We live in a global economy. We buy from the rest of the world and sell to almost every nation on earth. So why have trade agreements become such a contentious issue? Because, as is always the case with economic actions, they created winners and losers. However, it makes no sense to injure those who have benefited while trying to help those harmed. The new administration’s protectionist policies could do just that.
Free trade, in which we export (sell) goods to other countries and import (buy) products from the rest of the world, adds immensely to overall economic activity.
Businesses didn’t move to China, Mexico, or wherever because it's fun to operate there. They did so to decrease their production costs and increase their sales opportunities.
Producing goods globally as cheaply as possible means U.S. consumers pay lower prices, increasing our buying power. The money we save is often spent on domestically produced goods and services.
Though trade helps the economy overall, not everyone benefits. If it is cheaper to manufacture an SUV in Mexico, U.S. consumers can buy less expensive vehicles. Unfortunately, the factory workers who once built SUVs in the United States are now out of a job. Is the economy better off? Yes. Do some workers lose their jobs and become worse off? Absolutely.
Countries handle these inequities in a variety of ways. They provide programs to help those harmed, such as unemployment insurance or retraining programs. Still, the future earnings of the displaced workers rarely equal their previous incomes.
Some countries try to stem job losses by protecting domestic industries from foreign competition, either by directly limiting or taxing imports.
Once upon a time, a tax on imports was called a tariff. Today, the politically correct term is a border tax. So if you hear that someone supports a border tax, they are saying they want to tax imports.
Because it is a tax, a tariff raises the cost of an imported product. If you put a 20 percent border tax on Mexican products or a 35 percent tariff on Chinese goods, U.S. consumers will pay much of the tax. Simply put, tariffs increase consumer prices. If you like paying more for something made in Mexico or China or wherever, you will love a border tax.
Worse, the countries whose products are being taxed usually respond in kind. Does anyone doubt that the Chinese will punish U.S. companies if we put a tariff on Chinese products? And the Chinese will respond forcefully.
If tariffs -- excuse me, border taxes -- ignite a trade war, everyone loses. U.S. consumers will pay more for imports and have less to spend on other goods, harming companies that have nothing to do with trade. U.S. companies that sell or produce in foreign markets will see their profit margins and earnings fall. That usually translates into lower stock prices, so your stock portfolio could be in for a wild ride.
A different approach is to subsidize exports. A border adjustment tax is supposed to do just that, while also discouraging imports. With a BAT, firms cannot write off the expense of imported goods. That raises costs and, ultimately, prices. However, they can write off the expense of exported goods, which lowers production costs. The result: Imports cost more while export activity is subsidized.
But nothing is free. Firms such as retailers that stock their shelves with foreign goods, or manufacturers that use foreign-produced parts, will face increasing costs. They will either have to raise their prices or suffer declining earnings -- which is rarely good for stock prices.
Finally, there is the issue of free trade versus fair trade. All countries can gain if everyone plays on a relatively level field. But if some countries use special regulations to thwart imports or the production and selling of foreign goods in their domestic markets, the free-trade nations are harmed.
And that is where the free-trade agreements, such as NAFTA (North American Free Trade Agreement) and TPP (Trans-Pacific Partnership) come in. These agreements, as well as those negotiated through the World Trade Organization, were structured to reduce trade barriers and make trade fairer.
U.S. companies were often the main targets of the discriminatory policies removed by the trade agreements. Terminating them means deals have to be made with each country or those barriers could be reinstated.
Opening the world’s markets has allowed U.S. companies to lower costs and prices at home while increasing earnings and stock prices. Border taxes, border adjustment taxes, and ripping up trade agreements undo much of those benefits and raise the specter of trade wars.
It is never good to burn the village to save it.