Aaron/ September 7, 2018/ Blog Posts/ 0 comments

by Tyler Groenendal

As follows is a line-by-line rebuttal o“Free trade isn’t a principle, it’s a policy,”by Garrison Grisedale, appearing in the September 6, 2018 edition of theHillsdale Collegian. 

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For decades, the Beltway offered America an unflinching bipartisan consensus: Free trade, and all of its consequences, is an unmitigated good. Any deficiencies that might arise as are ultimately for the best. 

Mr. Grisedale begins with an unusual assertion, that the prevailing political opinion over the past several decades has been the full-throated support of free trade. While much of the “establishment” politicians have been nominally in support of free trade, actual protectionist policies have continually been sustained, though there has been positive movement in favor of more free trade.

Take, for example, the import restrictions in the U.S. Sugar Program, designed to support domestic sugar production at the expense of consumers, and those producers who use sugar as productive inputs (candy manufacturers, for instance.)

But the American people weren’t buying what Washington, D.C., was selling.

According to a 2018 poll by the Pew Research Center, 56% of Americans surveyed believe free trade agreements to be positive, while 30% were opposed.Though a similar poll conducted in 2016 showed slightly more negative numbers (51% in favor, 36% opposed), Mr. Grisedale’s use of public opinion polls, by an overwhelmingly economically ignorant electorate, is not the firmest ground to stand on when defending an idea.

President Donald Trump’s simple idea on trade is that we live in a world of nations competing for power, strength, and prestige. Thus, the political concerns associated with international trade ought to take precedence over economic considerations. The nation does not serve the economy; the economy serves the nation. 

In short, President Donald Trump’s support of protectionism is rooted in a plethora of economic fallacies, tied to his fairly overt nationalism.

To begin with, nations do not trade, individuals do. While we colloquially say “the United States” trade with “China,” this is merely shorthand for “individuals who reside within the United States” trade with “individuals who reside within China.” There is nothing sacrosanct about only trading within the borders of a particular nation.

If one is really concerned with political matters, and the idea of “the nation,” it’s baffling that this could translate into support for protectionism.

Protectionism only benefits a small, concentrated class (domestic producers of the protected good) at the expense of all consumers within a nation, along with other classes of producers who use that good as input for their production. Take, for example, President Donald Trump’s proposed tariffs on steel and aluminum.

While this does result in narrow gains to production and employment for producers and refiners of steel and aluminum within the United States, it results in far greater costs for anyone who consumes a product made with steel or aluminum, as well as any producer of goods which require steel and aluminum as inputs (car manufacturers, for example).

Free trade, therefore, is not a principle but a policy. It can be good or bad depending on the situation. It must be subject to the national interest. Free trade is a principle which, properly understood, should manifest as a policy. 

It is a principle insofar as it reflects something desirable to strive towards, rooted in an understanding of truth and liberty (which Hillsdale students are purportedly supporters of, Politics department notwithstanding), and it is a policy that ought to reflect that principle.

Free trade is objectively and absolutely good. I do not deny that free trade has costs: it does. Domestic producers who are unable to compete with overseas producers who operate at a comparative advantage (an economic principle originally expounded by nineteenth century economist David Ricardo) will go out of business. This, in turn, will result in less employment in that sector.

These costs, concentrated though they are, are enormously outweighed by the benefits of free trade to consumers and all other producers. If one posits that free trade must be subject to “the national interest,” then one must be overwhelmingly in favor of free trade.

Consider China: Our biggest competitor and economic counterpart places enormous tariffs on U.S. goods and the U.S. ran a trade deficit of $375 billion in the last year alone. 

The assumption that, because the nation of China places tariffs on U.S. goods, that the United States must also place tariffs on Chinese goods, is fallacious. For one, tariffs overwhelmingly harm domestic consumers and producers (beyond a narrow protected class), not those overseas.

