial political issue before it is too late.
The main issue at hand for the United States is now whether our trade policy will bend on an arc towards liberalization, or towards protectionism and mercantilism. Based on popularity, the choice is clear. Not just economists, but the American public remains staunchly in favor of trade liberalization.
As Bryan Riley cites in his report for the Heritage Foundation, “A Morning Consult poll from September 2017 found that 52 percent of Americans support an expansion of free trade across borders, versus just 25 percent in opposition” (Riley).
The gains from trade are obvious and logical to voters, but they are often spread among all of society and take years to develop fully, while the pains felt by specific communities or industries are visible and politically influential in the short term. While trade can cause short-term problems for those specific areas, the broad gains from free trade to the United States and across the globe are very well documented.
For example, from that same Heritage Foundation report, it was found that countries with more trade freedom had higher average per capita income, more food security, and cleaner environments, while the top third of nations ranked in trade freedom had average national income per capita of $27,000 versus the lowest third of nations in trade freedom that had an average national income per capita of $3,100 (Riley).
The data is clear; nations with freer trade have more prosperous economies, wealthier citizens, and more effective governments. On a similar note but more specific to the United States, “…economists with the Peterson Institute found that past global trade liberalization… generated between $2,800 and $5,000 in additional income for the average American” and that based on a 2015 study, “America’s poor and middle class… enjoy almost 90 percent of the consumer benefits of trade” (Lincicome).
Not only does trade make countries on average wealthier, but even poor Americans benefit from the greater prosperity and lower consumer costs. The principal case against trade liberalization and in favor of protectionism is that the United States has lost a net 4.5 million manufacturing jobs since 1994, and that those workers displaced due to foreign trade, who often are less educated, can’t find jobs easily, and when they do they are for lower wages (Whitman). Another recent study from three labor economists found similar results, specifically that labor force participation and wages are negatively affected in those areas hit hard by foreign competition (Lincicome).
While trade can cause short-term problems for those specific areas, the broad gains from free trade to the United States and across the globe are very well documented.
It is clear now that the broad gains from trade are apparent and documented, as are the losses felt by certain industries and communities, but the core of the issue remains untouched, which is that free trade in the United States is under assault from both sides of the aisle.
Since President Trump gave his inaugural address over a year ago in which he lamented the loss of factories across the “Rustbelt”, his administration, while not his party in Congress, has been committed to undoing the free trade status quo that has been developing over the past twenty years.
First, President Trump withdrew from the Trans-Pacific Partnership (TPP) on the third day of his presidency, which former President Obama and Senate Republicans were hoping to ratify. President Trump has also sought a “renegotiation” of the North American Free Trade Agreement (NAFTA) which was implemented in 1994 to facilitate free trade between The U.S., Mexico, and Canada.
At times, the President has even suggested that if his preferred protectionist policies do not get implemented in the renegotiation, he may unilaterally withdraw from the agreement, which would, according to the Heritage Foundation, “jeopardize 14 million jobs… expose businesses to $15.5 billion in new tariffs and increase consumer costs by at least $7 billion” (Roberts). NAFTA has brought historic and lasting benefits to farmers, manufacturers, businesses, and consumers who all benefit from lower costs due to cheaper imports, markets for exporting goods and services, and the easy formation of global value chains among the NAFTA participants.
More recently, with a bitterly divided Congress, a stalled legislative agenda, and midterm elections upcoming, President Trump has pursued an agenda of executive tariff action, first on steel and aluminum imports in the name of national security, and then more on Chinese goods specifically over their abuses relating to intellectual property rights.
The final part of the issue at hand is to remember that tariffs are tax hikes, plain and simple. Remember when the Trump Administration passed the most comprehensive tax overhaul in 30 years that cut taxes on average Americans?
Well, according to the Tax Foundation, “the $60 billion in proposed tariffs is more than 20 percent of the recently passed tax cut expected in 2019” (York). If President Trump wants to maintain his pro-growth record, he should not be raising consumer costs on the middle class and shrinking profit margins of businesses small and large, therefore imperiling job growth and security.
The issue of trade liberalization and the current protectionist threats to it has many different viewpoints and angles, but the discussion here is best split up into two parts: one on the pending tariffs and current trade agreements, and another about the trade deficit and its consequences.
