- We Need an Abundance Agenda
- Feeding 8 Billion People Has Never Been Easier
- The Greatness of Growth
- Testing Freedom
- A Successful Abundance Agenda Must Address Americans’ Anxieties
- Time to End the Manufactured Shortages in K-12 Education
- The Abundance Agenda: A Radical Response to Populist Protectionism
- Why We Need To Achieve Housing Abundance
- Getting to Housing Abundance in the Shadow of History
- Making Transportation Faster, Cheaper and Safer
- General-Purpose Technologies Are Key To Unleashing Economic Growth
- Zoning Out American Families
- Abundance Is About More Than Stuff
- Prometheus Unbound
- High Anxiety, Low Abundance
- An Abundance Agenda Promotes Social Mobility
- The Role of Sound Monetary Policy in an Abundance Agenda
- The Abundance Agenda: Energy, the Master Resource
Donald Trump’s presidential bid was founded in part on an anti-globalization platform: Revive American manufacturing jobs and save the middle class from extinction – all while sticking it to hostile China, which had been eating our lunch for two decades. The unions loved it as Trump vowed to reverse our chronic trade deficits and cure America of its impoverishing addiction to imports.
Once in office, Trump attacked the multilateral trading system built after World War II. He unilaterally imposed punishing tariffs on American purchases of imported steel and other goods, killed the newly forged Trans-Pacific Partnership, heavily redesigned the North America Free Trade Agreement (NAFTA) and refused to appoint new members to the World Trade Organization’s Appellate Body, effectively rendering WTO dispute resolution defunct. He went to economic war with our allies and close trading partners under the battle cry of “America First.”
Make no mistake: Industries that come knocking for special protection and legislators who hand out those protections are no patriots. In fact, they are the opposite
As he struck a chord of discontent with those across the political spectrum, Trump’s presidency succeeded at triggering an ideological reversal of decades of intermittent movement toward openness to trade and investment. Today’s “national populists” have fully embraced his economic vision and are advocating for a more isolationist America. This protectionist instinct runs across the political spectrum. In 2019, left-wing Sen. Elizabeth Warren proposed a dirigiste policy of “economic patriotism” to cheers from leading right-wing populists.
Unfortunately, President Biden has more or less continued to carry the protectionist torch lit by Trump, albeit a bit more diplomatically. And still these policies have yet to deliver the promised economic results. Industries given special protection via tariffs include steel, aluminum, washing machines, solar panels and a broad range of competitors with Chinese imports. Any positive effects of those tariffs for “special” sectors have come at an even bigger cost to the rest of the economy: reductions in U.S. manufacturing employment, rising input costs, higher household prices and retaliatory tariffs. Subsidies and tax credits to boost American-made semiconductors, batteries, and electric vehicles will have the same impact and will hurt the same victims.
We, of course, are not surprised by these failures, as Trump and the Nat Pops have simply exhumed the same old ghastly, desiccated protectionism that – despite insidious claims to the contrary – has never worked yet refuses to stay buried. So, rather than advocate for a return to the pre-Trump trade era, we hereby offer a more radical vision: a new dawn for America’s trading system.
You see, even though the United States has been relatively open to trade and investment, the model is not a true system of free trade. In fact, it is closer to mercantilism founded in large part on the mistaken belief that trade’s ultimate benefit is found in exports, while imports are mere means that must be tolerated to maximize exports. Aiming for more openness and growth while pointing only to the benefits of exports is self-defeating.
The Economic Case for Unilateral Free Trade
The case for unilateral trade openness is simple: Policies that restrict imports such as tariffs are taxes that intentionally raise Americans’ cost of living. Indeed, their sole purpose is to increase the prices, for example, of European goods to make these so unappealing that American consumers will instead buy more domestically made goods. When the U.S. government imposes tariffs, any tariffs, American consumers are left with fewer choices and higher prices. The same is true of foreign tariffs. European tariffs on U.S. exports are a tax on European consumers who would have preferred those products if not for their government’s intervention.
