How Wrong is Trump on Protectionism?

How Wrong is Trump on Protectionism?

Roy C. Smith and Ingo Walter

It’s hard these days to find anyone concerned with the national interest who hasn’t been raised on the idea that tolerably efficient markets are better than rigged markets. Properly structured, they help ensure that resources are put to best use and the public has access to the best products and services at the best price. And when things like technology or consumer preferences shift, market discipline assures structural change in the economy to redeploy resources from activities of the past to those of tomorrow. Of course there are always winners and losers – for sure in the short term – and adjusting to new realities can be painful, But in the end the system is stronger and grows faster than under any other arrangement that’s ever been tried. Best of all, market-based opportunities and market discipline works with human nature, not against it.

That’s the way it is with international trade and the notion of comparative advantage. People, companies and countries should focus on what they do relatively better than others and acquire what they don’t, each on terms determined by the market. In so doing, their welfare will be higher and its growth will be faster than it would be otherwise. Deviate from this principle, and a price will have to be paid in the form of lower welfare and slower growth.  There’s no way around it.

So what happened with President Trump’s plan to impose high tariffs on steel and aluminum imports (with some negotiated exemptions) and then doubling-down on protectionism by hitting China on an array of “sensitive” products?

Maybe he and his advisers don’t believe basic economics. Maybe they believe international markets are already rigged, so a bit more won’t hurt. Maybe they think that we’ve done a really bad job getting people in distressed industries redeployed, so they deserve a break paid-for by healthier sectors and the general public. After all, politics is politics. And people who believe they are facing a bleak economic future – often an existential threat - form a powerful voting block. Meanwhile, those who will pay the tab for protection may hardly feel it and must rely on arguments based on the overarching principle of liberal markets. It can be an uneven political battle at times. And it’s never hard to point to other countries’ protectionist practices – in trade policy and liberal market access, nobody has clean hands.

But there are plenty of cheaper and more effective ways of addressing the kinds of “fairness” issues that give rise to today’s protectionism. Admittedly, the US has had a poor record of walking the talk and successfully and efficiently helping to redeploy resources, notably labor. Farmers say there are two ways to harvest corn. One is conventional way in the cornfields. The other is to go behind the barn and seek-out the few whole kernels left in the hog manure. The Trump plan seems to fit squarely in the second category, an economic blunderbuss that will hit importers, supply chains, exporters, foreign markets that take massive amounts of US exports, consumers - and maybe the US economy as a whole as some benefits of the Trump tax cuts are wasted on the inevitable costs of protectionism.

Besides the directly affected products in the Trump target-zone and those hit by retaliation, at stake here are the rules of the game that allow the benefits of market economics to work its magic on a global scale, where trade and specialization form one of the key drivers lifting welfare and growth among billions of people worldwide. Since 1937 the US has been the most important advocate of letting global markets do their work. The US has been instrumental in launching every round of global trade negotiations, and every President across the political spectrum from Roosevelt to Kennedy to Nixon and onwards has identified America’s national interest fundamentally with pursuing freer international trade in both goods and services. The core principles are “non-discrimination” in how market-access is opened to competitors, domestic versus foreign, one country versus another, together with “reciprocity” – we open our markets to foreign suppliers in return for their opening markets to ours. Both can be lumped into “fairness,” as in Trump’s “free and fair markets.”

The fact is that well-functioning markets need rules that anchor its basic principles, along with effective dispute settlement procedures. Again the US was the motive force behind both the 1947 General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO). And when countries want to accelerate the efficiency and growth benefits of freer markets, something that may not be possible on a global basis, they may set up regional trade arrangements like the original European Economic Community (now EU) or the North American Free Trade Association (NAFTA) – not quite as beneficial as freer global markets, but better than the status quo. That option has likewise been under Trump policy assault in the case of both the Trans-Pacific Partnership (TPP) and NAFTA.

By apparently ignoring the factual power of globally freer markets, the Trump Administration betrays a critical US legacy based on a core belief in market outcomes that has overwhelming evidence to back it up. It also betrays America’s legacy of leadership in creating the global institutions to make it happen, cumbersome as they might seem at times. It puts the US on a slippery slope to some bad outcomes that will gradually become apparent and begin to poison the political chalice. In any case, the Trump tariff increases on steel and aluminum slam the EU and Canada and Mexico, among the leading US partners in seeking to assure sustainably accessible global markets. All three have their own protectionist practices that have not been successfully negotiated over the years, and all three have received Trump exemptions. Shooting yourself in the foot is not the best way to change the behavior of others.

But wait! Maybe Trump actually has a coherent plan, with a bulls-eye painted on China. Everything else may be a side-show – with the Europeans and others quietly cheering him from the bleachers.

Does China practice trade fairness market discipline? Hardly. China takes few prisoners in state support for exports and strategic investments abroad, stiff-arming foreign players in its domestic markets when it suits them, or in the murky calculus of state-owned businesses and banks. And there’s not much light between political targeting and competitive targeting in China. Non-discrimination and reciprocity often don’t seem to be in the Chinese vocabulary. It has violated key commitments under the WTO since it joined in 2001. But like Japan a few decades earlier, China has increasingly come under tough pressure from trading partners to play by the all-important rules of global trade and take its share of responsibility for a viable trading system. Toddlers are cute to have around the house, but not after they grow to 300 pounds.

Most importantly, China will eventually feel the effects of the kind of resource misallocation that results from persistently violating the spirit of those rules. Candidly, Chinese will often say “we will adjust, but on our schedule and terms, not yours.” China to Trump on protectionism in Twitter-speak:  “Won’t work. All wrong. Really bad.”

But Trump is also very good at borrowing ideas. His trade initiatives echo targeted measures taken by Richard Nixon, Ronald Reagan and George W. Bush over the years.  Each was intended to be shocking, but ended up with some voluntary or negotiated settlements, enough anyway to take the item off the political stage and allow a victory lap. By this logic, Trump aims to make a fuss over China tariffs, which can end in trade arrangements that will entail some backing-off and avoid a downward spiraling trade war that nobody wins. Trump could even include some sort of "surtax" on certain imports with sufficient proceeds (perhaps a few billion) to fund another try at a national worker retraining program – and sell it as a fair price to be paid by millions to fund assistance to the small number who are hurt. Could be a plan, if it can be made to work. But then, Trump is also very good at changing his mind.