by: Eric Feldpausch
President Trump’s expanding trade war seemingly stems from a misunderstanding of the costs and benefits of trade, and this misunderstanding is costing states with large agricultural exports, like Kentucky, most of all.[i] The Trump administration argues that trade deficits indicate that American workers and businesses are put at a disadvantage,[ii] and that without balance in trade Americans are being denied the opportunity to make and sell products in the world.[iii] However, the imposition of tariffs, which are customs duties placed on merchandise imports,[iv] distort market pricing signals leading to disadvantaged American workers and higher prices for American consumers, including business consumers.[v]
For the sake of brevity in this discussion of complex economic and political issues, perhaps the best way to demonstrate the principles behind free-trade is to quote Milton Friedman, a Nobel Prize winning economist and economic advisor to President Nixon and President Reagan:[vi]
“As a homely illustration, should a lawyer who can type twice as fast as his secretary fire the secretary and do his own typing? If the lawyer is twice as good a typist but five times as good a lawyer as his secretary, both he and the secretary are better off if he practices law and the secretary types letters.”[vii]
Professor Friedman goes on to explain the misconception surrounding unbalanced trade:
“. . . [T]he citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports, or equivalently, from exporting as little as possible to pay for imports . . . [i]n your private household, you would surely prefer to pay less for more rather than the other way around, yet that would be termed an ‘unfavorable balance of payments’ in foreign trade.”[viii]
This simple illustration to emphasizes the economic reality that free trade is beneficial for Americans, and even if the balance of payments between America and another country are not even, that does not represent a loss, but rather, both the United States and the countries it trades with benefit from engaging in trade and capitalizing on the comparable advantages of each nation.[ix]
Along with appearing to misunderstand the basic economic principles underlying free trade, the Trump administration also fails to realize the mismatch between the rationales for this trade war and the issues President Trump hopes to remedy. Two of the many rationales given for the protectionist and hostile trade policies of this administration are: (1) the need to protect industries vital to national security, such as steel and aluminum;[x] and (2) intellectual property (IP) theft by Chinese firms.[xi] Unfortunately, the strategies taken by the Trump Administration fail to appreciate the nature of these issues and may end up doing more harm than good by implementing tariffs and sanctions on hostile nations and allies alike.
The National security rationale for this trade war is a misguided pursuit. It is important to realize that national defense needs only a small fraction of the total steel used in the United States.[xii] In fact, our domestic steel industry produces 30 times the amount currently required by the U.S. department of defense and its contractors.[xiii] If we suppose, only for the sake of argument, that the improbable did happen where America relied entirely on foreign sources of steel and aluminum, there are alternative ways of confronting such a problem that would not bring about the economic and political consequences caused by the Trump Administration’s approach.[xiv] We could stockpile steel just as we stockpile petroleum reserves[xv], we could mothball domestic steel plants just as we mothball air force jets and navy ships for quick reactivation in the face of conflict[xvi], and we could count on our plethora of strategically aligned allies for raw materials.[xvii] Instead, if the United States were to tear down trade barriers and increase free trade, our steel industry and aluminum industry would be better positioned to compete on a global scale providing the U.S. with more robust access to these resources.[xviii] This is a solution in search of a problem that has been completely misunderstood.
The company’s facing IP theft or forced joint ventures with Chinese companies were well aware of those risks before they made the decision to do business in China. [xix] It is now considered as a “cost of doing business” in China and it becomes a simple calculation by private actors to weigh those costs against the enormous benefits of having access to over a billion Chinese consumers.[xx] Conversely, farmers and other agricultural producers, those most hurt by this trade war[xxi], are not at risk of IP theft, and therefore, have never had a market incentive to forecast and prepare for those risks. President Trump’s decision to impose tariffs on Chinese imports and sanction certain Chinese companies as punishment for IP theft is another solution to a problem already solved by private actors that directly confront those issues.[xxii] The agricultural product producers have never faced this problem, yet they are becoming victims of a “solution” implemented by the Trump Administration.
The Trump administration hopes to help farmers affected by the international trade war by setting aside $12 billion in aid.[xxiii] However, farmers would “just prefer to have their markets back and not have to get handouts from the government. They had spent years developing those overseas markets and it seems like they collapsed in 30 days,” according to David Hemesath, the general manager at Farmers Union Cooperative in Iowa.[xxiv] One television station in Arkansas reports the tariffs could cost the state up to 24,000 jobs. A rice farmer told the station. “Nobody wants aid. I don’t. We would just like to have free-market access around the world.”[xxv] Farmers in Tennessee and eastern North Carolina also told local news outlets that they preferred open and free markets over government aid.[xxvi]
Although free trade is often criticized as unattainable because it would only work “if all other countries practiced free trade,” that is yet another argument with no validity whatsoever.[xxvii] When other countries impose restrictions on international trade, they do hurt the United States, but they also hurt themselves.[xxviii] If the United States retaliates with its own set of tariffs, currency manipulation, and trade restrictions and quotas, we “simply add to the harm to ourselves.”[xxix] Professor Friedman said it best; “Competition in masochism and sadism is hardly a prescription for sensible economic policy!”[xxx] President Trump desires a more prosperous American economy and he seeks to correct what he wrongly believes to be other countries taking advantage of the United States. His intentions are noble, but his administration’s policies are misguided.
