One of the first things I learned in undergrad economics was the idea that free trade is one of the only things that most economists agree about. The idea is simple and was probably said best by Joan Robinson:
“If your trading partner dumps rocks into their harbor, you do not make yourself better off by dumping rocks into your own harbor.”
Donald Trump’s “America first” thinking on this idea is an attractive, but basic fallacy of composition – if you impose restrictions on your trading neighbors then they will impose trading restrictions on you. In the end, you will both be worse off since you now both have a harbor that is filled with rocks that no one can navigate into or out of. So why are trading restrictions like tariffs so intuitively attractive to people like Trump and his supporters? Let’s dive in a little deeper.
Change is Hard
The global economy is changing faster than it ever has. Globalization via international trade is one of the biggest changes as companies are able to build cheaper products abroad and sell them back home. This is not a bad thing. After all, when Apple builds a cheaper iPhone in China we all get to consume less expensive phones which leaves us with that much more money to spend elsewhere.
This sort of change is highly disruptive to the domestic economy. As companies stop building the same stuff in the USA all that saved income from cheaper products flows to different industries. In the case of the USA, that transition has been mostly from manufacturing to services industries. In the aggregate, we are not necessarily worse off, but we are very different. This is producing new industries, but it is also destroying older industries. For those in the losing industries, the pain is very real.
Trade Deficits aren’t Necessarily Good
The idea of being in a deficit does not have a good connotation. When we think of a deficit we think of a loss. From an income perspective that’s exactly right. A trade deficit represents more money flowing out than in. But it also means more goods coming in than going out. Again, it’s just a “trade”. China gets green pieces of paper and we get pieces of plastic that will end up in a landfill. Who’s really winning that trade? Well, we don’t really know. More on this below….