When it comes to the steel and Chinese tariffs, protectionists argue that President Trump’s tariff measures are vital for the survival of manufacturing jobs which have been shredded since the adoption of “unfair” free trade deals with China and others. The facts could not disagree more.
When it comes to the steel and aluminum tariffs, those industries and the unions of their workers claim that “unfair” foreign competition has hurt them drastically, cost jobs for working people, and damaged communities in the process. While those industries may have shed jobs over time, it is unclear, as with most of the manufacturing job losses over recent decades, that much of this at all due to foreign competition.
With steel, domestic output has changed little in 30 years (Grabow). This tells economists that like in other manufacturing industries, productivity has gone up allowing the same amount of steel to be produced with fewer workers. Even if some steel firms reopen or expand, these tariffs on steel for “national security” purposes will actually cause a net job loss due to higher input costs for the many more steel-using industries, as Bush’s 2002 steel tariffs did (Grabow).
Besides just the President’s steel tariffs, his broad tariffs on China, while praised by the domestic industries that would like to compete, will similarly result in a net loss. While supporting inefficient and marginal U.S. industries that would not exist otherwise, these tariffs will raise the cost of Chinese imports that are staples to working families and raise input costs for U.S. companies that rely on imported physical capital from China, hurting their profit margins and imperiling job growth (Griswold).
This is especially dangerous since “More than half of all imports (including those from China) are inputs consumed by other American manufacturers” (Lincicome). The escalating effects of a trade war would be disastrous, hurting American businesses and consumers alike, all just to benefit certain marginal manufacturing firms.
Trade wars are never won, but they are always lost, by American consumers and businesses. When it comes to NAFTA, protectionists claim that NAFTA has had many adverse effects on all the participants, but especially on the United States. Again they focus on the damage done to the “Rustbelt” communities that once thrived on manufacturing jobs were plentiful.
As previously stated, the existence of NAFTA currently supports about 14 million jobs in the United States and has lowered consumer costs by at least $7 billion (Roberts). The value of all goods and services traded annually between the three countries is currently at $1.1 trillion, up from $290 billion before the deal in 1993, and of those 14 million jobs supported, two million are in manufacturing (Roberts).
This large expansion of trade is not only good for wealthy corporate executives as protectionists claim, but it benefits consumers through lower costs for goods and services, access to certain imported crops year round, and lowering input costs for American businesses, thereby increasing the profit margins that they use to expand their workforces and grow.
Looking specifically at the thriving energy sector, now that the United States is a natural gas exporter, the Heritage Foundation estimates that Canadian purchases of goods and services related to the oil and gas industry “will generate $45.6 billion in U.S. GDP over the next decade” (Roberts). The same report even found that the improvements in the Mexican economy since NAFTA was implemented have contributed greatly to the large decline in illegal immigration since the mid-1990s.
One can even look to a state such as Ohio, often used as a “Rustbelt” example of a state “devastated” by free trade and see that trade has been a net positive for the United States. In Ohio, exporters of goods and services supported 370,000 jobs in 2015 alone, and about 259,000 jobs were supported by foreign direct investment in the state in 2015, which is only possible through trade (Whiting).
Along with the rest of the United States, Ohio has experienced no net job loss due to trade with 555,000 more jobs available than in 1994, and Ohio still maintains a manufacturing sector supporting 687,000 jobs as of 2016, with many of their employers relying on cheaper imports as either physical capital or as manufacturing inputs (Whiting). Trade has not destroyed the economy of Ohio, and it supports countless jobs and industries. Trade has not destroyed the economy of the United States.
It has made our country more efficient and prosperous, and the protectionist measures such as the steel tariffs, a Chinese trade war, and the possible exit from NAFTA would have far-reaching and overwhelmingly negative consequences on foreign investment, job growth, business earnings, and consumer costs.
When it comes to trade with China and other free trade partners, protectionists’ largest complaint, and one of the only facts that they use to support their arguments is the net loss of 4.5 million manufacturing jobs since 1994, as mentioned earlier. This sounds frightening and seems logically connected to trade, but the evidence doesn’t line up.
