Trade in the news
While trade is not usually seen as a glamorous or exciting topic to casual observers of policy debates in Washington, recent announcements by the Trump administration to impose nearly $100 billion in tariffs on Chinese goods—and China’s introduction of retaliatory tariffs—have generated more conversation about a fairly complex topic. This action was preceded by similar announcements on over 1,300 Chinese goods ranging from batteries to medical devices to televisions, the importation of steel and aluminum in early March, and washing machines and solar panels in late January. Tomorrow is the deadline for a decision from President Trump on extending exemptions to European and other select countries from the steel and aluminum tariffs – setting up “will he or won’t he” intrigue today.
For newcomers to the trade debate, the discussions of tariffs, trade deficits, and all of other nuances that this issue entails can seem a little daunting and hard to follow. This explainer will help navigate the difference between free and protectionist trade policy and show why tariffs actually do more harm than good. Before we begin, we must define the terms of “free” and “fair” trade that come up so often during this debate.
What is free and fair trade?
In February 2017, President Trump tweeted that he “[believes] in free trade, but it also must be FAIR TRADE.” This immediately raises the questions of what it means for trade to be free or fair. Free trade, put simply, is the idea that countries trade goods and services without the imposition of tariffs—duties or fees levied on imports and exports—or other such restrictions. The opposing view, usually referred to as mercantilism or protectionism, instead observes that placing tariffs on certain goods and services is necessary to protect the industries of their country from having to compete with cheaper foreign imports. This immediately puts the concepts of “free” and “fair” into conflict since free trade implies the total absence of any government regulation of trade.
Shouldn’t all trade be fair?
If other countries try to exploit the free movement of goods and services with the end result of hurting domestic manufacturers, is that not inherently unfair and in need of restitution? From this perspective, free trade only seems like a good idea when domestic industries are not harmed.
Adam Smith argues in his seminal text, The Wealth of Nations, that protectionist trade policies carry the unintended consequences of hurting the very people they strive to help. “By means of glasses, hotbeds, and hotwalls,” Smith writes, “very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”
Cato Institute Adjunct Scholar Scott Lincicome elaborates on Smith’s point. “Protective tariffs,” he argues, “force American families and businesses to subsidize—through hidden, regressive taxes—the small share of U.S. manufacturers and workers (and the tiny portion of the total economy and work force) that compete directly” with foreign imports. When tariffs are placed on goods and services, the cost that is borne by U.S. manufacturers and distributors as a result of the tariff is transferred to consumers in the form of higher prices for the product or service in question.
The distinction and merits of “free” versus “fair” trade is only one aspect of the trade debate. Another argument that is often cited by proponents of the protectionist view of trade is that such actions protect the American worker. By placing tariffs on certain American imports, industries in the United States that cannot compete with how cheap other countries make a product are then insulated from the lower-priced goods being imported.
Protecting American workers sounds like a good thing. Why are so many people angry about that?
Addressing the January 2018 decision to impose tariffs on washing machine and solar panel imports from other countries, the White House released a statement explaining that the decision was meant to “serve the interests of U.S. workers” and “commit to fair and reciprocal trade.” Indeed, the view of protectionism as a defense of American workers is a bipartisan affair. Senator Bernie Sanders (I-VT) said of the recent steel and aluminum tariffs that “[we] need to fundamentally rethink our trade policies and move to fair trade rather than just unfettered free trade.”
The concepts of “fair trade” and “creating jobs in the U.S.” have an understandable rosy glow to them, and it is hard to imagine why politicians would not be in favor of fairness and job creation when the debate is framed that way. When the details of the effects that restricting trade between nations have on American workers are more closely examined, however, the picture becomes far less rosy.
Let’s take a look at the steel and aluminum tariffs announced by the Trump administration. The protectionist argument sounds altruistic; nations like China produce steel at a cheaper cost and then export it to the U.S. to be sold at lower prices that American steelworkers cannot match. Refineries are forced to downsize and close down as a result—as they no doubt have been.
This strikes many as unfair because American workers are seen as being valued less than the benefit of importing things from other nations at a cheaper cost. When examined more closely however, it is actually the case that introducing tariffs on steel and aluminum hurts more American businesses and workers than it helps. This is because of the fact that 38 Americans work in industries using steel or aluminum for every one worker making steel or aluminum. The result of making steel aluminum more expensive through the imposition of an import tax means that industries which use steel and aluminum must now pay more for the raw materials they need to manufacture whatever goods they produce. American farmers have been similarly hurt by the Chinese imposition of retaliatory tariffs on America-grown soybeans and sorghum. This consequence led Senator Ben Sasse (R-NE) to conclude that the Trump administration’s discussion of a trade war with China would “[threaten] to light American agriculture on fire.”
Inhibiting trade is also bad for consumers, as the goods themselves become more expensive. Economists Stephen Moore, Arthur Laffer, and National Economic Council Director Larry Kudlow summarize this cascade by concluding that “tariffs are really tax hikes [because] a 25 percent tariff on these commodities may get passed on to consumers at the cash register.” The tax levied on imports is passed down to American consumers who are forced to pay more for products that use steel and aluminum—everything from car parts to beer cans—in order to make up for the higher price of the raw materials.
Final points
While the various nuances, theories, and sometimes unclear details of the trade debate may seem overwhelming, it is clear that it is an issue that has broad impacts on the way we live our daily lives. The mission of Pursuit proudly states that our government must be held accountable and that the economic impacts of poor policy decisions will be especially felt by younger generations. This includes trade and weighing the potentially harmful results that stem from more restrictive trade policies.
In fact, a May 2016 YouGov poll found that millennials are far more in favor of free trade than preceding generations, and it almost surely has to do with the fact that millennials are notoriously fans of avocado toast and other products that we enjoy every day from around the globe. That said, it is important to consider both the large-scale and local effects that trade has on communities. It should be noted that manufacturing jobs are lost in the short term, in association with more rigorous international trade, but there is also an overall positive growth effect on jobs as a result of that increased trade. Policy proposals are almost never a choice between a clear good versus a clear bad, and the various nuances of trade policy are no different.
Having a complete understanding of the ways in which trade impacts our daily lives and how proposals to make trade more fair or more beneficial to workers is felt in practice is indispensable to finding solutions that help both workers and consumers.
