Does Anyone Believe in Free Trade?

The Democratic presidential candidates have vigorously criticized President Trump for his imposition of tariffs on China, arguing that they have unfairly hurt farmers, producers, and cost jobs. And yet, when asked specifically during the September 10 debate whether they would lift them “on day one,” they all ducked or said no. Specifically, Mayor Buttigieg said he would have “a strategy that includes the tariffs as leverage.” Why is free trade so hard to support? Let’s try to be fact-based and rational.

Chapter One of most economics textbooks begins with an explanation of comparative advantage, which provides the basis for trade. In essence, if country A builds a car more efficiently than country B, and country B grows corn more efficiently than country A, both are wealthier by specializing in what they do best and trading for the rest. In other words, country A builds cars and trades them to country B for corn, and vice versa. The reality of this simple concept has driven the growth of first local and then global trade since the beginning of humankind. What is equally true, however, is that when trade costs a person a job because they can no longer be the most efficient producer, dislocation and suffering result. In this example, corn producers in country A lose, as do car producers in country B. 

Given this reality, policymakers have often responded with tariffs to protect people and industries with political influence from these dislocations. When a tariff is imposed on an imported good, consumers pay more for the good, and the presence of a higher price in the marketplace enables the less efficient domestic producer to survive. The protected producer wins, the employees of the producer win, and the consumer at large loses. 

Historically, the consensus has been that the benefits of trade outweigh the cost, and as such trade and trade agreements have continued to flourish. Republicans, until now, have generally been pro-free trade. The position of Democrats has historically been more nuanced. They have often campaigned against trade as unfair to workers, but when in office have generally been supportive. Think President Clinton, who championed NAFTA, President Obama, who promoted TPP, and even Hillary Clinton, who supported TPP until she became a candidate for president. 

President Trump, in an effort to protect factory workers and farmers, has imposed tariffs on several countries, most aggressively on China. (It is important to note that he also believes that such tariffs give him leverage in negotiating better trade, IP, and open markets with the Chinese. The fact that he erroneously believes the Chinese pay the tariffs is the subject for another day.) Republicans, despite their traditional defense of free trade, are silent. Democrats would like to have it both ways, criticizing Trump but not wanting to alienate their pro-protection constituents by advocating for lifting the tariffs “on day one.” Despite dissimilar motives, the result is the same: the American consumer loses.

Here is another way to look at the issue. As is often the case, we try to fix the “wrong problem.” Trade creates more wealth than it destroys. It also creates hardship for those who become uncompetitive and lose their livelihood as a result. To impede free trade to protect the uncompetitive reduces wealth for everyone and makes it difficult for companies to plan and for markets to work. So, if we as a society believe that we should protect people from such dislocations, we should do so directly rather than interfering with the free market of trade. Options for doing so are plentiful, and can include assisting those subject to dislocation with transition support, relocation support, retraining opportunities, interim healthcare, etc. Fixing the problem this way, meaning directly, and not trying to fix the “wrong problem of trade” would be far more efficient, the cost easier to define, and the results far easier to measure.