Earlier this week, Neil Cavuto asked me about the politics of trade and I warned that Trump’s protectionism may backfire on Republicans because many workers and businesses are suffering the consequences.
Needless to say, I’m not a political expert, and I think even the folks who do that for a living have a hard time disentangling the various factors that motivate voters, so we may not even know for sure after the mid-term elections.
But I do have some actual knowledge of economics, so this is a good opportunity to share some excerpts from my recent article in the Federalist. I start with the basic observation that interventionism is misguided.
…the economy grows faster when markets rather than politicians determine where labor and capital go. …Simply stated, government intervention is a recipe for cronyism, corruption, and inefficiency. It’s no coincidence that market-oriented jurisdictions such as Hong Kong are so much more prosperous than state-driven nations such as Greece. This appreciation of markets explains why conservatives should be in the forefront of the battle to defend free trade.
And it doesn’t matter whether politicians are interfering with transactions between neighbors or interfering with transactions between people who live in different countries.
We understand it would be wrong to let politicians interfere with our freedom to trade with our local grocery store. We also understand it would be a mistake to allow politicians to hinder our liberty to trade with people in neighboring states. The same argument applies when looking at our trade with people in other nations.
I then list seven reasons why free trade is desirable, starting with the fact that exchange, by definition, is mutually beneficial.
1. Voluntary Trade Is a De Facto Good – The capitalist system, based on competition and trade, is defined by voluntary exchange. There is no need for “balance” between participants. We all have trade deficits with our local gas stations. …they never buy from us. Is that bad? Of course not.
And it doesn’t matter whether people in one country are buying more than people in another country.
2. A ‘Trade Deficit’ Means a ‘Capital Surplus’ – Nations don’t trade, people do. So when people in one nation buy goods from people in another nation, the money doesn’t disappear. …Foreigners have placed trillions of dollars in America’s financial markets… This “capital surplus” boosts prosperity and should be celebrated, not bemoaned.
I also point out that trade barriers enable cronyism and corruption.
3. Protectionism Corrupts Markets – Many people unfortunately equate capitalism with big business. This is very unfortunate because large companies…manipulate the political process in order to obtain unearned profits. Trade barriers…interfere with genuine free markets…they contribute to the perception that capitalism is merely a system for the benefit of the rich and powerful.
I then share Bastiat’s wisdom about the “seen” and the “unseen.”
4. Trade Barriers Reduce Jobs and Growth – It’s easy to identify jobs that have been “saved” because of protectionism…it’s not easy to calculate the greater number of jobs that are lost because of higher prices, lost purchasing power, enforced inefficiency, and lost competitiveness.
I admit that trade of any kind can be harsh, but that’s what drives prosperity.
5. Creative Destruction Is Painful But Beneficial – Trade causes pain, but not because goods cross borders. Far more jobs are lost because of domestic trade than because of international trade. …These changes, including ones driven by cross-border trade, are painful for some people, but we all wind up much richer if markets are allowed to function.
I close with two lessons in economic history, starting with an explanation of what drove growth in the 19th century.
6. Tariffs Didn’t Create Growth in the 1800s – …the growth of the 1800s wasn’t because of trade barriers. This was an era before the welfare state. Government was very small and there were no income taxes. There was no regulatory state. …Those were the policies that helped make America an economic powerhouse.
And concluding with an observation about the success of nations with laissez-faire trade policy.
7. Protectionist Nations Lag Free-Trade Jurisdictions – …sometimes it’s easier for people to learn from real-world examples. Hong Kong and Singapore are the two jurisdictions with the world’s lowest trade barriers. Is it any coincidence that they have become rich and prosperous? …countries like New Zealand enjoyed a renaissance after dismantling trade barriers.
The bottom line is that Trump’s protectionism is bad policy. And risky policy.
I politely ask those who disagree to answer these eight questions.
