“Trade protection accumulates upon a single point the good which it effects, while the evil inflicted is infused throughout the mass. The one strikes the eye at a first glance, while the other becomes perceptible only to close investigation.”
― Frédéric Bastiat
Following the Brexit vote, I have decided to pen a post on the real dangers of a Trump Presidency not thoroughly discussed in non-economist circles.
Evidently, it seems Trump is a deeply flawed candidate with very few constructive policies socially and economically. Indeed, nearly all his proposed policies are very destructive.
This discussion will cover what is the most dangerous part of Trump’s policies, viz.: trade protectionism.
Trump’s protectionist trade policies as articulated on his website (link) make some very crude and erroneous assumptions about trade tariffs while being rubber-stamped by billionaire distressed investor, Wilbur Ross, and Peter Navarro, a Harvard-trained business professor at UC Irvine. (A documentary on China is below.) The assumptions on trade gains from tariffs have unanimously received no approval from economist of all stripes – whether right-leaning or left-leaning economists. Scott Sumner, a market monetarist, gives a very thorough dress down of the assumptions in the economic plan in this article. Tyler Cowen, a professor of economics at George Mason, blogging at Marginal Revolution, profiles Peter Navarro in a Bloomberg View piece. Paul Krugman, a trade expert and Nobel economist, also criticised both the GOP and Trump here and here.
A recent report from the Peterson Institute of International Economics (PIIE), an economic think-tank, looks at the implications of both Clinton’s and Trump’s trade policies and the effect on the US economy under several scenarios.
The PIIE report largely assumes that trading partners refrain from an all-out trade war with the US. Also, the countries that could punitive tariffs on their US exports could be potentially widened to other countries like Japan, Vietnam which could be welfare-destroying. If an all-out trade war were adopted, there could be debilitating effects on trade volumes, productivity, wages, employment levels (especially youth employment). Furthermore, such trade wars could poison international relations and lead to extremely nationalist politics with very deleterious effect on rearmament and military grandstanding.
Domestically, a slowing economy ensuing from wrong-headed trade policies could further strain race relations leading to nasty identity politics and more illiberal government policies. Although some US domestic producers may thrive under the veil of protection, the American consumer, accounting for 70% of the economy, will probably face higher prices for goods and services; hence, lower real (inflation-adjusted) income. The welfare effects would, in aggregate, be negative.
Since trade is a two-way street, restricting foreign imports necessarily means the restriction of US exports as foreigners do not earn the dollars from exports needed to buy US goods and services. Therefore, major US industries such as aerospace, higher education, business services, banking services, agriculture, tourism etc, may suffer as a richer world may be unable to buy US services, a sector that the US has an enormous competitive advantage in world markets. The resultant effect could be a drop in employment in those sectors and a drop in wages of those highly-skilled workers. Second order effects of the aforementioned result of trade protectionism could be a loss of jobs in non-export industries such as plumbing, restaurants etc. Other second order effects – international in this case – would be the impact on the price of commodities, which are the main exports of most developing countries with the debilitating impacts on the politics and economies of those countries. Several studies show a positive relationship between trade and productivity; hence, productivity may be adversely affected. Furthermore, there may potentially problems of misallocation of resources within the American economy compounding an already bad situation.
Politically, this could lead to more lobbying in Congress and perhaps, covert corruption by the winners to keep the status quo. Congress, already despised by the electorate, could become more beholden to vested interests with increased rent-seeking.
Finally, an unseen effect could be the potential for limited immigration of the world’s smartest minds to American firms and universities thereby putting American firms at a disadvantage to foreign competitors – and limiting innovation further depressing productivity years out.
In conclusion, while the supposed benefit of “winning” on trade and protecting jobs may seem compelling, upon closer inspection, it is a terrible idea for the US and the world.
Photo credit: Flickr/ Ivan Febri, used under a creative commons licence.