Mr. Grisedale’s assertion can be compared to me shooting myself in the foot, on the premise that my neighbor is also shooting himself in his foot, in some sort of convoluted and misled scheme of false revenge. Trade deficits are not inherently, or even typically, bad things. It simply means that individuals within the United States imported more goods than they exported.

And many of the American dollars that China receives as a result of this deficit are used to purchase U.S. debt and U.S. assets. 

Mr. Grisedale’s next argument is particularly bizarre. The balance of payments which he alludes to here is an identity of economics. That is, it is not a theory. It is objectively true based on the very definition of terms. A simplified version essentially reads that Capital Account + Current Account = 0.

The Current Account is largely the exchange of goods (the source of the trade deficit or surplus), while the Capital Account pertains to transfers of money as investments. Given the identity, a Current Account Deficit (which, in this simplified world, we’ll assume to represent merely a trade deficit) by definition, MUST correspond to a Capital Account Surplus.

U.S. dollars are generally used to purchase U.S. goods and services (or, to invest in companies who produce within the United States.) It is not some elaborate geo-political conspiracy that individuals in China purchase assets or investments within the United States, it is a blatantly obvious fact of life.

China also engages in mass-scale intellectual property theft (both outright and through coercive government regulation), copyright infringement, dumping, and currency manipulation. China is the largest carbon dioxide emitter in the world and Chinese vegetable protein imports were so laden with toxic chemicals that the Food and Drug Administration issued a recall in 2007. 

In this tirade against various Chinese government policies (including a laughable condemnation of China for “coercive government regulation” while simultaneously supporting protectionism), Mr. Grisedale fails to make any sort of reasonable justification for restrictions on trade.

China also uses the U.S.’s flexible free trade policies to flood our nation with drugs. Fentanyl, an opioid roughly 50 times stronger than heroin and 100 times stronger than morphine, is the deadliest drug in the U.S. and killed nearly 30,000 Americans in 2017, according to the National Institute on Drug Abuse. A 2017 congressional report identified China as the primary source of origin for fentanyl in the U.S. Chinese fentanyl makes its way into the U.S. in three primary ways: China ships the drug into the U.S. directly, smuggles it in through Canada and Mexico, or sends the raw chemicals (and sometimes lab infrastructure) to Mexican drug cartels to then disperse. 

This similarly bizarre paragraph manages to try to pin the blame on drug overdoses on free trade, even while noting that two of the three primary conduits of fentanyl into the United states (smuggling and raw chemical shipping for later manufacture) occur beyond the confines of legally sanctioned trade.

In any case, Mr. Grisedale seems to be trying to portray overdose deaths commonly attributed to fentanyl, and other opioids, on either a deliberate and malicious move by China, or the necessary consequence of free trade.

Free trade does facilitate the ability for individuals to purchase desired goods from overseas, but I can’t find any reason to blame free trade for overdose deaths. It’s roughly akin to blaming free trade in automobiles for the approximately 40,100 people killed in vehicle deaths in the United States in 2017.

A yearly $800 billion trade deficit in goods worldwide has hollowed out the manufacturing base which once catapulted the United States to the the status of a world power. Is this what free trade looks like? 

Mr. Grisedale now attempts to blame the trade deficit for a “hollowing out” of a manufacturing base in the United States. To begin, a trade deficit is not causal. Rather, it’s a reflection of millions of choices and exchanges that individuals make on an annual basis. The trade deficit exists, as outlined above, merely because individuals in the United States choose to import more goods than they choose to export. Once again, there is nothing inherently wrong with this.

Further, manufacturing output in the United States is essentially as high as it has ever been. According to data from the St. Louis Federal Reserve, manufacturing output in Q2 2018 was just below its pre-Great Recession peak.

While there are certainly fewer workers employed in manufacturing than there have historically been in the United States, attributing this change to foreign competition is patently false. It is, instead, the result of increased technological innovation and capital investment, boosting the productivity of the average individual worker, with a natural consequence of fewer workers needed.