As Edward Conard states in his book about the Great Recession and its aftermath, “High productivity gains in manufacturing have accounted for two-thirds of lost manufacturing employment since 2000” (Conard). This sentiment is echoed by Lincicome in his “National Review” article by observing that the United States has added a net of over 30 million jobs since 1994, the United States has been shrinking its manufacturing workforce since its peak in the late 1940s, that the U.S. is still the world’s second largest manufacturer, while continuing to mention a study that again connects three quarters of manufacturing job losses since the 1990s to productivity gains.
The manufacturing sector hasn’t been decimated, only the inefficient manufacturing firms have been outdone by foreign competition, as they should if they cannot survive in a free and open global market. As Henry Hazlitt wrote in his timely Economics in One Lesson (Hazlitt 102):
The X Industry is shrinking or dying… Why, may it be asked, should it be kept alive by artificial respiration? The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error
Manufacturing output is still high, meaning that those firms who were productive and cost-efficient remained in business, while the inefficient or marginal firms failed, to the benefit of consumers who got equal manufacturing output and lower prices from the remaining firms and the new imports.
Imposing tariffs would only bring back the marginal firms who couldn’t survive with competition, a recipe for market inefficiency, even if it does restore some old jobs.
The market should decide which industries thrive and which ones die, and this is a generally accepted economic concept domestically, but when faced with global competition, too often politicians cater to special interests instead of long-run economic benefits.
Regarding the trade deficit in general, the common claim that protectionists trot out with almost certainty is that the trade deficit is “draining wealth” from our country. To look at the equation for calculating a nation’s gross domestic product (Consumer Spending + Government Spending + Investment Spending + [Exports – Imports]), they seem to be justified.
If you have a trade deficit it subtracts from your GDP. Seems simple enough, but it is based on a false premise.
In the United States’ long economic history, it often ran trade deficits before the 20th century, and yet still remained a beacon of hope for millions of immigrants and was one of the most prosperous nations on Earth, while from after the Second World War until 1975 the nation ran trade surpluses and experienced tremendous growth (Gramm).
Since 1976 the United States has always had a trade deficit, and even during the boom times of the Reagan and Clinton years, when the trade deficit quintupled and quadrupled, respectively (Gramm). Having a trade deficit or surplus hasn’t fundamentally shaped the direction of our economy because it is only one half of the equation. In the balance of payments system, the current account (goods, services, factor income, remittances, etc.) must balance with the financial account (assets) to equal zero. In the context of the United States, it means that while we have a current account deficit we must have a capital account surplus.
That means foreigners are investing in American assets such as stocks, bonds, government securities, or indirect investment like factories or stores. This surplus is precisely why America is the top receiver of foreign direct investment (FDI) in the world totaling $384 billion in 2015 (Lincicome). The trade deficit may hurt Ford workers in Detroit but it ends up helping Nissan workers in Mississippi.
The capital account surplus will only increase in the future because of the new tax reform law which is leading to multinational corporations such as Apple to repatriate hundreds of billions of earnings parked overseas, so while this will increase the trade deficit, the new investment in America will be very beneficial for job growth and business expansion (Gramm).
Besides simply the balance of payments system which sheds light on why the trade deficit is misleading, there are also global value chains which mean that an import or export from a country may contain parts from another country than the country of origin, further diluting the relevance of the trade deficit (Lincicome):
According to the WTO… almost 40 percent of all U.S. exports are involved in global value chains; almost 31 percent of exports from China, Canada, or Mexico contain U.S. inputs; and almost 34 percent of U.S. exports contain inputs from these same three countries
This method of global trade integration truly shows how market forces, competition, and the idea of comparative advantage have led to peaceful exchange among countries and why continuing open trade is so important as countries specialize in what they are best at and rely on other countries to help them prosper.
With the protectionist arguments in favor of tariffs and dissolving free trade deals answered and thoroughly dismissed, now comes the time to ponder on the solutions to the trade ills that imperil our economy at this juncture in our history. First, actions must be taken to further liberalize trade and solve legitimate problems in existing trade deals in order to fully experience the benefits of free trade and neutralize its political potency.
The second is that legislative action must be taken to rein in presidential authority on trade and also to provide a sustainable and effective means of helping those hurt by international trade.
