Trump vs. Free Trade

A version of this article was published in the Atlanta Business Chronicle October 26, 2015

By Robert Dell

"What China has done to the United States may be the greatest theft in the history of the world."
--Donald Trump in Atlanta, October 10, 2015

Five days before Donald Trump's campaign rally at the North Atlanta Trade Center, trade representatives from the U.S. and 11 other Pacific Rim countries (but not China) concluded the Trans Pacific Partnership (TPP) in Atlanta. For all its defects, the TPP promises to reduce the costs of international trade and investment leading to potential global annual income gains exceeding $1.9 trillion within the next 10 years.

Trump, still leading in most Republican presidential polling, does the devil's work in threatening countries like China with tougher trade terms and telling a 60 Minutes audience, "We need fair trade, not free trade."

For more than two centuries economists have advocated free trade (not fair trade) with near unanimity. It was Adam Smith who first advanced the proposition that the gains to some producers and their employees from tariffs or other import restrictions are more than offset by losses to other domestic workers and especially consumers, a much larger group. The 1930 Smoot-Hawley tariffs, which led to a global trade war and worsened the Great Depression, were opposed in an open petition to President Hoover signed by 1,028 economists.

High-wage American workers are not, as a group, threatened by "unfair" competition from low-wage foreign workers. The productivity of a country's labor force, not trade policy, is what fundamentally drives its wage level.

Trump has adopted the mercantilist view that a country's prosperity is tied to the volume of its exports. Exports are actually the price we pay to get imports. Prosperous trade means getting the highest possible value of imports for the lowest possible price in exports. To the extent China undervalues its currency (another Trump trope), the predominant effect is to transfer wealth from Chinese to U.S. consumers.

In recent years inexpensive goods, including staples, have improved in quality or declined in price (or both) more so than have luxury goods, improving the purchasing power of the poor relative to the rich. According to economist Christian Broda, the credit goes mainly to trade with China, whose exports have supplied discount retailers such as Target and Wal-Mart. In a 2008 interview Broda declared: "we may have won the war against poverty without even noticing."

Trump faults China for the U.S. trade deficit, an imaginary problem. Throughout the nineteenth century, despite its tariffs, the U.S. ran "unfavorable" balance of payments "deficits" nearly every year to everyone's advantage. We imported goods from Great Britain; they imported less from us, choosing instead to invest in U.S. treasuries. These capital account "surpluses" reduced interest rates and raised U.S. investment in productive assets. In recent years China has played a similar role.

But don't we need Trump-like negotiating prowess to pry open foreign markets as a quid pro quo to opening ours? No, that is another trade fallacy. We would benefit from phasing out our tariffs even if other countries did not. In recent decades countries such as Argentina, Australia, Chile, Mexico, and New Zealand have all benefited from unilateral market-opening reforms.

From 2005 to 2014 US exports to China increased 198 percent and now exceed exports to all other countries except Canada and Mexico. While overall U.S. exports dropped 18 percent in 2009, exports to China declined hardly at all.

Of course, the Chinese have appropriated our technology in violation of international law, which hinders exports of technology goods. The TPP, which Trump opposes, will indirectly incentivize China to clean up its act with regard to intellectual property.

The U.S. energy revolution made possible by hydraulic fracturing and horizontal drilling raises the possibility of China becoming a large importer of U.S. crude oil and liquefied natural gas. Why don't we hear Trump railing against the antiquated legislation that blocks U.S. energy exports, if increasing exports to China is of such great importance to him? Maybe because bashing foreigners is an easier way to whip up support among low information voters.

What we need most from the Republican presidential candidates is the coherent advocacy of "new deal" style proposals for market-based reforms to boost the general prosperity and tackle our biggest potential domestic threat--the federal government's $200 trillion + fiscal gap.

But in his campaign so far Trump has squandered his great talent for big deal thinking and execution. Instead the Wharton graduate offers us demagoguery and willful ignorance of the basic economics of major policy issues.