“Take heed that we buy no more from strangers than we sell them, for so we impoverish ourselves and enrich them.” Although this sounds vaguely like Donald Trump talking about his trade policy, it was actually written by Sir Thomas Smith in 16th century England. Smith advocated a trade policy that enriched the merchant class and hurt the common people of England. Trump’s similar trade policy would have the same consequences for the American consumer.
A mercantilist society is a rent-seeking society.
On his website, Trump lambasts decades of trade policies that he says have caused companies to move jobs and resources overseas to the detriment of the American people. According to Trump, free trade is beneficial only as long as it is “fair trade.” He has vowed to scrap the Trans Pacific Partnership (TPP) and renegotiate NAFTA on his first day in office. In a campaign speech in Pennsylvania, Trump rejected the policies of globalization that the Obama administration pursued. He claimed that these policies have wiped out the middle class. Instead, he promoted a policy of “Americanism” that relied on boosting manufacturing and providing it with a “shield.” He pointed out that early presidents recognized the importance of strong manufacturing and praised their insistence on “protective” policies. Trump promised to “put America first again.”
Old World Economics
These sentiments are anything but new. They have already been tried by the governments of England and France. This philosophy of trade, called mercantilism, dominated these countries between the 16th and 18th Centuries. Mercantilism aims to make a country rich by selling more goods to other countries than it buys from them. Like Trump, mercantilist nations emphasize the manufacturing of finished goods that can be exported around the world. Also, like Trump, these countries try to protect their manufacturers by enacting high tariffs, forcing people to use domestic resources rather than getting them from other countries.
Mercantilism was moderately successful for the French and English royalty and merchant classes, but a complete disaster for the millions of common men and women in these countries. The vast majority lived in abject poverty compared to today’s standards. This is because mercantilism seeks to protect industry at the expense of the consumer. Adam Smith viewed the protectionist system as a conspiracy between manufacturers and merchants against consumers.
Free trade encourages countries to specialize in making only those goods which they can produce most efficiently.
Modern economists Robert Ekelund and Robert Tollison called mercantilist society a “rent-seeking society.” In a world where Trump is offering deals to companies like Carrier and proposing tariffs to protect industry leaders, similar rent-seeking behavior will become more common. In that scenario companies like Apple would stop producing more innovative iPhones for their customers. Instead, they would pander to politicians and try to win additional “free” money. Products would not get better and more affordable, thereby hurting the middle class family trying to stretch their dollar.
Tariffs, like those Trump is proposing, make everyday consumer products unnecessarily more expensive. Economist Matt Ridley reported that trade barriers between the United Kingdom and the United States make every American pair of jeans 12 percent more expensive for British fashion lovers. And beer lovers in the United States like me must pay 157 percent more for every pint of British beer. These laws make it harder for everyday Americans to get the products that they want.
Instead of offering protections to large corporations, government should work to make trade as free as possible. Adam Smith and David Ricardo showed how free trade helps the average consumer. It encourages countries to specialize in making only those goods which they can produce most efficiently at the lowest cost, much like people specialize in being a doctor, a plumber, or a taxi driver. Allowing countries to specialize in a few goods and import the other things they need offers consumers more numerous, less expensive choices.
While Trump says his protectionist policies will help the average family and make America great again, these policies benefit large corporations the most. They encourage companies to seek political favors instead of making better products driven by consumer demand. They also limit choices and impose higher prices on families whose budgets are already tight. These policies were tried centuries ago and found lacking. Trump should focus on what works: more freedom.