The entire premise behind tariffs are to protect a special interest at the expense of the general interest. I had been supportive of Trump’s pro-growth strategic tax cuts, as well as his willingness to eliminate regulations in an attempt to promote and stimulate the growth of business in the U.S., but protectionism was the one component of his platform I was hoping to be hyperbole. However, when your “left of center” Democratic economic adviser resigns because your trade policy garners too heavy a bureaucratic hand of protection, it’s time to rethink whether the GOP is still the party of limited government.
Protecting the few thousand workers in the steel industry at the expense of the millions of workers, consumers, and manufacturers in every other industry that uses steel as inputs to production is definitely a mathematical anomaly that makes absolutely no sense. Chinese taxpayers have been heavily subsidizing American standards of living for all those who have been the benefactors of affordable steel from abroad. This, in turn, allows every other industry using steel the ability to increase productivity. By protecting steel manufacturers, government has now forced the millions of beneficiaries of imported steel to face higher production costs, which mean they will lose millions of jobs and billions of dollars, all the while creating a protected environment of low quality, high priced monopolistic companies, rather than promoting competition and efficiency through horizontal growth of new supplemental business and industries.
So, yeah, Hurray! The steel industry is saved, but the agricultural and farming industry, the transport industry, the construction and industrial sectors, as well as the energy sector who all, consequently, employ millions more than the steel industry, will have to pay more for inputs and materials to production. Which will make them more expensive to domestic consumers, as well as less competitive in the foreign market, exacerbating the very claim that Trump is making about losing billions in trade, which is misunderstood as well.
For the past 30 years, President Trump has laid claim that the U.S. has been undermined and hosed when it comes to trade, and for 30 years he has been misguided when it comes to the benefits of global trade. The president has perpetuated the notion that we are losing billions of dollars a year through trade, which has all been the result of obtuse and moronic trade deals. First off, there is nothing more reciprocal than trade, which has certainly been a net benefit for everyone on aggregate. The balance of trade is a very misunderstood metric when it comes to determining economic prosperity, and in all actuality, has very little to do with trade deals. The balance of trade is much more affected by a country’s savings-to-investment ratios.
Without being too technical, as it turns out, Americans would rather invest and consume than save. The excess investment must be subsidized from somewhere, and thankfully it is through cheap imports from countries like China. Thank you, China, for supporting our industries by allowing our companies to produce goods and services using the most affordable factors of production. If anyone should be upset, should it not be the Chinese taxpayer who must subsidize their export industry to the point of funding American investments and living standards through the consumption of cheaper cars, cheaper construction costs, cheaper farm equipment, or cheaper appliances? I mean, do we really believe predatory pricing occurs in the U.S. to the degree that politicians suggest, or is it just politically viable to suggest that? This can’t be sustainable, as I certainly don’t know of any company, despite their location, who makes it a practice to sell at prices lower than cost and expect to make a profit, and if they do, then I want to thank their citizens for donating most of their income to promoting U.S. business and industry. I would much prefer to be in a country that runs a massive trade deficit bearing a higher investment rate, rather than running a trade surplus with a low savings rate, because that means investment would be even lower.
This takes us back to the balance of trade and the trade deficit. The balance of trade is one component, albeit the biggest component, used in the current account, which together along with the capital account make up the balance of payments. The balance of payments is simply based on double-entry bookkeeping, to which all accounts that make up the balance of payments must balance. Every single penny that the U.S. runs in terms of a trade deficit in the current account is reciprocated by a surplus in the capital account. We pay for our imports by exporting dollar denominated assets, which end up funding domestic investment, so that the balance of trade falls by exactly the same amount that the capital account is raised. So, by default, the two accounts have to balance, hence the name: balance of payments. In fact, those times the balance of payments don’t balance is usually when government has tried to artificially mediate the negative balance of trade, either through tariffs, quotas, subsidies, or devaluation. Which end up leading to conditions far worse than those to which it was trying to fix.
In addition, when President Trump and his administration says to the world that we, as Americans, are losing billions of dollars a year to China in trade, this is just not accurate. Yes, the U.S. does run a trade deficit with China, but in doing so, Americans simply receive in goods what was paid for in dollars. We don’t just give China billions of dollars, shake hands, and walk away. We receive goods and services for those billions of dollars, to which we in turn then consume, invest, and further use as raw materials in the production process of globally competitive products. So, there is no loss. Furthermore, as the current account lessens, the capital account increases by the same amount. Trade is nothing but a mutually beneficial voluntary exchange between groups of willing parties. There is always an offsetting effect. The U.S. economy has grown during times when it has run consistent trade deficits, as there are, in effect, massive amounts of capital inflow available for investment. This has allowed the U.S. to keep inflation low by maintaining low interest rates which otherwise would have had to rise in an attempt to attract business abroad.
Therefore, artificially trying to fix the balance of payments through heavy-handed bureaucratic barriers that promote protectionism have typically led to undesirable results, instead of allowing business and industry to adjust through the fluctuations of the market. Some lessons are never learned. Government has seemed to respond to a problem that offers a solution which creates a problem greater than the problem that the original solution was trying to solve. This is the paradox of bureaucracy. This is the gibberish of protectionism. What other institution would spend billions of dollars to subsidize tobacco farmers, while spending billions more advertising the dangers of tobacco? I guess the same institution that would resurrect barriers to protection, then cry for anti-trust laws to prevent monopolies. What’s the definition of insanity again?
* Gwayne Gautreaux works full time in the aviation industry and has studied international political economy at Penn State University. He has been a life-long passionate researcher in the field of political economy which is referred to as politiconomy. Looking to government as the solution to every problem has kept us in a perpetual mode of dependency for too long. So, Gwayne is also eager about promoting the concepts of a truly unfettered free market, individualism, and limited government through the principals of libertarianism.