US should reject Trump’s obsolete mercantilist idea


Recently, the Office of the United States Trade Representative “released a list of approximately $200 billion worth of Chinese imports that will be subject to additional tariffs,” the Trump administration’s effort “to obtain elimination of China’s unfair policies.” The announcement is the latest offensive in President Trump’s ongoing trade war with China. It is an ill-conceived policy that will have disastrous consequences for Americans.

President Trump’s economic illiteracy is most conspicuously on display when we discusses trade. From his campaign to the present, he has emphasized “our massive $376 billion trade imbalance in goods,” stating that he wants only to bring “balance to our trade relationship with China.”

{mosads}Trump’s repeated stress on the idea of balance in international trade calls to mind the old policies of mercantilism, based on the assumption that nations must use public policy to affect a favorable balance of trade, meaning that imports should be discouraged, exports actively promoted.

It was this very idea that Adam Smith set about to demolish in, “The Wealth of Nations.” Indeed, we can accurately regard the birth of economics as a separate and distinct discipline as an attempt to vindicate international free trade, to topple mercantilism and the arguments in its favor. As Smith writes, “Nothing . . . can be more absurd than this whole doctrine of the balance of trade.”

Even if we must think of ourselves as “fighting a trade war,” we ought nevertheless to adopt a wealth-growing policy of unbridled, unilateral free trade, free of all tariffs and import duties of any kind. Far from ceding ground to other nations, this would give us a decisive advantage over our trade partners and competitors, allowing us the most perfect possible access — viz., the lowest possible prices — to the supplies and finished goods we want and need.

As Tim Worstall remarked, “Quite why China making things we want to buy is an economic war is also difficult to understand. It’s entirely the inverse of the normal economic understanding of these matters.” Worstall correctly notes that imports, not exports, are the raison d’être of international trade — are what make us richer. Just as we go to work to buy the goods and services we need and want, so do we export in order to import, to consume. Importing cheaply from abroad means we have already won.

Some countries are simply better than others at producing some things; this fact, it turns out, benefits everyone, as long as we open ourselves to our neighbors and take advantage of it. This concept, called comparative advantage, is associated with the work of classical economist David Ricardo, in particular, with his book, “On the Principles of Political Economy and Taxation” Ricardo’s famous example discusses the export of cloth, manufactured in his native England, to Portugal, from which England in turn imports wine.

Both countries take advantage of the cost efficiencies of the other, and both benefit, becoming rich than they would otherwise have been. Explains Ricardo, “England exported cloth in exchange for wine, because by doing so, her industry was rendered more productive to her; she had more cloth and wine than if she had manufactured both for herself; and Portugal imported cloth, and exported wine, because the industry of Portugal could be more beneficially employed for both countries in producing wine.”

This simple lesson, so obviously and self-evidently true, is rejected by protectionists like Trump, who want to push back against imports and favor exports. Thus does the mercantile system, the endeavor after a favorable balance of trade, set out to undo comparative advantage, to counteract the very thing that makes international trade so beneficial to all involved.

Calling attention to the absurdity of protectionism, Henry George pointed out that we might instead destroy wealth less circuitously: “Instead of levying import duties, we might, for instance, destroy a certain proportion of imported commodities, or require the ships bringing them to sail so many times round the world before landing at our ports.”

Even if China doesn’t want our exports, engaging in a perverse act of self-harm by imposing high tariffs, we should nevertheless avail ourselves of the cheap imports we desire, not for China’s benefit, but for our own. When governments erect high barriers that their domestic industries might be protected, they only ensure the enfeeblement of those industries, their insulation from competition of the kind that would spur innovation and improvement.

Let other countries enact this self-defeating policy if that is their choice. If China’s government won’t admit American cars, for example, then it is hurting China’s people. Protectionism only guarantees that weak, unprofitable, and inefficient enterprises will carry on much longer than they would have if subjected to legitimate market competition. Americans should be loath to adopt such a harmful policy.

Tariffs don’t exist in a vacuum, as PR bludgeons with which the political classes of the United States and China can swing at one another without affecting the individuals who lives within the two countries. They come with serious consequences for American businesses that can no longer obtain the right resources at the right prices.

Thus compelled to pivot and adjust their operations, American businesses must incur the costs associated therewith, looking for new supplies (and suppliers), delaying or abandoning projects that are now destined to run over budget, and dismissing workers or halting new hiring.

Though effectively impossible to measure, these are tremendous costs to Americans and the swirling mass of transactions we call “the American economy.” They are the unseen costs of meeting protectionism with more of the same, a millstone around the neck of the economy.  

Protectionism is, moreover, a subtle form of corporate welfare, for even if certain protected industries may benefit, the costs, discussed above, are dispersed, borne by ordinary Americans. This kind of government intervention also renders lobbying more important, as industry groups and companies vie for special treatment and exceptions. The federal government, a captive of special interests, should not be in such a position within the economy.

Looking at the trade deficit, so-called, is the wrong way to think about trade; that is, it simply doesn’t matter. Trade isn’t a war; it’s a prosperity promoting act of peace in which two parties engage only if they both benefit. The United States should embrace its trade partners with open arms, rejecting Trump’s obsolete mercantilist ideas.

David S. D’Amato is an attorney, an expert policy advisor at both the Future of Freedom Foundation and the Heartland Institute and a columnist at the Cato Institute’s

Tags Adam Smith Donald Trump Trade

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