Tariffs and trade wars won't fix what ails U.S. trade

Trump Trade
President Trump (center) speaks in the Roosevelt Room of the White House before signing two proclamations, one on steel imports and the other on aluminum imports. Standing with Trump are workers (left) Vice President Mike Pence, Treasury Secretary Steven Mnuchin, and Commerce Secretary Wilbur Ross.

Too much of the talk and commentary these days centers on tariffs and trade wars.

The discussion obscures the key issue when it comes to trade: Free trade is an ideal, but fair trade is what countries need to strive for, and how we reach that goal is critical.

The need to rationally approach the issue of trade is not a new issue. I wrote a column on this one year ago, and much of this column follows arguments made in my book, Big Picture Economics, which was released four years ago.

For the global economy to work smoothly, goods and services must move freely and easily between nations. Economists have maintained for 100 years that if countries concentrate on what they do best and trade with other countries that have their own special ways of producing goods and services, the world will be better off.

This is called “comparative advantage,” and it is the concept that underpins the drive for free trade.

The advantages of trade are readily apparent — they are not just results from economic models. When shopping, consumers see every day the benefits of goods produced around the world flowing into the United States.

Consider a trip to the mall or a visit to Amazon. Much, if not most, of the goods for sale are produced outside the United States.

We are buying so many foreign products for one reason: They are cheaper. If they weren’t, firms would be selling U.S.-made products.

And cheaper products means our standard of living is increased as we can purchase more goods with the same income.

Unfortunately, cheaper foreign products come with a cost: Domestic firms that cannot compete go out of business.

That creates two negative facts of life. First, jobs are lost. Second, to compete against foreign producers, costs must be limited.

One of the reasons wages have been so stagnant is that labor markets are now international, and foreign workers compete with U.S. workers for jobs. That holds down wage gains in the United States.

To reap the benefits (but also suffer the costs), free trade requires that no artificial barriers be erected. In the real world, though, while countries love to sell their goods to everyone else, they are rarely happy when foreign firms take sales from domestic companies.

And those that lose don’t go quietly. Politics enter the economic arena.

To limit the negative impacts, governments impose trade barriers such as tariffs, manipulate currencies, subsidize exports, or foster dumping. Those actions do limit imports or increase exports, but they also reduce the benefits of trade.

But I cannot blame just politicians for the move to restrain trade. It is hard for economists to argue that if one country has fewer barriers than others, that country benefits. A country with limited trade restrictions could lose out to those that don’t reciprocate.

So, if we don’t have free trade, what do we replace it with?

To account for barriers, the free trade argument has morphed into a “fair trade” movement. If you cannot have free trade, make trade as fair as possible for the companies in your country.

Unfortunately, how best to create a fair-trade world with level playing fields has not been part of the current dialogue.

To get there, our options are limited: unilateral action or negotiations.

The administration’s approach has been to take unilateral actions and demand negotiations with conditions. Trade agreements, such as the Trans Pacific Partnership, have been scuttled. Tariffs have been implemented. Mexico and Canada were warned that NAFTA would be terminated unless changes beneficial to the U.S. were made.

But negotiations between governments are vastly different from bargaining between businesses. There is a different bottom line and much of it is political, not economic.

Threats are extremely problematic in this situation. Leaders of countries threatened by the president of the United States could not survive very long if they capitulated to the demands.

And then there is the bizarre statement that “trade wars are good and easy to win.”

Let’s be clear, trade wars are losers for everyone. Reciprocal tariffs and restrictions would cause U.S. firms to lose international sales, while increasing business and consumer costs. Many times more jobs would be lost in a trade war than gained.

So it all comes down to “the process.” The president believes, as do many businesspeople and economists, that the trade field of play is tipped and something should be done.

But how we go about leveling the field is critical.

The process matters and that is what we should be discussing.