On the trade front, the solution to the problem facing us is for those willing in Congress to continue trade liberalization and push for beneficial changes to trade agreements to show that free trade is good for the country. The first action that the United States should take is changing direction in the NAFTA renegotiation.
Instead of creating sunset provisions, complex rules for settling disputes, new labor policies, and creating new carve-outs for certain industries, the NAFTA talks should be reoriented around eliminating any remaining special interest provisions originally in the deal, including forcing member nations to end subsidies to certain industries and dropping all remaining quotas and tariffs. As the American Enterprise Institute puts it, “Where there are no trade restrictions or subsidies and all trade is voluntary, there are no unfair trade practices.
Whether the U.S. runs a trade deficit under such an arrangement has nothing to do with fairness” (Gramm). Pure free trade among the nations will allow whatever prices the market determines best and efficiency would increase as nations who lose certain formerly-protected industries and marginal firms can fail and redeploy those resources to better use elsewhere.
A more specific example of remaining restrictions in NAFTA comes in the Mexican energy sector, which while it has made progress is still very closed off and monopolistic and could provide a boon to the U.S. as our energy sector is growing with current U.S. exports of natural gas to Canada providing billions of dollars (Roberts). On purely trade grounds, the same liberalization that is the prescription to our ills with Canada and Mexico, while beneficial, would not solve the root of the problem the U.S. currently has with China.
While the Trump Administration’s prescribed punishment of tariffs on China is clearly the wrong move, China’s theft of U.S. intellectual property is a serious matter that must be dealt with. China’s leader Xi Jinping has expressed a willingness to work on this issue with the U.S., but too often Chinese promises on this issue are empty and vague.
The only way to truly confront China over their abuses is not through a trade war, but with U.S.-led W.T.O. actions against China for infringing on our rights (Gramm). This is the only peaceful solution that will not produce an economic confrontation of enormous costs. The United States must look to the W.T.O. to enforce basic rules more strictly than they have been in order to preserve free trade. While those two solutions focus on two of the most nagging issues, China and NAFTA, the United States must also take action to enhance free trade more globally to benefit ourselves and to be a leader on this issue.
Two ways the United States can do this are by rejoining the Trans-Pacific Partnership (TPP), and a more radical idea, unilaterally liberalizing all trade. The former is a more realistic approach that even the President in recent days has seemingly half-endorsed. The TPP is a large trade deal with 11 Pacific Rim nations, that excludes China, and while the United States already has bilateral deals with six of the participants, this deal would go much farther than those and open up five new markets to U.S. exports (Scissors).
While on net it is liberalizing, the deal does have its flaws, in that there are many protectionist measures that continue to benefit certain industries in each of the member countries, and the threat of ratifying it as is that these policies, including strict labor and environmental policies that are protectionist measures under the guise of social justice, could become the norm and prevent further trade liberalization (Scissors).
Scissors’ report is joined in the mixed criticism of the deal by the Cato Institute in a working paper by Daniel Ikenson and others that praise the TPP for overall liberalization but frets over the caveats that reduce its effectiveness (Ikenson). As Ikenson puts it, “the TPP is not really about free trade… the TPP is about managed trade.”
With those roadblocks in mind, it is the position of this paper that if the TPP were liberalized and became a truly “free” trade agreement, it would be a no-brainer to join. While radical, the better solution that this paper endorses would be to unilaterally drop all remaining tariffs and quotas, end all business subsidies and let the global free market and pure free trade decide what happens. While it may be a libertarian fantasy, it is often joked that this is what economists would do if they ran the government. In this scenario, the United States would be a role model and would attain maximum economic efficiency.
It would not hurt the economy, even if the trade deficit increased due to the balance of payments system as has already been discussed. New Zealand lowered all of its tariffs and eliminated most agricultural subsidies, of which it had many of both, starting in 1987 and by 1999, 95 percent of New Zealand’s tariffs were set at zero and this was not accompanied by an economic collapse, but instead by a huge boost in GDP per capita (Tyrell). It is not totally unprecedented.