Some foreign producers of the goods could, in theory, shoulder the full cost of the tariffs if they simply accepted reduced profit margins. Multiple economic studies demonstrate, however, that importers pass a large portion of the costs of tariffs onto customers – manufacturers and households in the tariff-imposing country – by raising their prices. This result isn’t surprising because the unspoken purpose of protectionist measures like tariffs is to raise the relative prices of imports. The more that tariffs are absorbed in the form of lower profits by foreign producers, the less protection they give to American producers. As such, we Americans are better off with no tariffs on EU goods, regardless of the EU tariff policy.
What about American exporters subjected to European tariffs? They will be fine under unilateral trade openness. First, talking about importers and exporters as if they have separate interests is mistaken. Many importers are themselves domestic producers trying to secure their preferred inputs at the lowest cost for producing American exports. Second, contrary to the belief that seems to underpin our reciprocal trading system, trade’s ultimate benefits are the goods and inputs that we import at prices lower than would be our costs of producing these at home. Let us repeat that: The true value of trade comes from imports, not exports. Exports are costs, although costs worth incurring insofar as they are a means of obtaining imports of even greater value.
Here’s how it works. The more a country imports, the more money its people spend (and send) abroad. With more of its money abroad, foreigners have more money with which to buy the home country’s exports. This explains why, when our imports grow – as they did after NAFTA went into effect in 1994 – so do our exports. That export growth may not be as much as the growth in imports because foreigners can also invest their dollars in the U.S. In short, increased imports tend to go hand in hand with increased exports and often increased foreign investment in our economy. So whenever we use protectionist measures to decrease our imports, we end up decreasing our exports as well as productive investment from abroad.
This relationship between imports and exports explains why it’s foolish to threaten to raise tariffs for the purpose of increasing exports. It is counterproductive to attempt to reduce the trade deficit with tariffs on imports. (Equally counterproductive are export subsidies, as increased exports enable home-country citizens to buy more imports and hence don’t ultimately reduce the trade deficit.) This fact explains why the Nat Pop trade policy will likely shrink our economy. Sure, with enough tariffs and domestic subsidies we could reduce imports from, say, China. But in the process, we will shrink our economy and reduce our exports. Further, we will not only raise the cost of goods consumed by Americans, but also – because about half of Americans’ imports are used for production of goods domestically – raise the costs of producing things in America.
Even now, as the Biden administration pushes for transformative green reforms, the White House is undermining its own efforts by maintaining bogus security-based tariffs on foreign steel and duties on Canadian lumber, both needed for new infrastructure and denser, more affordable urban housing. Tariffs on solar panels are suppressing growth of renewable energy, while the Jones Act’s autarky in domestic shipping makes offshore wind energy harder to build and pushes mountains of cargo into vastly more carbon-intensive trucking. New calls for additional tariffs to target steel used in the electrical grid would make it even more expensive to bring new power sources online to charge electric cars and reduce dependence on fossil fuels.
Free Trade Is Easier to Implement Too
Protectionists aren’t the only group that misunderstands or misstates the fundamental case for unfettered trade. Even free marketeers have been mostly content to mumble about the necessity of trade openness as a means to increase our exports while they should have been singing its praises from the rooftops. This misguided justification for more trade openness – best described as pro-export mercantilism – is currently baked into our global trading system, our institutions, and even how pro-trade politicians communicate the importance of trade and trade agreements. Instead of killing protectionism, we have allowed it to parasitically feed on the productive economy.
This pro-export mercantilism has been the guiding mindset of trade negotiators, who for generations have pursued agreements that accept the protectionist premise that imports are a cost and exports the reward. For example, the Commerce Department’s International Trade Administration declares that its first goal in trade agreements is “to reduce barriers to U.S. exports.” Unfortunately, this upside-down mindset has diverted much of our energy toward convincing other governments to lower their tariffs, when all we had to do to reap the benefits of trade abundance was to convince our own legislators to lower our tariffs.
Unilateral trade openness is straightforward to implement compared to the years or decades of negotiations to ink a free trade agreement. (And sometimes, as with the World Trade Organization’s failed Doha Round of negotiations, those years or decades end with nothing to show at all.) The home government can unilaterally eliminate import restrictions like tariffs, quotas or harmful subsidies. It need not wait for foreign counterparts to drop trade barriers. American trade negotiators flinch at the thought of unilateral trade liberalization because what leverage would they have if the U.S. did that? But just ask New Zealand or Singapore, both of which have gone ahead with unilateral trade openness. Both, too, are in more trade agreements than the U.S., and benefit from more market access around the world for their exports and imports.
