Some economists overstated the damage of trade taxes. And some of them may have been motivated by anti-Trump sentiments.
But that doesn’t change the fact that protectionism is bad for the economy.
Here are five points to keep in mind. The first three apply to all policy analysis and the last two apply specifically to trade policy.
- Economists are lousy forecasters. If they actually knew how to predict the economy, they could make millions or even billions of dollars in financial markets. What economists should do – and can do – is assess whether a particular policy will cause more growth or less growth.
- It is very difficult to dramatically change the economy, so even a very good policy may only cause the economy to grow by, say, an extra 2/10ths of 1 percent per year (and vice-versa for a bad policy). Of course, because of compounding, even small changes can lead to big long-term differences in prosperity.
- The policy lever that is most likely to cause a recession isn’t trade policy or tax policy. It’s monetary policy. Almost all recent economic downturns (the COVID lockdown being the exception) were caused by misguided boom-bust policies by the Federal Reserve.
- Regarding trade, there are two major measures of economic liberty (Economic Freedom of the World and Index of Economic Freedom) and trade only accounts for about 20 percent of a nation’s grade. So it is easy to have bad policy in one area that is offset by good policy in other areas (and vice-versa).
- Some estimates of serious economic damage were made after Trump’s so-called Liberation Day trade taxes were announced. After the adverse reaction in financial markets, Trump backed off. The chart shows that Trump has made trade policy worse, but the overall tax increase on trade is not nearly as bad as originally planned, so it should not be a surprise that the damage has not been as severe.
Last week China introduced new draconian restrictions on rare-earth magnet exports, a reminder of its power to disrupt global supply chains—and cause American manufacturers, including carmakers, to halt production.
American auto companies have long relied on China for the magnets, which are essential for making everything from electric motors to headlights and windshield wipers
But today, one automaker, General Motors GM has less reason to fret.
In 2021, GM made the bold bet of investing in rare-earth magnet production in the U.S., as part of a broader effort to cut its reliance on China for parts, components and materials. As a result, in the coming months, GM is now set to be the only U.S. automaker with a large direct supply of American-made rare-earth magnets from multiple factories.
It has been a risky bet. GM had to commit to long-term purchase agreements with new suppliers, in some cases relatively unproven ones, whose magnets are more expensive than the Chinese ones.
Writing in the Washington Post, Johan Norberg asks: “Is it America’s fate to decline and fall?”
The ancient Greek historian Thucydides spoke of two mindsets — the Athenian’s, eager to venture out into the world to acquire something new, and the Spartan’s, intent on staying home to guard what he already had.
Broadly speaking, the Athenian spirit is associated with golden ages. When civilizations were open to influences from merchants and migrants, and when they let people experiment with new ideas and innovations, they prospered. This required tolerance of pluralism and surprise, as well as institutions and norms to restrain rulers’ arbitrary use of power.
Indeed, modern China offers another example of the importance of such a mentality. Its rise has been Athenian in character, beginning with Deng Xiaoping’s 1978 “reform and opening up,” when the country embraced entrepreneurship and trade. Xi’s recent Spartan crackdown on freedoms and private enterprise threatens to undo those gains. Productivity has slowed, debt has soared and confidence has ebbed. It’s hard to see the East rising much further that way.
It is difficult to uphold open societies for long. When cultures turned anxious, curiosity gave way to control and open trade to barriers. The populace tended to long for strongmen and hunt for scapegoats. In times of trouble, the Abbasid Caliphate and Renaissance Italy imposed orthodoxy and persecuted heretics. Even open-minded Athens sentenced Socrates to death. In 1672, the usually tolerant Dutch lynched Johan de Witt, the statesman who had led them to prosperity, and purged their universities of Enlightenment thinkers.
The parallels with our world are unsettling. Since the turn of the millennium, the dominant Western mentality has shifted from Athenian to Spartan. We have endured terrorism, wars, a pandemic and economic turmoil, while social media has intensified polarization and politicians have learned how to divide and conquer.
The world looks increasingly dangerous, and the result has been a backlash against trade and migration. That threatens to cut us off from the world’s talents and technologies, recalling the Chinese Ming dynasty’s 15th-century ban on international trade. They sought stability; they got stagnation.
At the same time, two reactive forces to modern pluralism have developed: a hard nationalist right and a radical illiberal left. They present themselves as opposites but are united in their obsession with identity politics and a dream of sameness, in which alternative ideas and cultures are seen as threats. For years, the illiberal left tried to cancel dissenting voices on campuses and in academic curriculums. Now the Trump movement seeks to impose its own orthodoxy, threatening universities, law firms and media companies with government power.
This ambition to enforce one idea on everyone is always presented as a call for unity. In practice, it creates a zero-sum game that fuels conflict. The assassinations of conservative activist Charlie Kirk and Democratic Minnesota state representative Melissa Hortman, the Jan. 6, 2021, attack on the U.S. Capitol and the repeated attempts on President Donald Trump’s life show how quickly angry tribalism can descend into violence.
California Gov. Gavin Newsom, like every politician, claims to be a champion of free speech. Then why is his state arguing in court that progressive climate orthodoxy trumps free speech?
The answer is because the Democratic left wants to force businesses to disclose publicly their putative climate risks and CO2 emissions. The Biden Securities and Exchange Commission’s effort to compel such disclosures hit a dead end when President Trump took office.
Enter Mr. Newsom, who is now leading the campaign. California law requires companies with more than $500 million in annual revenue that “do business” in the state—which can mean having a single employee or contractor in the state—to detail how speculative climate-related risks could affect their businesses.
Congratulations to Joel Mokyr, Philippe Aghion, and Peter Howitt.
Who ever claimed that “a free market economy will automatically solve the problem of poverty”? No rational capitalist would ever say such a thing. What is true is that free market economies generate far more wealth, so that far, far less of society ends up trapped in poverty.