The only thing holding this reality back are the special interest groups who control Washington and its politicians. From NAFTA to TPP, to the WTO, any solution on the trade issue must liberalize trade, not choke it with protectionist schemes or trade wars.
On the political front, the solutions to the United States’ trade issues are legislatively clear, but murky on their probability of success.
Legislatively, the clearest action to take would be to pass Senator Mike Lee’s (R-UT) bill, the “Global Trade Accountability Act” which would subject all presidential trade actions to congressional oversight, usually meaning an up or down vote if necessary (Grabow). Surely the Founders would be rolling in their graves if they knew that the President could unilaterally and without congressional authority levy tariffs and exit trade pacts, when they specifically granted those rights to Congress by ratifying treaties and raising funds.
This first act would subject the President, whoever they may be, to oversight from the representatives of the people and would be just on all accounts. Under no circumstances should the President except in time of emergency be able to unilaterally make trade decisions at will with no oversight. The second political solution pertains to helping people displaced or hurt by foreign trade in a responsible manner while preserving labor force flexibility.
Currently, the problem is that many of those displaced workers discussed previously remain in those distressed areas and dropping out of the labor force, especially when at older ages, creating the stereotypical economically depressed “Rustbelt” rural town (Lincicome).
Previously the solution presented by Congress has been the Trade Adjustment Assistance Program (TAA). The TAA has existed in one form or another since 1962 when President Kennedy expanded free trade, and its last two major expansions were in 2002 and 2009 (James). Basically, the program provides job training benefits, health benefits, unemployment benefits, and a small benefit for relocation to help people move to those who lose their jobs because of trade, but the program has been found in numerous studies by the Heritage Foundation, the OMB, and the GAO to offer little benefit to the economy, and that it hasn’t raised the wages of participants (James).
Billions of dollars are spent every year on this program, which is targeted at a tiny group of workers, only about one percent of layoffs, and which prolongs unemployment like any other unemployment benefits program (James). Instead of expanding or tinkering with this failed program, lawmakers should transform it in a few ways.
Some of the prescriptions which would be most helpful would be to consolidate the many federal job training programs into one basic course and to transform the TAA from largely unemployment benefits and shift it towards either an education tax credit or a relocation tax credit. The idea is either displaced worker’s train for a new job, go to a community college or a trade school with a tax credit, or relocate to an area with more plentiful jobs.
This would preserve the labor market dynamism more than just another welfare scheme for unemployed workers that discourages them from moving or looking for new jobs. On another note, as Scott Lincicome points out in his “National Review” piece, there are numerous other reforms that could be done to help workers prepare and adapt to a dynamic labor market, including losing one’s job due to productivity gains or even automation along with foreign competition.
Some of these including creating a system of tax-free savings accounts to serve as “Rainy Day” funds, creating new tax deductions for work education expenses not just related to one’s current line of work, reducing the barriers put in place by federal and state occupational licensing laws, and reforming the Social Security Disability Insurance system whose effects are similar to the TAA.
We need to make sure that our government programs are encouraging work and education, not the opposite. All of these small but profound free market and limited government reforms could make the labor market more dynamic by making it easier to train for new jobs, move to new areas, and encourage labor force participation, which is currently its lowest since the 1970s. Clearly, the current system of just using the TAA and a collection of other current government programs isn’t working, and if nothing is done to change how we handle displaced workers, labor dynamism and participation will continue to decrease.
While free trade remains overall popular with the public and economists, in the United States and across the developed world it is under assault as populism flexes its muscles and free markets become less popular among today’s youth, and if no action is taken the global order of free trade may come crashing down.
The Trump Administration, along with newly-emboldened protectionists on both sides of the aisle, is launching an assault on the general policy of trade liberalization and negotiation that has made the United States prosperous and more efficient in recent decades.
If nothing is done to stop this new trend of an outdated philosophy, the United States will be thrown into the very export-driven mercantilist ways that prompted our Revolution against Britain. If the flame of trade liberalization is snubbed by the freest country on Earth, who will remain to spread its agenda of prosperity to the world?
Timothy Callery is am an 18 year old student from Lakeland High School in Yorktown, NY. Timothy is an Eagle Scout, the class salutatorian, and was a member of the debate team. This fall Timothy attending Villanova to study economics and business.