That isn’t to say that the U.S. shouldn’t put any constraints on which foreign goods flow across its borders, but it should do so in the least restrictive way possible. For instance, most European countries do not allow the import of U.S. chicken treated with chlorine. Whatever one thinks of that processing method, the European rule applied to U.S. chicken should be applied equally to all European and other imported chicken.
Unilateral trade openness also allows for exceptions for national defense, even though doing so has a real economic cost. It is why we don’t see free trade in plutonium or telecommunication devices with companies that are heavily intertwined with authoritarian regimes – because it would create excessively high national security risks.
But beware: Not every call to protect a particular domestic industry in the name of national security improves the government’s ability to defend America. In fact, most such claims are illegitimate, which is why we must be careful each time the argument is raised. While many thought the WTO obligations would help countries curb their enthusiasm for claiming national security for protectionism, a recent WTO case involving tariffs on steel and aluminum suggests otherwise. (Listen to this helpful discussion on the topic by Chad Bown, Jennifer Hillman and Mona Paulsen to understand why.)
What about special treatment for domestically produced goods or domestically assembled goods, you ask? Well, it might make you feel better to call it industrial policy, since that is all the rage these days, but it is still just protectionism. These types of policies force a rearrangement of labor and capital and other economic resources, and end up shrinking the size of the American economy and ultimately reducing U.S. households’ real incomes.
Here are just a few recent policies that are veiled protectionism:
- Tax credits for electric vehicles that are assembled in North America.
- Tax credits for electric vehicles that use batteries and critical minerals from battery makers that locate facilities in the U.S.
- Reinstating import taxes on infant formula.
- Tariffs on imported steel and aluminum in the name of national security.
- Recent calls to add electrical steel to national security tariffs.
A Moral Imperative
Being economists, the two of us are accustomed to explaining that trade is a source of many economic opportunities, and that this fact is true regardless of the trade policies followed by other countries. But there is also a strong ethical case for unilateral free trade. In a powerful 2001 piece that has withstood the test of time, trade economist Dan Griswold argues that Western moral thought provides a solid foundation to pursue economic openness, which in turns promotes such cherished outcomes as political freedom, peace, democracy and hope for the poor.
Here are some of these arguments:
- A policy of unilateral free trade is the only one that fully respects our right and our freedom to decide with whom we conduct peaceful commerce.
- A policy of free trade is nondiscriminatory. With rare exceptions, such as legitimate national security or public health priorities, the government shouldn’t interfere with our decisions to buy goods and services from foreign merchants, any more than it interferes with our decisions to buy goods and services from merchants in other states.
- Free trade promotes equality because tariffs take a larger share of the incomes of the poor than of the rich. As Cato Institute’s Scott Lincicome explains, trade is an effective way to lift people out of poverty.
- Free trade plays no favorites. Any protectionist policy short of absolute autarky necessarily favors some citizens over others. Consumers who purchase lower-tariffed imports benefit at the expense of consumers who purchase higher-tariffed imports, while some domestic producers get more protection than others.
- Trade is not a panacea for the world’s problems. Trade won’t necessarily instigate a turnaround in authoritarian regimes. Nevertheless, countries that trade more with each other are less prone to engage in armed conflict and more prone to form stronger alliances. So, while trade does not guarantee democracy or peace, it is a much better bet than protectionism.
Nationalism and populism have enjoyed a bit of a comeback in the U.S. Meanwhile, geopolitics is seeping into trade policy. These trends could reverse decades of international trade and investment openness that have brought opportunity and progress across America.
Trade openness is more likely to bring about abundance and improvements in our well-being than protectionism. Trade openness says “no” to special interests and “yes” to opportunity.
The competitive instinct is innate in humans, but it needs a competitive landscape to flourish. The Nat Pop agenda threatens the competitive landscape we need. Further, legislators must find a way to distinguish between legitimate national security concerns and veiled calls for protectionism. Samuel Gregg gives helpful guidance in The Next American Economy, noting that trade competition is one thing, while theft is another.
No U.S. company should trade or do business with foreign entities that directly bolster the military or security forces of a nation deemed hostile to the U.S. Beyond that, however, openness to trade is simply American and it is patriotic.