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Thursday, June 7, 2018

No One Comes Out the Victor in a Trade War

The wisest course of action in a “trade war” is unilateral disarmament.

The President is at it again, having made good on his promises to punish foreigners in the United States he is working hard to punish foreigners outside the United States as well as the Americans who trade with them. Trump has tweeted that it is “easy” to win a trade war. I respectfully disagree.

Four Points to Prove the President Wrong

First, “trade war” is an oxymoron. People don’t trade unless they expect to be better off, and the way to persuade someone to trade with you is to offer them something in return that they prefer to what they are giving up. Suppose T’Challa has apples and wants oranges. Sufi has oranges and wants apples. They trade at a price they both find agreeable. Importantly, they don’t do so unless they both expect to be made better off. We make them worse off if we stand between them and say “thou shalt not.”

Second, rhetoric about the “trade deficit” is misleading. “Trade deficit” sounds bad, but a trade deficit makes up a large chunk of the US current account (payments flowing out) and is offset by the US capital account (payments flowing in). A politician saying “we’re running record trade deficits” and a politician saying “we’re running record capital surpluses” are saying the same thing. I’m not sure why they don’t emphasize capital surpluses more, but I suspect it’s because people view foreign investment in the US as a very bad thing because it means they are buying our assets. It’s a view of international trade as imperialism that simply isn’t correct.

Every dollar of higher wages, higher prices, and higher profits for the steel industry comes out of the pockets of steel consumers.

Third, there is a larger issue at play here that concerns the kinds of institutions—that is to say, rules—we have in the United States. The incentives for firms to seek special privileges from the government can be overwhelming. After all, a dollar in increased profit that comes from innovation is the same, financially, as a dollar in increased profit that comes from currying political privileges that allow a company to raise prices above what they would be in a competitive market.

Fourth, appearances are deceiving. A lot of people will see an increase in US steel production and conclude, therefore, that the tariff was a very good thing. They will be wrong for three reasons. First, rising steel prices make it more costly to produce things like cars and buildings and almost everything that uses steel. We’re poorer because we have less steel, fewer cars, fewer hammers, fewer shovels, and fewer buildings. Second, we’re wasting resources producing steel in the United States. The workers producing the steel could be producing something else. The capital going into the steel factory could be used to produce something else. We would get more of that “something else,” but we have the resources tied up in inefficient steel production. The next time you pass a closing business or shuttering factory or decaying building, ask whether it would have happened had steel been cheaper and had workers been available to work in that factory, run that business, or occupy that building had they not been absorbed by steel producers. Third, the “prosperity” we create for steel producers is false prosperity. Every dollar of higher wages, higher prices, and higher profits for the steel industry comes out of the pockets of steel consumers. They aren’t richer because they have produced new output, on net. They’re richer because they’ve picked consumers’ pockets.

One of the problems with economics is that we can’t predict exactly what people will do if they can’t make steel. “I don’t know” is the honest answer, but we can get a few ideas by thinking introspectively. Suppose we got rid of all trade restrictions on steel, sugar, toys, you name it and everyone in the country were suddenly $100 richer on average. What would you do with an extra $100? Would you get that oil change you’ve been putting off? Save more for college? Paint the bathroom? Go out for a nice meal?

Think about the opportunities this would create. Those are some of your answers to “what will people do?” And I think they suggest that the wisest course of action in a “trade war” is unilateral disarmament.

Reprinted from Forbes.

  • Art Carden is a Professor of Economics, author, and co-editor of the Southern Economic Journal.