Trade Wars

Immigration and free trade.  Two shibboleths that have fueled our nation’s economy for decades.  The vaunted economics department at the University of Chicago drilled those concepts into me.  A growing population and free trade are essential to a prosperous nation.   Most of us that have even a cursory grounding in economics have accepted, adhered and defended those ideas more readily than we have the 10 Commandments.   Just a couple of weeks ago I had the pleasure of having lunch with Deirdre McCloskey, libertarian and U of C trained economist that specializes in economic history (I highly recommend her recent book, Bourgeois Equality- a readable tome on economic history).  Commenting on Trump’s threatened imposition of tariffs, she simply stated, “It’s just stupid.”  In general, I have been in total agreement that free trade is good--as most economically literate people have.  

Free trade has undoubtedly enriched us.  The trouble with free trade, however, is twofold.  First, it does create some net losers, as companies turn to the cheapest sources.  According to McCloskey, 14% of jobs disappear per year permanently.  Second, not everyone plays by the same rules.  There is great temptation to “cheating” by subsidizing your own industries and erecting barriers to entry for the other guy.  But as a general matter, immigration (which I will deal with later) and free trade have been pillars of our prosperity.

But now comes Donald Trump to tap on the breaks and in his inimical style has caused even devotees like myself to put asterisks next to those concepts, and made me rethink them as absolutes.

With respect to free trade, I still remain a free trader and I have a natural aversion to the tariffs that Trump has proposed.   But I am no longer quite as doctrinaire.  “Free trade” is not an altogether straightforward thing.  Barriers to trade can be erected through various mechanisms:  tariffs, quotas,  product requirements, and subsidies.   All effect the way a market operates.  Our European allies have used all of them, which is part of the reason Trump has targeted them.   And we don’t always have unclean hands either.   For instance, we provide plenty of subsidies to our farmers.   The EU is notorious for doing protectionism through product requirements--- specifying, say, the exact required length and dimension of an imported banana.  Canada has a number of tariffs on products as well, and while tariffs might be a blunt instrument to get barriers in all forms lowered, Trump is correct to call out the EU and Canada on them.

China, however, is another matter.  Free trade is uncoerced, voluntary exchanges for value.  The most basic trade is your trip to the grocery store.  You give the store money and in exchange you get your groceries.  The exchange relieves you of the chore of picking your own beans, slaughtering your own cow, or milling your own flour.  And the store gets money.  It’s a great exchange.

But assume that every 4^th trip or so, the store owner sent his employees out to the parking lot and stole the tires from your car.  You probably wouldn’t want to shop there anymore.  But this is what China has been doing.  And as intellectual property is one of our main competitive products, protecting our rights is paramount.  If China interdicted some of our ships and forcibly took the goods, it would be a casus belli.   It would make them no different than Somali pirates.   Yet the value that the Chinese have stolen far exceeds what the Somali pirates have taken.  Outright theft, along with coercive measures like conditioning a U.S. company’s entrance into the Chinese market on transferring its intellectual property to a Chinese owned entity.

The Chinese have hacked our military repeatedly.  Most recently, it was reported that the Chinese hacked a U.S. military contractor and stole sensitive missile and submarine data.  Their fighter looks identical to the SU-27.   They have infiltrated the New York Times and most egregiously, stole personnel files from the OPM.  Many defense experts believe that the core technological leaps of the Chinese military over the past decade or so have been pilfered from the U.S.

Good trading partners do not steal each others’ stuff.

Most credible economists assert that Trump’s focus on the trade deficit is wrongheaded.  The trade deficit itself is a fairly meaningless number.  I agree.  I also agree that protectionism is a bad policy and that on balance more jobs will be lost than gained, especially if it devolves into a trade war.

But viewed as a tactic, threatening tariffs is a risky but not altogether irrational move.   This is especially the case with respect to China, but also may get some movement out of other global players.   I do not regard poking China in the eye with any regret.   China has manipulated its currency, subsidized its industry and effectively blocked many U.S. companies from its markets.   Its financial system permits companies laden with debt to operate far longer than U.S. banks would.  The West operated under the assumption that by letting China into the WTO, China would become a responsible trading partner.  Even the great Nobel Laureate Eugene Fama asserted as recently as a couple of years ago that a richer middle class in China would begin to assert itself and demand more freedom.   But the opposite has happened.   China has become more authoritarian, more aggressive and more militaristic.  At home, it has become a surveillance superstate.  Outliers like John Mersheimer were warning that a rich China is not good for the world.

Trump tweeted out that he would like to see a removal of ALL trade barriers.   Perhaps whacking China with tariffs is the only way to get its attention.  We’ve had a couple of decades in which nothing else has really worked.