The men who transformed America into an industrial superpower didn’t think so. The American founders saw the need for the protection of domestic industry, and the second bill ever passed by Congress, the tariff of 1789, stated that its explicit goal was the “encouragement and protection of manufactures.” 

It’s unsurprising that such a passionate defender of protectionism, on grounds that ignore basic economics, also ignores basic history. While protectionism was a secondary goal for the Tariff of 1789, the primary purpose was to collect revenue for the newly formed federal government which, over a hundred years prior to the passage of the 16th Amendment in 1913 which instituted the federal income tax, had few other means to collect revenue.

Regardless, arguing for the wisdom of a policy merely on the basis that it was prominent in early American politics does not offer firm ground to stand on. While I agree with Mr. Grisedale that the Founders of the United States have many qualities which warrant admiration, their economically ignorant endorsement of protectionism is not one of them.

His analysis on the positive impact of this protectionism at promoting economic and industrial growth in the United States is similarly flawed. I’ll refer to Scott Lincicome’s excellent paper on the subject, Doomed to Repeat It: The Long History of America’s Protectionist Failures,” for further reading.

To provide just a small excerpt on Lincicome’s remarks:

“But more importantly, we live in a strikingly different world today than the one inhabited by supposed protectionist champions such as Alexander Hamilton and Abraham Lincoln. Trade among nations was far less developed; trade barriers were generally higher everywhere; national economies were much less diversified, reliant mainly on agriculture and only later on some basic manufacturing; communications and shipping were inefficient and costly; and there was no rules-based multilateral trading system for countries to commit to trade liberalization and for adjudicating disputes.”

America’s greatest statesmen drew upon the founders’ wisdom. Henry Clay imagined his “American System” of tariffs, domestic commerce, and internal improvements to ensure domestic vitality. Honest Abe warned in an aside conversation that “abandonment of the protective policy by the American government [will] produce want and ruin among our people.” And William McKinley, a man from whom the president draws great inspiration, invoked the first law of nature in his defense of protectionist measures: the law of self-preservation. 

Mr. Grisedale is correct that Henry Clay, Abraham Lincoln, and William McKinley were all ardent defenders of protectionism, but that doesn’t make him, or them, correct in their assessment of its economic impact.

Clay’s interventionist “American System,” which served as a large source of inspiration for Lincoln’s similar machinations, is rooted in the false assumption that government action is necessary for economic growth. The argument goes that, absent excessive tariffs and public works projects for the development of infrastructure, economic growth would be impossible.

Never mind the abundance of privately owned, funded, and operated toll roads in the United States during this era. Never mind that contributing industrial growth solely to protective tariffs (which, indeed, probably played some small role) is economic lunacy. Never mind the fact that domestic commerce proceeded, and always will proceed, even without government intervention (following Adam Smith’s dictum on man’s propensity to “truck, barter, and exchange.”)

Lincoln’s wild predictions on the downfall of American society without protectionist tariffs is likewise deluded. Throughout American history, as trade became freer, and competition increased, Americans enjoyed a higher standard of living and greater levels of wealth.

McKinley’s bizarre claim that the United States is in danger of failing to exist by the removal of tariffs echoes those of Lincoln. His fallacious use of war-like language to describe trade is not new, nor is it any less false than it was a century-and-a-half ago, when French political economist Frederic Bastiat wrote the following in Economic Sophisms:

“And yet, what analogy is there between an exchange and an invasion? What possible similarity can there be between a warship that comes to vomit missiles, fire, and devastation on our cities, and a merchant vessel that comes to offer us a voluntary exchange of goods for goods?”

Protectionism has long been a part of the great Republican tradition. With domestic protection in mind, Warren Harding and Calvin Coolidge ushered the United States into the “Roaring 20’s.” Even Ronald Reagan turned to tariffs to save the U.S. auto industry from Japanese competition. 

