The current support for tariffs in the United States has left me disappointed, frustrated, and in many unproductive debates. The French political philosopher, Frédéric Bastiat, best articulated my sentiments in an 1847 letter to Richard Cobden, “And I want not so much free trade itself as the spirit of free trade for my country. Free trade means a little more wealth; the spirit of free trade is a reform of the mind itself, that is to say, the source of all reform.”
What I want for the United States in 2019 is a return to, or maybe even a discovery of, the “spirit of free trade.” You might ask, what is the “spirit of free trade”? I would infer that Bastiat means a respect for private property, the Rule of Law, and a general understanding that mutually agreed upon trade makes people better off and promotes peace.
President Trump has now put in place tariffs on Chinese goods valued over $200 billion. The most popular reasons argued on behalf of these tariffs are (1) the Chinese are stealing our intellectual property, (2) our trade deficit is too high, and (3) the Chinese are engaging in unfair business practices.
Let’s consider these arguments in reverse order.
Since taking office as President, Donald Trump has frequently lambasted China for engaging in unfair business practices. In early 2018 he made the strong statement, “From now on, we expect trading relationships to be fair and to be reciprocal.” Why is this desirable? As Jeffrey Dorfman, economics professor at University of Georgia says, “It is trade which looks the most unfair that creates the most benefits because the potential gains are the largest.”
When countries specialize in what they are relatively better at (i.e. their comparative advantage), it allows persons within a country to consume more of all products. When China specializes in its comparative advantage and the U.S. does the same, we both become better off when we trade with each other for those goods that we did not produce. When tariffs are imposed, restricting trade between countries, it forces each country to allocate resources to what they are relatively worse at producing (where they have a comparative disadvantage). This disproportionately harms low wage earners. Research has shown that free trade most helps the poor as they purchase relatively more imported goods. As Acton Institute’s director of research, Samuel Gregg, states in a recent article at Law & Liberty, “The more we (America and Americans) can import, the better off we are in terms of material prosperity.”
When the U.S. trades freely with other countries it allows us to play to our comparative advantage, which benefits both consumers and producers in the United States as well as individuals in the countries that we trade with.
Another frequently cited argument is that our trade deficit is “too high”. We first need to consider what a trade deficit is. A trade deficit in the United States occurs when the cost of our imports exceeds the value of our exports. Many, including President Trump, think a large trade deficit to be bad for the American economy and jobs. This simply isn’t true. The U.S. has run consistent trade deficits since 1976, importing $6 trillion worth of goods more than we have exported. This has had little to no negative impact on jobs (see charts). This shows that running a trade deficit impacts the types of jobs and growth in our economy, not the number of jobs or size of growth.
Finally, let’s consider what has become the loudest, most cited argument, in recent months. China is stealing “our” intellectual property and we need to impose tariffs – in the order of $250 billion – to convince them to stop.
In a recent essay, free trade advocate Don Boudreaux listed six convincing arguments against imposing high tariffs as a result of alleged Chinese intellectual property theft.
Two of Boudreaux’s six arguments are worth restating here.
First, “President Trump’s tariffs are first and foremost punitive taxes on Americans who buy imports from China.” When the U.S. government imposes punitive taxes on American citizens through high tariffs on foreign goods they are, in essence, attacking private property. They are confiscating resources from the majority of citizens for the benefit of a few – typically large businesses with successful lobbying firms.
Second, “American victims of China’s IP theft could avoid much of this theft simply by refusing to do business in China.” The decision should be left to particular corporations on whether they want to do business in the Chinese market at the risk of forfeiting their intellectual property. In addition, for cases where China is legitimately stealing intellectual property from U.S. businesses operating outside of China, there is already a process set up to handle these disputes through the World Trade Organization. We should use this process for recourse rather than imposing punitive tariffs that harm Americans.
Tariffs hurt the average person. They hurt you and me, decreasing our quality of life and the value of our dollars. In a 2016 article released by the World Trade Organization (WTO), Maurice Obstfeld said, “those who promote “getting tough” with foreign trade partners through punitive tariffs should think carefully. It may be emotionally gratifying; it may boost specific industries; the threat may even frighten trade partners into changing their policies; but, ultimately, if carried out, such policies cause wider economic damage at home.”
This past week, my dad and I ventured into a family owned bicycle store near my Fort Wayne childhood home to purchase a bicycle for my mother. The owners, a husband and wife team, mentioned they are struggling to appropriately price their bicycles because of the recent tariff increases on aluminum and steel, among other consequences of the growing trade war. They mentioned there is a chance their bicycles could increase in price by 25 percent this year. If you run a small business, you can understand how difficult this makes planning for the year ahead.
Tariffs, for any reason, might prove to make specific corporations in the United States better off, but they make the average person worse off. The mother who simply wants to buy her child a bicycle for their birthday might no longer be able to do so. President Trump’s trade policy is benefitting the politically connected minority at the expense of the majority. Yes, I want free trade, but what I want more is for Americans to restore “the spirit of free trade” in 2019.