Economics

Free Trade on Trial: Trade and National Security

Contrary to a lot of political rhetoric, expanding trade and economic integration actually enhances our national security

Image Credit: USAF / Handout via Getty Images

Among the criticisms of free trade that we’ll likely hear during the fall campaign is that it threatens our national security—by strengthening our enemies, weakening our industrial base, and potentially leaving us deprived of critical commodities during a time of conflict or war. These arguments are serious, but none of them undermine the argument for a general policy of low to zero tariffs and robust trade with other nations.

President Trump has invoked national security frequently to justify tariffs on steel and aluminum and even potentially on imported automobiles. Political leaders in both parties have also raised the specter of China as a geopolitical rival and warned that ceding the lead in such sectors as semiconductors and 5G networking could jeopardize the ability of the United States to defend its interests. Trade remedies, including tariffs, are a favorite policy response.

Unlike the arguments about trade and job security, national security can provide a legitimate rational for restricting trade, albeit under narrow conditions. For example, the US government can apply export controls to keep goods and hardware with military applications out of the hands of hostile foreign governments.

In most cases, however, national security is merely a cover for more traditional economic protection of politically favored domestic industries. Even if the United States wants to maintain a certain capacity to produce needed products, stockpiling or direct subsidies to the industry are almost always less distortionary and economically damaging options than tariffs.

Exhibit A for how national security concerns can be exploited for special-interest benefit is the Trump administration’s Section 232 tariffs on imported steel and aluminum imposed since March 2018. The administration has justified the tariffs by arguing that a viable domestic steel industry is necessary to meet the needs of the US military, but that justification fails any reasonable test.

Contrary to the administration’s arguments, the US steel industry has remained more than viable in recent years. According to the World Steel Association, steel output at US factories was averaging about 80 million tons a year before the Section 232 tariffs were imposed, ranking the United States fourth in the world in output. That is far more steel than the US military requires each year for its construction projects and hardware. In fact, in a memo submitted in 2018 for the Section 232 investigation, then-Secretary of Defense James Mattis noted that “the US military requirements for steel and aluminum each only represent about three percent of US production.” Mattis also expressed concern that the steel and aluminum duties would antagonize US allies.

If military leaders genuinely fear that our nation could be left short of critical commodities at a time of conflict, the right response is not to ban or heavily tax imports of needed goods. Instead, the government should stockpile necessary quantities while intentionally shifting to more reliable foreign suppliers.

More broadly, concerns that trade threatens America’s “industrial base” are equally unfounded. America remains a leading producer of semiconductors, motor vehicles, aircraft, and a range of other advanced products. Before the COVID-19 virus took its toll earlier this year, US manufacturing value added in 2019 had reached a record $2.36 trillion, according to the US Bureau of Economic Analysis. Since 2000, inflation-adjusted manufacturing value added in the United States has grown nearly 30 percent. The number of manufacturing jobs has fallen during that same period, not because we are making less, but because US manufacturing workers have become so much more skilled and productive. This is a sign of national strength, not weakness.

In recent years, concerns about national security and trade have focused on China, and with some justification. China is not an ally like Japan, Canada, or the nations of Western Europe. But cutting trade with China and even “decoupling” the world’s two largest economies would do nothing to enhance US security. In fact, it would weaken our own economy and could provoke more conflict between geostrategic rivals.

Americans benefit in large ways from our trade with China. We benefit as consumers through lower prices and more variety for a wide range of consumer goods. US companies benefit from selling into China’s huge consumer market, either through exports or direct sales through US-owned affiliates in China. And the US government and private sector benefit from the lower interest rates brought on by China’s purchase of US Treasury bills.

The US government can take steps to contain China without forfeiting the benefits of a normal trade relationship with the world’s second-largest economy. Such steps can include curbs on certain high-tech US exports that could accelerate China’s military development. The US government can also monitor China’s direct investment in American firms through the Committee on Foreign Investment in the United States to prevent China from gaining control of key technologies and intellectual property. And the US government can sanction specific Chinese individuals and entities that may pose a national security threat.

Expanding trade and deeper commercial integration tend to promote international peace and enhance American security. Following the devastation of World War II, the United States joined with other major industrial nations to create the General Agreement on Tariffs and Trade to promote freer trade and more economic integration—not only for economic reasons but to secure the peace and make future wars less likely.

That visionary policy has proven to be a success. In the post-war era, trade helped to knit Western allies together and to win the Cold War. Studies have shown that increases in bilateral trade ties and global trade integration significantly promote more peaceful relations between countries. More recent initiatives such as the Trans-Pacific Partnership are designed not only to boost the US economy, but to strengthen our ties to more like-minded nations while providing an alternative model to China’s more state-directed economic system.

America’s security depends, of course, on a modern military and robust diplomacy, but it also relies on the “soft power” of commercial engagement with the rest of the world. Far from being a threat to our security, openness to trade and foreign investment will enhance America’s edge in technology and productivity while deepening our ties to friendly nations.

This is the second in a series of four articles that will examine the most common arguments against free trade. The first piece in the series focuses on the impact of trade on labor markets. The third piece discusses how free trade boosts healthcare security.

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