Understanding International Trade and Why Trump's Approach Is Misguided
International trade policies are as controversial among economists as they are among politicians. The reason is that there is much at stake, not only in regards to jobs, but also in the cost of consumer products, intellectual property rights, inflation, and even national security. What makes trade policies so contentious is that any one particular action can cause an economic measurement to rise, while another one may fall.
For example, cheap imports help to bring down inflation, but can cause unemployment in certain areas of the economy. While some manufacturing jobs are lost, retail jobs increase due to higher consumer purchases. Also lower prices benefit the poor and the middle class as they are able to afford products they would normally not be able to buy.
This allows them to spend money on other items, eventually further benefiting the economy. However, this increase in spending on foreign made products also increases our debt to other countries. The above descriptions only represent a minute part of the total complexity of international trade, making this subject a difficult one to come to any sort of general consensus.
U.S. International Trade Policy and Free Trade
Prior to the Trump Administration, the U.S. trade policy was relatively simple. Most politicians and government trade experts espoused a policy of free trade coupled with the aggressive pursuit of free trade agreements as a way to ensure that as many foreign markets as possible remained open to American products.
Behind this policy of free trade and globalization lies the overarching socio-economic and political philosophy we know as Liberalism, which sees free trade as consistent with capitalism, free markets and personal freedoms. This policy of liberalism advocated the idea that American companies had the right to import merchandise and manufacture where ever they saw fit. Even beyond that, those embracing these concepts felt that free trade in a globalized world would be good for all.
Unfortunately, this approach in many ways has become an uphill battle, as many countries openly embrace mercantilism or partly protect their markets through a combination of tariffs and non-tariff barriers. Notable examples of this approach are countries such as Japan, Brazil, China, India and others.
Additionally, free trade agreements pose an additional problem, which becomes apparent when the signatories to these transnational contracts are not co-equals in market magnitude, country development level and/or median earning. Case in point is the NAFTA (or USMCA) agreement which includes Mexico, a country in which salaries are one-fourth of those in the U.S., and the market size is equally as lacking.
The asymmetry in the size and scope of all economic metrics regarding what the U.S. and Mexico could each bring to this endeavor basically created an environment in which it was more advantageous for American companies to transfer manufacturing to Mexico, and reap higher profits in their domestic markets than to pursue a robust export or market development approach. Consequently, the trade imbalance between the two countries has benefited Mexico to what is currently an approximate $78 billion surplus.
The U.S. Trade Deficit
While not all free trade agreements have yielded a negative trade balance to the U.S., many have. In fact, when looking at the totality of all bilateral and multilateral free trade agreement, the U.S. experienced a $180 billion trade deficit in 2018. From a purely quantitative perspective, the free trade agreements that have gone into effect have not yielded the results past U.S. trade representatives have hoped for. Of course, this number pales in comparison to the overall U.S. trade deficit during the same year, which totaled $891.3 billion, an increase of $68.8 billion over the previous year.
To be fair, most economists know that perhaps one of the most important reasons for our current trade deficit has to do with the relative strength of the dollar as it compares to the currency from countries such as Japan, China and Korea. These countries have persistently devalued their currency in order to boost exports. Another reason for the overall strength of the dollar is our budget deficit in comparison to other countries.
As a comparison, we can look at the structural surpluses accumulated by the European Union, especially the Netherlands and Germany. These surpluses allow these countries to maintain balance in their currencies and put a check on overspending in imported products.
In spite of the negative effects a trade deficit could represent to a country, many notable economists feel that trade deficits are not as bad as most people make them out to be. Nobel laureate Milton Friedman once claimed that trade deficits are never harmful in the long run, since currency always come back to the country in some form or another, such as through foreign investment.
Certainly, with the exception of some of the boom and bust periods we have experienced in the last thirty years, our economy has continued to grow even though the combined trade deficit over this period of time adds up to $7.7 trillion.
International Trade and National Security
However, international trade is not just about the economy. Most world leaders understand that international trade is more about national security, international relations and creating alliances than a mere couple of points rise or fall in GDP. In fact many free trade agreements created by the U.S. or other countries have more to do with political and security considerations than the expectation of economic benefits.
Take for instance the free trade agreements formed between the U.S. and Israel, and between the U.S. and Jordan. The former was created by Reagan in 1985 and the latter by George HW Bush in 2001. Both had the express purpose of reaffirming American support of those countries as well as strengthening mutual relationships. Gaining economic benefits from these relationships were a secondary consideration, since as it has turned out in 2018 the U.S. carried a trade deficit with Israel that totaled $21.8 billion, and a deficit with Jordan of $207 million.
