National Sovereignty and Trade Policy: New Directions

 

Is Free Trade Dead? National Sovereignty and Trump Economics

How important is a country’s trade deficit? Are countries just large markets made up of consumers, or are do they have interests' outside of economics?

I had a teacher who liked to talk about how deficits in trade were meaningless. “Does Walmart buy goods from you? No? so you have a trade deficit with Walmart.”

Big Deals

This was how trade deficits were explained to me in my economics class. They’d started calling it Global Economics by the time I was in grad school. “Macro Economics” had gone the way of the gold standard. His point was that some countries buy and some sell, we all specialize in a mature market based economy. Trade deficits aren't a big deal.

My question to him should have been “Aren’t a big deal to whom?” If you sell whisky or cars or beef, it’s a very big deal when you can’t sell into a foreign market. Especially if other industries, like retail, are able to buy shipping container loads of electronics and shoes.

With a country like China we buy more than we sell. Partly because they keep their currency artificially low and partly because our goods are significantly more expensive.

My professor was focused on America’s balance sheet. Since China isn’t the only country we trade with, we make it up by selling to others. Most of our trade is with Canada and Mexico. Both are significantly larger trading partners because of their proximity. Let’s not forget the rest of South America, Europe and Asia. But we do have a massive trade imbalance. Oil is the culprit. We buy a lot instead of producing it here, a mistake for sure. But that’s an article for another day.

Ricardo’s Influence on Trade

The existing framework for international trade is based on the David Ricardo model. If your knowledge of trade theory is a little rusty, here is a quick summary. Countries should trade what they’re good at in exchange for what they aren’t good at. This is all theoretical so bear with me.

Countries with an abundance of grapes will become adept at making wine. Countries with tech industries will become adept at making microchips and smart phones. These countries will trade with each other and focus on what they do best. Both will have a comparative advantage; wine countries shouldn’t try to make microchips and tech countries shouldn’t grow grapes.

 It’s a dramatic oversimplification but it gives us a starting point. The model falls apart when you introduce quotas, tariffs or subsidies. The free traders have tried to get everyone on level field of play by introducing global rules in their game. But it’s like agreeing to play football with multiple sets of rules. Countries can’t agree to exactly the same game because their internal politics are vastly different. And they all have special industries to protect. For some it’s agriculture and for others it’s manufacturing. Add to that, the unions with their own demands.

Tariffs Make a Comeback

But the basic structure of free trade involves removing barriers like tariffs to increase the overall amount of trade. But what if countries ignore the rules or subvert the process?

There isn’t a great mechanism for settling disputes but there is one. The WTO (World Trade Organization) has courts to hear cases between nations. But it takes years and is often unsatisfactory for both countries.

 I don’t hear politicians talking optimistically about free trade anymore. It’s no secret that manufacturing in particular, has taken a beating. Partly this is the fault of the unions. They negotiated sweet deals in past with the auto makers. You can’t blame them for getting the best deal possible, but the legacy costs hurt the auto manufacturers. They also started moving their manufacturing overseas to save on labor. Also, the rest of the world started selling great cars in the U.S. putting further pressure on our industries.

 A lot of the complaints that President Trump has about trade is the lack of transparency in foreign markets, particular China. His thinking goes like this, ‘we open our markets, why can’t you?’ Trump and Peter Navarro (trade advisor) made sure to put a hefty tariff on China for their unfair trade practices like technology transfers (Intellectual Property theft) from US companies. Those tariffs are still in place.

National Sovereignty Economics

It's hard to make an economic case for tariffs. It’s just a tax on foreign goods. The consumer pays it anyway. But Trump isn’t just punishing foreigners, he’s trying to keep industries at home and maybe bring a few back that have left. He’s concerned more for American jobs than cheap consumer goods. The downside is that countries will retaliate with tariffs of their own on our products and services.

But is it really as damaging as we’re told? Liberal economists make it seem like the tit for tat on tariffs will necessarily lead to war. It feels to me like there is a similar historical parallel with the Soviet Union and President Reagan. He bankrupted the Soviets by spending heavily on defense and forcing them to keep pace. Moscow couldn’t afford it. It didn't lead to war.

 What if we invest in our own industries, produce our own oil, grow our own crops and promote American companies abroad?

 China won’t easily find another consumer driven economy to replace what they’ve lost with the Americans. They can’t afford to keep up.

There are probably a hundred things wrong with that example, but Trump thinks in terms of national sovereignty first and economics second. He believes that a strong America is the best thing for the world. For all the criticism he gets about being a bully on the international stage, he does want fair trade. That’s how I read it at least. I’d rather have someone who puts America first. A lot of our leaders are completely owned by international interests. Their trade policies are not significantly different. Ross Perot, who ran for president in 1992, was a critic of the NAFTA (North American Free Trade Agreement). But he finished a distant 3^rd. The free trade skeptics haven’t had a standard bearer until Trump. Whether you like his tariffs or hate them, Americans need to start having the debate again.

Conclusion

Walmart has certainly benefited from lower trade barriers in the last 30 years. That’s a good thing. Most of us have a trade deficit with Walmart. Individuals can run those deficits forever, but countries need to balance their accounts at some point. Countries are more than just markets, they’re sovereign nations with cultures and religions and notions of progress. We have (or had) a thriving middle class and an upwardly mobile citizenry.

 Does America have the capacity to defend itself if attacked?

That takes a lot of industry to convert to tanks and ships and weapons. This isn’t a big deal until you’re suddenly forced into a war footing.

China has been America’s Walmart for too long. What we don’t get from China we get from other countries. That’s called leverage. They have leverage on us. If you can’t make enough to supply the domestic market, you’re in trouble. Trade can be a liberalizing force between nations, but when it’s uneven it can be dangerous. It’s time to put American industries first again.