Two Simple Reasons Not to Start a Global Trade War
Here are two reasons not to blow up one third of the U.S. economy.
President Trump has officially withdrawn the United States from the Trans Pacific Partnership (TPP), a deal that would have eliminated 18,000 foreign tariffs on U.S. exports. It was a foregone conclusion, unfortunately. For more than a year before the election, all three leading candidates (Bernie Sanders, Hillary Clinton, and Trump) had pledged to stop President Obama’s signature trade deal.
There were real problems with the TPP — its intellectual property provisions were excessive, for instance — but in the end, they didn’t matter: the deal died because politicians like to rabble rouse about swarthy foreigners “stealing our jobs.” If the deal had been nothing but IP protectionism, it would have sailed through unopposed; if it hadn’t touched copyright or patents, it still would have failed.
Nonetheless, killing TPP outright was a mistake; there was broad consensus among economists left, right, and libertarian that the deal was a net positive for the US economy. But the end of TPP is only the beginning for Trump’s war on free trade.
Trade policy under the Trump administration is likely to make the United States poorer and less competitive in a global economy. He has pledged to withdraw from NAFTA, impose tariffs by executive order, retaliate against U.S. companies with factories overseas, and even threatened to remove the United States from the 164-member World Trade Organization — a move that would destroy the post-World War II consensus for freer trade and cut the throat of the $2 trillion U.S. export sector.
It can be difficult to explain why trade is a good thing for Americans. There are many reasons why tariffs are bad and free trade is good, but many of them are complicated and hard to grasp intuitively.
So I’ll briefly set aside four arguments for free trade but conclude with two simple reasons why you should still not blow up the global economy.
(1) Low Prices Are Good for Americans
Let’s say you see no value at all in American consumers being able to buy cheap products from overseas — it’d be ironic, as you are almost certainly reading this on a technological marvel of astonishing quality, which you can only afford because of international trade.
But an iPhone or laptop or car doesn’t feel like much compared to someone’s job, so let’s say that the benefits to (especially) low-income American consumers count for nothing.
(2) Cheap Imports Increase Demand for American Stuff
Let’s also assume you don’t see how American consumers spending less on imported goods allows them to spend more on other things, supporting other jobs and production in other sectors of the U.S. economy.
Fine, that’s abstract and hard to visualize. I won’t beat you over the head with econometrics.
(3) American Jobs Depend on Imports
Let’s further assume you don’t see how cheap imports support a large number of American jobs in retail, services, and freight. Jobs at places like Target and Verizon and Amazon depend on consumers being able to afford their products; making them vastly more expensive will hurt those workers and those companies, and the truckers and stevedores who ship stuff for them, too.
(4) U.S. Companies Have to Be Profitable
Let’s also say that you don’t see how American companies being able to source parts in Japan, assemble products in China, and sell them at a profit in America (and elsewhere) directly supports their workers in the United States.
Companies like Microsoft and Apple, and the hundreds of thousand of jobs they support here, exist because they can be competitive and profitable in a global economy, thanks to supply chains that touch dozens of different countries. Investors put money into companies because they expect profit; without profit, there is no investment; without investment, there are no products, no jobs, and no innovation.
But let’s also ignore that, because [pick a reason]. Here are two inescapable reasons why you still should not start a global trade war: imports and exports. Together, they are a third of the U.S. economy.
First, forget your TV and iPhone: more than half of American imports from abroad are inputs — machinery, equipment, raw materials, etc. — for American companies in America. These are imports, equivalent to about 8 percent of GDP, that directly support U.S. production.
When you consider that the other half of imports — consumer products, cars, food, etc. — are almost all intermediate goods for retailers, car dealerships, food producers, and grocery stores in America, you can see how important foreign goods are for American jobs.
Second, exports are about 13 percent of U.S. GDP — over $2 trillion. This is the soft underbelly of the American economy. If you think foreign countries are “killing us on trade” now, wait till you see what a global trade war does to America’s export sector.
Finally, as the Peterson Institute shows, importers are exporters. American firms are deeply integrated into the global economy. The top one percent of U.S. exporters (about 2,000 companies) employ 14 million people — as many as the entire U.S. manufacturing sector — and 90 percent of them are also importers. Together, our top exporters account for 66 percent of all U.S. imported goods.
The inverse is also true: 96 percent of top U.S. importers are exporters. These much-maligned companies are responsible for 60 percent of U.S. exported goods.
Almost every industry you’d “protect” by throwing up a huge tariff wall around America would also be damaged by some other part of it. Trump’s “Fortress America” trade policy looks more like an economic prison than a safe space for American companies, even before you consider the costs of foreign tariff retaliation on American exporters.
The costs of protectionism are severe, and the benefits to producers are vastly outweighed by the losses to all Americans. The jobs saved are short-lived and confined to swamp-dwelling special interest groups. The case of Nabisco is instructive. Last year, Nabisco announced that it would terminate 600 jobs in the United States and move its cookie factory from Illinois to Mexico. Donald Trump was outraged and vowed to boycott Oreos, but he had only American protectionism to blame. As James Bovard explained in USA Today,
Federal policy has long kept the U.S. price of sugar at double or triple that found in the world market. … Federal sugar policy costs consumers $3 billion a year, in a failed effort to save the jobs of sugar growers, even as the number of such farmers has declined by almost 50% in recent decades.
That’s bad enough, but sugar policy is one of Uncle Sam’s most successful job destroyers. The Commerce Department estimated a decade ago that “for each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.”
“Protecting” sugar jobs means huge costs to consumers and, consequently, huge costs to industries that use sugar. That’s why Nabisco and other sugar-consuming companies want to flee to Mexico, where sugar is available at normal prices (it’s also why “Mexican Coke” tastes better — it uses real sugar instead of the inferior but cheaper corn syrup).
If Trump really wants to make America great again, he should focus on making the United States a great place to do business, sell products, and create jobs. Cutting off U.S. companies and consumers from the rest of the world will ultimately make America a poorer, lousier place for everyone.