Arguably one of the reasons the Obama administration proposed the Trans-Pacific Partnership is for the U.S. to reassert its influence in the Pacific Rim over increasing Chinese influence and pressure. In many cases free trade agreements are primarily used to reward or shore up allies. It can be argued that the agreements with Australia, Chile and Singapore were aimed at increasing existing security ties.
The same goes for other countries. Take for instance Mexico. “Since the early 1990s, Mexico has had a growing commitment to trade liberalization and currently has a trade policy that is among the most open in the world. Mexico has actively pursued free trade agreements with other countries to help promote economic growth, but also to reduce its economic dependence on the United States."
Australia’s free trade agreements have also been reported to fulfill certain political needs. Australia’s most recent trade agreements can be viewed as deepening both political and economic ties. Australia’s motivations for a Japan free trade agreement seemed to be more geo-political and strategic than economic or commercial. The 2015 signing of the Australia-Japan free trade agreement, or JAEPA, forms part of a recent trend to strengthen Australia-Japan relations, particularly around security and defense.
A key example of this was Japan’s role as a strong candidate to build Australia’s new submarine fleet. Although Australia ended up buying the submarines from a French contractor, the original idea of considering Japanese subs offered a number of strategic advantages. As the Australian Institute of International Trade claimed, it represented a ‘deepening of the Australia–Japan defense relationship at a time of shifting major-power relations in the Asia–Pacific region’.
Trade with China
Today we face a deteriorating relationship with China. Over the years, China has protected its markets, kept its currency artificially weak against the dollar, stolen trade secrets, forced American companies to give up trade secrets as a prelude to having access to its markets, as well as behaved in other objectionable ways. However, its antagonistic behavior goes far beyond its predatory business practices.
As a member of the global community, many world leaders view China with great concern. From its building of military bases in the disputed islands of the South China Sea, threats directed at Taiwan, its oppressive Hong Kong policies and the reported encampment of over one million Muslim Uighurs, it has become obvious that business as usual with the Middle Kingdom is no longer an option.
China, Trump, and Tariffs
While the Trump Administration and the Democrats are far apart on most policy positions, there is one issue in which there seems to be agreement. After additional tariffs on Chinese goods were announced by the White House, Senator Chuck Schumer of New York exclaimed; “The president’s actions on China are on the money. China is our real trade enemy, and their theft of intellectual property and their refusal to let our companies compete fairly threatens millions of future American jobs. While we await further details on this trade action, President Trump is right on target."
It seems that more people in Washington are beginning to question not just our economic ties with China, but also starting to realize its potential as a military foe. Just a few years ago, support for engaging with China diplomatically as well as economically was an accepted bi-partisan approach. It seems now that perhaps the West, including the U.S., was somewhat naïve in thinking that by bringing the communist country into the global economic order it would evolve into a market economy. And once Chinese people increased their wealth democracy would shortly follow.
At this point in time, it has become obvious that we can no longer allow a potential economic and military enemy to continue to enrich itself at our expense. China’s behavior in recent years has debunked the “liberal myth”, that stated that a country cannot espouse capitalism and at the same time stay undemocratic. We now know China’s true intentions and must start looking for ways to create other alliances and pick up other trading partners.
Where Donald Trump seems to be misguided is in obsessing over trade deficits thinking that they are the equivalent of being emasculated. His attitude towards trade seems to be similar to the mercantilist countries of the 18th century, who perceived no mutual gain from trade. However, trading with our friends and allies strengthen diplomatic ties and alleviate security concerns.
Tariffs' Effects on Trade Deficit
Another area in which most experts disagree with Trump is in his overreliance on tariffs in order to bring trade deficits under control. In spite of his claims that tariffs would bring additional revenue into the coffers of the U.S., they are in fact a surcharge on the poor and the middle class, who are ultimately the ones who buy the largest portion of consumer goods.
Tariffs are also a crude tool, oftentimes inviting retaliation from friends and foes alike. When it comes to friends, retaliation can come in the form of refusal to reinstate sanction on a country like Iran or to create a coalition force to confront a foreign enemy. From a foe like China, reciprocal tariffs can be put in place, as well as the currency can be devalued, as we have seen them do in the last couple of weeks. Both these actions have a neutralizing effect on any tariffs imposed on them by the U.S.
There is no doubt that we have reached an inflection point in regards to our relationship with China. Hopefully, the U.S. government is judicious in guiding its trade policies and in understanding that we must constructively engage with our friends and allies while looking for ways to conduct business elsewhere besides the Middle Kingdom.
Resources to Explore
- When and Whether National Security Plays a Role in Trade
- Foreign Trade and National Defense
- Free Trade Agreements, Their Impact, Types, and Examples
- What Is International Trade Theory
- Australia to Get Japanese Submarines?
- How France sank Japan's $40 billion Australian submarine dream