[i] See Jason Devaney, McConnell: Corker's Anti-Tariff Bill Is Pointless, Newsmax (Wednesday, 06 June 2018 09:42 PM), https://www.newsmax.com/politics/mitch-mcconnell-corker-anti-tariff-bills/2018/06/06/id/864663/ [https://perma.cc/P5QC-K8PJ]; see also Phillip M. Bailey, Darcy Costello, Kentucky Bourbon Boom In Danger as Trump Trade War Could 'Kill Jobs', Courier Journal (Published 1:32 p.m. ET June 1, 2018), https://www.courier-journal.com/story/news/politics/metro-government/2018/06/01/kentucky-bourbon-industry-tariffs-trump-trade-war-job-killer/663119002/ [https://perma.cc/S9EW-LFG8]; see also John W. Schoen, These States Would Get Hurt Most In A Trump Trade War, CNBC (10:19 AM ET Mon, 23 Jan 2017), https://www.cnbc.com/2017/01/23/these-states-would-get-hurt-most-in-a-trump-trade-war.html [https://perma.cc/6KQ7-C84Q]; see also Jeffry Bartash, Which States Could Get Hurt Most In Trade War, MarketWatch (Apr 8, 2016 11:31 a.m. ET), https://www.marketwatch.com/story/which-states-could-get-hurt-most-in-trade-war-2016-04-08/print [https://perma.cc/GFU4-MDLX].
[ii] Department of Commerce, Op-Ed: Free-Trade is a Two-Way Street, China, The EU and Other Trading Partners Put Up Formidable Barriers To Imports From America (Tuesday, August 1, 2017), https://www.commerce.gov/news/opinion-editorials/2017/08/op-ed-free-trade-two-way-street-0 [https://perma.cc/HNF9-7YRV].
[iv] World Trade Organization, Tariffs https://www.wto.org/english/tratop_e/tariffs_e/tariffs_e.htm (last visited July 25, 2018) [https://perma.cc/3YAK-NVCS].
[v] See Milton Friedman, Rose Friedman, Free to Choose: A Personal Statement 38-54 (1990).
[vi] Bruce J. Caldwell, Milton Friedman American Economist, https://www.britannica.com/biography/Milton-Friedman [https://perma.cc/B55X-BCAB].
[vii] Milton Friedman, Rose Friedman, Free to Choose: A Personal Statement 44-45 (1990).
[viii] Id. at 41.
[ix] Id. at 44-45.
[x] Peter Coy, National Security Is a Good Reason for Protection. But Not of Steel and Aluminum, Bloomberg (March 2, 2018 4:00 AM) https://www.bloomberg.com/news/articles/2018-03-02/national-security-is-a-good-reason-for-protection-but-not-of-steel-and-aluminum [https://perma.cc/YT4Q-RRJP].
[xi] Ana Swanson, Trump Administration Goes After China Over Intellectual Property, Advanced Technology, The Washington Post (August 14, 2017) https://www.washingtonpost.com/news/wonk/wp/2017/08/14/trump-administration-goes-after-china-over-intellectual-property-advanced-technology/?utm_term=.c9156ebe683c [https://perma.cc/GL8Z-KX8H].
[xii] Milton Friedman, Rose Friedman, Free to Choose: A Personal Statement 46.
[xiii] Louis Jacobson, How 'vital to our national security' Is Steel, Aluminum?, Politifact (Friday, March 9th, 2018 at 4:20 p.m.) https://www.politifact.com/truth-o-meter/statements/2018/mar/09/donald-trump/how-vital-our-national-security-are-steel-aluminum/ [https://perma.cc/5ZV5-FW6Q].
[xiv] Milton Friedman, Rose Friedman, Free to Choose: A Personal Statement 46.
[xv] See Id.
[xvi] See Id.
[xvii] See Jacobson, supra note xiii.
[xviii] See Milton Friedman, Rose Friedman, Free to Choose: A Personal Statement 46-47.
[xix] Federation of American Scientists, US Perspectives On Technology Transfers To China https://fas.org/nuke/guide/china/doctrine/China2.pdf at page 46 [https://perma.cc/535L-DNN8].
[xxi] See Devaney, supra note i.
[xxii] See Federation of American Scientists, supra note xix; see also Milton Friedman, Rose Friedman, Free to Choose: A Personal Statement 38-54.
[xxiii] Olivia Paschal, American Farmers Are Still Worried About Trump’s Trade War, The Atlantic, July 28. 2018, https://www.theatlantic.com/politics/archive/2018/07/trump-trade-war-tariffs/566288/ [https://perma.cc/8X37-67MF].
[xxvii] Milton Friedman, Rose Friedman, Free to Choose: A Personal Statement 50.