In a rare first, Mr. Grisedale gets a historical fact correct. The Republican Party has historically been a proponent of protectionism. He is wrong to assert that this protectionism was the cause for subsequent economic growth in the 1920s. In fact, increased protectionism under Republican President (Herbert Hoover) in the form of the Smoot-Hawley Tariff was a major contributing factor to the ongoing Great Depression, inviting numerous reprisals and starting a trade war.

As seems to the case with each of Mr. Grisedale’s desperate appeals to the authority of history (wherein anything a Republican president does is inherently good and wise), the tariffs enacted under Ronald Reagan for the purposes of protecting domestic car manufacturing are not any better merely because he was the one who ordered them.

As is the case with all tariffs, such moves only served to prop up an industry that was flagging due to an inability to compete with superior product. American consumers suffered with greater restrictions (in the form of higher prices) on purchasing the car they would like, and their alternative was an inferior American made car.

But when NAFTA went into effect in 1994 the U.S. lost is economic advantage. Since then, the U.S. has bought $1.1 trillion more in goods from Mexico than it has sold, according to the U.S. Census Bureau. And when China joined the World Trade Organization in 2001, the U.S. became vulnerable. America bought $4.4 trillion more in goods from China than it has sold, the U.S. Census Bureau reported. 

In the latest in a series of spurious claims, Mr. Grisedale now asserts that the mere presence of a national trade deficit is a negative, claiming it illustrates a loss of “economic advantage.” Instead, it actually represents an increase in the use of comparative advantage, wherein the lowest cost and most efficient producers gain market share at the expense of higher cost, less efficient producers. The only losers in this scenario are the producers who couldn’t stand up to competition.

He repeats the odd charge against China, and it is no more true against China than it was when it was directed towards Mexico.

American politicians are hollowing out the heartland, wasting away our country’s domestic industry, undermining our industrial base, and lowering American wages. All for cheaper foreign trinkets. It’s reminiscent of Voltaire’s “Candide,” in which the main character’s mentor, Dr. Pangloss, maintains an illogical optimism, telling Candide not to worry despite his many misfortunes. Regardless of what might happen, Pangloss says, and as bad as it might seem, this is the best possible scenario in the best of all possible worlds. 

Despite remaining the world’s largest economy, Mr. Grisedale continues to insist that the United States is being “hollowed out,” and domestic industry (which is at a near record-high) is “wasting away.” Wages also continue to increase, on average, in manufacturing. 

The assertion that all the United States gains from freer international trade is “foreign trinkets” is laughable. Whether through raw materials, varied agricultural products, consumer electronics, or thousands of other goods and industries, Americans overwhelmingly benefit to a tremendous extent from free trade.

What Voltaire proposed mockingly, through Pangloss, the free traders say with a straight face. 

I agree that the current trade policies in the United States are not the best possible scenario: it’s not completely free. If President Trump continues to have his way, however, it will move further and further away from that ideal.

The benefits of free trade are economic fact. Those like Mr. Grisedale can choose to ignore that fact for a fanciful interpretation of history and economics, but truth remains truth.

But the American people aren’t buying what they’re selling. 

Here, unfortunately, I must agree once again with Mr. Grisedale. Some Americans are increasingly becoming proponents of protectionism, to the peril of their own economic well-being and happiness.

Like Mr. Grisedale, I’ll also conclude with a great piece of literature from the Western canon. Here are some appropriate lyrics from “Stargazer” by Rainbow, appropriate for any pro-Trump protectionist wondering why they’ve suddenly become less prosperous:

All eyes see the figure of the wizard 
As he climbs to the top of the world 
No sound, as he falls instead of rising 
Time standing still, then there’s blood on the sand 

Oh I see his face! 
Where was your star? 
Was it far, was it far 
When did we leave? 
We believed, we believed, we believed

Originally published at: https://satisarbitratus.blogspot.com/2018/09/the-principles-of-free-trade.html
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