Setting the record straight on tariffs

Setting the record straight on tariffs
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Any well-trained economics instructor struggles to dispel two widely held misconceptions. The first misconception is that government budget deficits are always bad. The second misconception is that international trade destroys U.S. jobs.

Politicians play to the crowd, using the first misconception to compound an economic downturn with poorly timed deficit reduction. Those same uninformed politicians plug protectionist tariffs to claim to save jobs. The first misconception reigned a decade ago, and fortunately, the financial crisis is behind us. Instead, today’s economy is put at risk by applications of the second misconception.

Misunderstanding of trade has several parts. The uninformed think of every international trade relationship as bilateral, meaning one nation with one nation. Also, each relationship is “zero-sum” in which one nation wins, and the other loses. Negotiations over trade rules are likewise zero-sum. If our nation runs a trade deficit with any other nation, we are losers, and they are cheaters. Cutting off trade with them will make us better off.

This view is fundamentally wrong. Trade is voluntary exchange. It benefits both parties. If another nation offers us goods or services at prices that leave us worse off, our people simply will refuse to buy. Our citizens engage in trade because they like the outcome, as do their trading partners.

Furthermore, trade is multilateral. Our nation might very well buy from, and run a trade deficit with, one other nation to acquire goods or materials to make and sell goods to a third nation, with which we run a trade surplus. Attacking the one bilateral trade deficit in this three-way exchange through protective tariffs on the imports would prevent us from running the trade surplus with the other trading partner. About half of U.S. imports are “intermediate goods” that we use to make other products, some of which we export.

The current White House buys this misconception. The administration says other individual nations “beat” us in trade, looking only one by one. The administration declined to join the new Trans Pacific Partnership trade deal and wants to write new agreements one-by-one with every other nation. Forget that we don’t have enough diplomats to do that. Such a stack of bilateral agreements cannot reflect the real world in which country A sells to country B, which sells to country C, and all should play by the same rules.

The administration says that other nations won’t retaliate against our tariffs because they do not want to lose our business. But other nations cannot and will not accept the United States as the world trade bully. They need to protect their own standing, and they will. Other nations may appeal to the World Trade Organization first to demonstrate that they are playing by the rules, while arguing that we are not, but when given the green light, they will not hesitate. As just one precedent, the European Commission sued Microsoft in the 1990s over practices that disadvantaged European competitors, and Canada has taken on Boeing. They were not deterred by any fear of offending the United States.

If we play the bully and try to force our trading partners into new agreements in which we explicitly win, and they explicitly lose — rather than all parties winning through voluntary exchange — other nations will understandably refuse to play. We will be the losers in the long run because they will gain as they trade more with each other.

The United States has run large trade deficits for decades. That is not a good thing, and we should stop. The world’s richest nation should not pull goods and services from poorer countries year after year. We pile up debt, and we could have more jobs. Why do we run large trade deficits? We don’t save enough, and a key part of our nation’s overspending is our federal government’s large budget deficit.

That is another counterintuitive economic truth, to discuss on another day.

Joseph J. Minarik (@JoeMinarik) is senior vice president and director of research at the Committee for Economic Development. He served as chief economist at the White House Office of Management and Budget for eight years under President Clinton. He previously worked with Sen. Bill Bradley (D-N.J.) on his efforts to reform the federal income tax, which culminated in the Tax Reform Act of 1986. He is coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity.”