Trump also believes in something called “fair trade.” On his website, he writes, “For free trade to bring prosperity to America, it must also be fair trade.” He continues, “America fully opened its markets to China but China has not reciprocated.” Although he exaggerates—America’s markets are not as open to Chinese goods as he thinks—it is true that the Chinese barriers to U.S. goods are higher than the U.S. barriers to Chinese goods. But do we need their barriers to fall to the level of ours for trade to flourish? No, we don’t. We would be better off if their trade barriers fell, and so would they. But just as we have domestic firms pushing for restrictions on trade, China has Chinese firms that don’t want to compete with imports. But we are still better off having fewer restrictions on trade whether or not the Chinese government reduces its trade barriers.
Someone who understood this and used a beautiful analogy to make the point was Ronald Reagan. In a presidential speech he made defending free trade and criticizing the idea of retaliating against other countries’ trade restrictions by imposing more U.S. restrictions, Reagan compared trade to two people in a lifeboat on the high seas. Imagine, he said, that one of the people shoots a small hole in the boat and water slowly leaks in. That hurts you, but it also hurts him. What should you do to respond? Should you shoot another hole in the boat? That will effectively retaliate against him, but it will also hurt you. Countries gain from trading with each other, and the more restrictions there are on trade, the worse off both sides are, no matter which side imposed the restrictions.
Most troubling, however, is his prescription to “Make America Great Again” — which is to seal it off from the world by erecting walls, tearing up trade agreements, and forcing American companies to stay put. Trump may think that he’s invented a brilliant new economic approach. In fact, it is so old — and such a perennial temptation for socialist dictators — that there is an actual term for it in economic literature: import substitution. Even in quasi-democracies like India, it has led straight to the poorhouse.
But that’s not the main problem with it. As [an aide to] FDR’s Secretary of State Cordell Hull noted, “If soldiers are not to cross international borders, goods must do so.”
The manner in which you become wealthier matters. (HT Tyler Cowen)
In my most recent Pittsburgh Tribune-Review column I explore further the inconsistency between supporting tariffs because they cause firms to economize on inputs and supporting minimum wages because they allegedly do not have this same effect. A slice:
Sanders wants to believe that higher tariffs cause American firms to buy fewer imports, and so he concludes that higher tariffs have this effect. It so happens that his desire in this case is satisfied by reality: higher tariffs do indeed cause fewer imports to be bought. But Sanders also wants to believe that higher minimum wages will not cause firms to employ fewer workers. He therefore concludes from his fancy that there is no downside for workers to higher minimum wages. Unfortunately for Sanders — and, more importantly, for workers — reality here protests against Sanders’s fancy.
As companies engage in peaceful commerce with their friends and neighbors, they begin to inculcate what the economist Deirdre McCloskey calls the “bourgeois virtues,” which go vividly on display when disaster strikes.