Thursday, March 12, 2020

If China Is the Problem, Can’t...


If China Is the Problem, 

Can't We at Least Have Free Trade with Everyone Else?

 

 

 

It remains unclear how much the stock market implosion of recent days will affect the larger economy. As David Stockman has noted often, the Wall Street economy is not synonymous with the Main Street economy, contrary to what the advocates of rampant bank bailouts and financialization would have us believe.

Nevertheless, fear of a general crisis has driven Donald Trump to hint that tax cuts should be on the table.

That's good news, and the first place Trump should start—since he has the authority to unilaterally do so in many cases—is reducing trade barriers.

It is certainly true that Trump's trade war against China has reduced real wages for Americans, raised the cost of doing business for entrepreneurs, and generally hobbled the US economy. Trump's protectionism serves mostly to pander to select interest groups (such as organized labor and steel factory owners) while raising net taxes for everyone else. (See: "Smashing Protectionist 'Theory' (Again)" by Murray Rothbard).

It's Not Just a China Thing

An Rothbard explains, economics-based arguments made by protectionists against free trade fail again and again (see also the many linked resources at the end of this article), but I am aware that there are many non-economics-based arguments against free trade with China. (These geopolitical and sociological arguments appeal to non-monetary benefits of protectionism, and implicitly concede protectionism does not bring net monetary gain.) But even these arguments tend to focus on China as the real threat. After all, few people outside doctrinaire protectionist circles are willing to buy that South Africa, Brazil, or India — let alone Australia, Italy, or Peru — pose threats to the self-determination or physical defense of Americans.

But let's leave the issue of trade with China alone for the moment. Since I'm such a moderate and accommodating fellow toward my critics who advocate for a war of economic nationalism against China, let's turn our attention instead to every country that isn't named China.

The claim that free trade is bad because it fosters a supercharged China obviously doesn't apply to anyone else. Russia's economy is a tiny fraction of the US's. Mexico is no geopolitical threat to the US whatsoever, and indeed Mexico depends on US prosperity for its own prosperity. The US has been at peace with the entire Anglosphere for more than two hundred years, and all other large countries are either US allies or far too small to present any sort of real geopolitical threat.

So, why are there so many US trade barriers constricting trade with the world outside of China?

The answer is simply bad economics and interest group politics. Many industries want to use protectionism as a weapon to protect their industry at the expense of taxpayers, entrepreneurs, and consumers overall.

This applies, of course, to tariffs on tech, sugar and all other agricultural products, minerals and metals, automobiles, and a host of other products.

It's Not Just Tariffs

But trade barriers are also much more than tariffs. It's misleading to look at a tariff schedule since this does not give us a sense of the many barriers to trade that actually exist. Nontariff trade barriers are actually quite common.

Yes, it's true that imposed tariff rates tend to be low, averaging around 2 percent. But it's important to remember that those are "best case scenario" tariffs in the sense that low tariff rates are imposed only on goods that meet a wide array of other nontariff requirements on potential imports.

As noted here at mises.org earlier this month, the United States is actuallya world leader in imposing nontariff trade barriers, such as
  • Subsidizing US industries so as to help them outcompete foreign goods.
  • Requiring government procurement of domestic products only (known as "public procurement" policies).
  • Placing quotas on imports.
  • "Rules of origin" preventing "transshipment" of goods from third parties through countries with "free trade" access.
  • "Sanitary and phytosanitary measures," which are controls on the importation of foods affected by substances such as beef hormones and "genetically modified organisms."
  • Regulatory requirements on the production of foreign goods, including mandates on foreign wages, labor unions, and environmental regulations.
  • Imposing packaging, labeling, and product standards.

Since the 1950s, these barriers have been increasingly used by the US government and other governments to reduce imports, and "[n]ontariff barriers [have] spread to substitute for the tariffs previously bargained away. Pressure began to surface for retaliation to punish trade partners for unfair trade barriers and unreciprocated tariff cuts. All of this was a prelude to the changes that would overtake U.S. trade policy in [the 1960s]."1

These barriers are applied generally, and not at all just specifically to China.

Thus, when protectionists insist trade barriers must be kept in place in order to combat "a rising China" they are mostly talking about barriers that apply to the world outside of China as well. Basically, these enemies of innovation, entrepreneurship, and productive Americans are using China to justify an enormous government bureaucracy designed to limit trade in order to benefit a small number of special interests such as labor unions and environmentalists.

Step One: Open Up Trade with Every Country Not Called "China"

Although it's true that an ideal policy would let Americans chose for themselves whether or not they want goods from China, a perfectly sane first step would be to drastically reduce or eliminate the trade barriers imposed against goods coming in from the rest of the world. Protectionists may claim that imported lumber from Canada is a grave threat to American security and propserity, but these claims are frankly and utterly incoherent. Imported goods are essential to American productivity and prosperity. For exmple, Canadian lumber is a boon to US homebuilders and millions of Americans who wants to buy a home or rent an apartment. Imported vehicles from Mexico may make the difference between a profitable business and a failed business for American entrepreneurs who need delivery vehicles.  And of course, on the household level, imported goods may mean the difference between a household that lives paycheck to paycheck, and one that manages to sock away a little bit of savings each month.

Trade barriers, on the other hand, make both business and workers wasteful and incapable of dealing with innovations and productivity gains in the rest of the world. This is why the protected dinosaur industries of the Rust Belt couldn't even keep up with domestic US industries in other regions of the country. 

Protectionists Resort to Violence to Enforce Their Whims

Protectionists, of course, will continue to attempt to trick people with their sleight of hand which conflates trade in general with the public's fear of Chinese geopolitical growth. It's an easy political ploy that often works. And when people aren't convinced? Then the protectionists lobby for laws that ensure people who engage in non-government-approved trade will be jailed.  After all, you can't have protectionism without jailers to enforce it.

However, a sound understanding of the economics of trade—and an understanding of how US trade policy also limits trade with everyone who isn't China—should lead us to conclude that most trade barriers have little to do with what the anti-China activists are going on about.

Thus, Trump could embrace free trade without even backtracking on his anti-China rhetoric. He'd just have to admit that freedom is a good thing and that American business owners and consumers ought to be free to chose to buy goods from Mexico or South Korea or the United Kingdom if they like. Unfortunately, freedom isn't a big priority in Washington.


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