Donald Trump is on a self-proclaimed quest to “make America great again”. He has pledged to tear up trade agreements that do not benefit the USA. Thus far he has, amongst other things, withdrawn the US from the Trans-Pacific Trade Partnership, threatened to withdraw from NAFTA (North American Free Trade Agreement) and imposed billions of dollars of trade tariffs on China, who have of course retaliated. Let’s take a look at the economics behind trade and protectionism.
Economists usually view free trade as beneficial for all parties. The country who is most efficient at producing a good makes it cheaply and gains revenue from exporting and the country who is less efficient obtains the good more cheaply than if they had made it themselves and can focus on producing goods and services that they are more efficient at. Everyone benefits. For a more technical explanation of this you may wish to read up on the theory of absolute advantage (Adam Smith, 1776) and the theory of comparative advantage (David Ricardo, 1817).
Most economists contend that to impose tariffs (taxes on imports) would diminish these benefits or eliminate them. However, there are some situations in which many would consider protectionist (anti-trade) policies:
1) Infant industries - temporarily protecting new industries until they are developed enough to compete on their own.
2) Sunset industries – declining industries that we may wish to let go more slowly so that workers have time to retrain and the economy can adjust.
3) Strategic industries – sectors that are so important to the security of an economy that we might be prepared to produce less efficiently in order to keep control of them.
4) Anti-dumping – protecting firms against foreign goods that are being sold below cost price either because too many have been produced or in a deliberate effort to damage competitors.
It is these last two that Trump is claiming as justification. The US has regularly accused China of dumping surplus goods or of giving state subsidies to firms, which, they say, amounts to the same thing. Trump also claims that steel, an industry that has declined significantly in the US over recent years, is a strategic industry as it is needed for national defence.
It is not the first time that the US has looked to protectionist policies. The first US Treasury Secretary, Alexander Hamilton (1755-1804), oversaw a raft of protectionist measures that many have credited as highly successful in building the fledgling United States.
Critics of the Trump administration would suggest a degree of hypocrisy in the anti-dumping argument and point to the $25bn a year that the US pays out in farm subsidies and the generous defence contracts given to some firms that allow them to subsidise other products. Some have also suggested that the steel the US has traditionally produced cannot be considered a strategic industry,1 as they have traditionally focused on lower grades of steel, not the very high grade steel required by defence industries, which they have always imported.
Trump’s trade theory then; is he getting tough to defend American interests or is this a naked attempt to appeal to core voters who have lost manufacturing jobs in the Rust-Belt? Does it make good economic sense or is Trump destined to increase costs for US businesses and condemn the economy to focus on inefficiently producing goods and services that it is ill-equipped to produce instead of importing them?
Further Reading:
BBC Radio 4’s “The Long View” considers the early history of US protectionism and whether Trump’s policies are likely to have the same beneficial effects. You can listen to it here: http://www.bbc.co.uk/programmes/b09xjtd8
EconplusDal has some excellent YouTube videos on the benefits from trade and the theories of comparative and absolute advantage. You can find these here: https://www.youtube.com/watch?v=aPJTi3gGOHs
You can find Adam Smith’s original publication of the theory of absolute advantage here: https://www.ibiblio.org/ml/libri/s/SmithA_WealthNations_p.pdf
You can find David Ricardo’s original work on comparative advantage here: http://www.econlib.org/library/Ricardo/ricP.html
BBC News have some excellent articles on Trump’s approach to trade, including this one: http://www.bbc.co.uk/news/business-43635623
