Why Trump Is Wrong On Trade

 

LAREDO, TEXAS - JULY 23: Republican Presidential candidate and business mogul Donald Trump talks to the media at a press conference during his trip to the border on July 23, 2015 in Laredo, Texas. Trump's recent comments, calling some immigrants from Mexico as drug traffickers and rapists, have stirred up reactions on both sides of the aisle. Although fellow Republican presidential candidate Rick Perry has denounced Trump's comments and his campaign in general, U.S. Senator from Texas Ted-Cruz has so far refused to bash his fellow Republican nominee. (Photo by Matthew Busch/Getty Images)

Think of the last thing you bought. Who won, you or the seller? What about the last purchase you made from Amazon; was that a win for your state or for Washington (where Amazon is located)? When you buy something from Walmart is your state losing to Arkansas? I assume most of you are thinking that these questions are nonsense — because they are. We do not think of free market transactions as having a winner and a loser; free market transactions happen only when they make both parties better off. When you buy something, you get a product that you want, and the seller gets value for a product that they want to sell. When individuals freely engage in trade, there is no winner and loser, there are only winners.

This does not change just because one of the parties is in Mexico or China and the other is in the United States. Every product that is imported from Mexico or China is purchased by an American consumer who is better off because of it. The concept that we are “losing on trade” is nonsense. And, Trump’s assertion that our trade deficit with China is “the greatest theft in the history of the world” is a gross distortion of what a trade deficit actually means.

Initially, we must be disabused of the notion that a trade deficit is inherently bad. Trump claims that “[o]ur trade deficit with China is like having a business that continues to lose money every year.” But, this is a false analogy. While the term “trade deficit” sounds bad, it could just as easily be called as a “goods surplus.” Each year, American consumers get more products from Mexico and China than Mexican and Chinese consumers get from America. This is the natural result of America being a wealthier, consumer-driven economy. Americans simply have more buying power than the Mexicans or Chinese, which allows us to buy more goods. And, having more imports than exports means that we are able to consume more than we can produce, resulting in a higher standard of living for all Americans. As Milton Friedman once explained: “The gain from foreign trade is what we import. What we export is the cost of getting those imports.” It is absurd to say that we are “losing” because we get more than we need to give up.

Trump and many others may retort that free trade is good, but China is cheating by manipulating its currency. It is true that China manipulates its currency — but so does every other country in the world. One result of the quantitative easing by the U.S. Federal Reserve was an artificial weakening of the U.S. dollar, which the Brazil finance minister called a “currency war,” echoing the sentiments of many developing nations who saw their currencies appreciate against the dollar. Negative interest rates in Europe and Japan, and bond buying by the ECB, have contributed to a weakening of those currencies. Whether or not you agree with these monetary interventions, it is silly to point the finger at China to claim that it is the only bad actor. Moreover, despite China’s supposed efforts, the yuan has actually strengthened by over 35% against the dollar over the last decade, which represents a rise in the price of Chinese exports by over one-third. And, even taking the “currency manipulation” argument at face value, what Trump and others are arguing is that China is charging us too little for its products, and we should take action to make them charge us more. How is that good for American consumers? When is the last time that you went into a store and thought you were being cheated because a product was too inexpensive or you were being offered too large of a discount? It is absurd that we would actually try to force China to charge us more for its products.

But, what about job losses — aren’t China and Mexico “stealing” American jobs? There is no denying that some American factories are being shut down to move manufacturing abroad, with examples such as Carrier’s recent decision to move a manufacturing facility to Mexico. Less obvious and more difficult to measure, however, are the jobs created by trade. Jobs needed to support exports are an obvious example — and exports will only increase as Mexican and Chinese consumers become wealthier and can afford to purchase more American products. But, importing more products also means more dock workers to offload them, more truck drivers to transport them, and more salesmen to sell them. And, when consumers pay less for a Carrier air conditioner because it can be made less expensively in Mexico, they have more money left over to buy other products, supporting other businesses. This means not only a higher standard of living for consumers who can buy more for less, but also more jobs that are supported by consumers’ increased purchasing power. And, when we give dollars to China, it tends to reinvest those dollars in America either by buying U.S. Treasuries or through direct investment in U.S. business, which has increased significantly in recent years. In either event, this means more capital, more economic activity, and more jobs in America.

It is difficult to determine exactly how this all nets out. Some research has concluded that trade is a net job creator, while other studies have concluded that trade has meant a net loss of several million jobs over the past 10-15 years. Even if we were to accept the most pessimistic conclusions, we need to put these job losses in perspective. There are now about 1.6 million layoffs or involuntary discharges in the United States each month, and about 5 million workers leave their jobs for all reason. That means more U.S. workers will leave their jobs this month than the worst-case studies claim have lost their jobs to trade over the past 15 years. And, while preserving existing jobs may sound good, and stories of workers laid off from shuttered factories are heartbreaking, you can look to the over two decades of economic stagnation and rising unemployment that have stifled Japan to see the results of an economy and corporate culture focused on preserving existing jobs at the expense of productivity.

Ideally, although counterintuitively, job losses associated with outsourcing should be a good thing, because it frees up workers to engage in more productive endeavors. This does not mean that there is no hardship for those workers involved; but it is an unfortunate fact that job losses are a necessity of economic advancement, real per-capita growth, and higher wages. (Nobody could argue that we would be better off if we were all still farmers, but the development of farm equipment certainly meant hardship for displaced farm workers who were forced to find new employment.) Thus, our concern should not be that some jobs may be lost to trade, but that we do not have an economy that is fully utilizing the human resources that are now available; i.e. that we are not creating enough new jobs. For that, we can look to an increasing tax and regulatory burden that makes opening or expanding a business and employing workers more difficult and expensive than ever. We can also look to an educational system that fails to prepare students for today’s jobs. On both issues, we should be looking inward for solutions, not scapegoating Mexico and China.

Finally, we need to address the tariff. Trump says that imposing a 45% tariff on goods imported from Mexico and China would force companies to “bring back American jobs.” Nobody should believe this. If Trump were to impose a tariff on Mexico and China, then companies would just move manufacturing jobs to India, Thailand, Vietnam, Malaysia, Ethiopia, or countless other developing countries that offer the same tax, regulatory, and labor-cost benefits. Even imposing across-the-board tariffs on all countries would have little employment benefits, while increasing prices significantly. Just look to Brazil, where similar promises were made that 60% tariffs on imported electronics would mean more manufacturing jobs. But, the promised jobs never materialized, while Brazilian consumers pay over $1,200 for an iPhone that costs $600 in the U.S. and over $1,800 for a Sony PlayStation that costs $400 in the U.S. These and other anti-market policies have Brazil facing its greatest economic turmoil since the Great Depression.

Trump’s tariff would simply be a 45% tax on the American consumer, which would most devastate lower-income Americans who benefit most from lower-cost imported products. Indeed, a recent study estimated that international trade has raised the purchasing power of American households at the 10th percentile of the income distribution by 62 percent. Either directly through a tariff, or indirectly by forcing companies to engage in higher-cost production, Trump wants to raise the cost of goods for all Americans. Is that the kind of “winning” that we should expect under a President Trump?

In short, “global outsourcing actually creates more jobs and increases wages” because it helps American companies “be more competitive and more productive.” While “outsourcing means that [some] employees lose jobs” and “[l]osing jobs is never a good thing . . . we have to look at the bigger picture” to recognize the overall economic benefits of trade. Those quotes are taken from a blog post written several years ago by Donald J. Trump. So, it appears that Trump does understand the economics of trade — he just does not consider them as important as pandering to a portion of the electorate that does not.