Donald Trump says he loves free trade, but he also said that he wanted to impose a 45 percent tax on Chinese goods.
To the lay listener, this may come off as a contradiction, but the message is as simple as he makes it: free trade is a good idea in most cases, but sometimes it is not. Especially when dealing with nations who play by a different set of rules than the United States. As economic agents within a nation, we should always consider who our trade deals will affect, and what we lose in each instance, no company is interested in taking a loss, so we can reasonably assume they will almost always try to go with the cheapest, most efficient option. We can also assume wealth is accumulated by individuals and nations through rule of law, property rights, free speech, prices, profits, losses, and stable currency.
What do we do if nation one does not practice nation two’s rule of law, private property rights, and we trade freely with them? In doing so, nation one limits the individual workers ability to accumulate wealth while exploiting more of the wealth for themselves. Nation one will have a major competitive edge over the any nation focused on growing the wealth of nation two. The cost of following safety restrictions (based in the rule of law), and paying quality workers a wage is unnecessary.
This allows them to produce (in nation one) at or below the cost of production in nation two. This predatory pricing siphons large portions employment from nation two into nation one; resulting in an overall negative for nation two nationally. On that basis it would be reasonable for the economic benefit of the individuals and the nation to have restrictions to trade while maintaining a free market within the borders of the nation.
This is precisely the relationship China and the United States have with one another, and we can see the effects it’s having on our job markets since 1995 (Figure 1). The U.S.A. currently has a $500 billion trade deficit, of which $116 billion is with China. The free trade absolutists often argue trade deficits are irrelevant to economic growth because the we have a $500 billion dollar capital account surplus to make up for our trade deficit. Nevertheless, we are still seeing stagnant wages, and slow to stagnant growth in labor participation (Figure 3) while U.S. corporate profits are consistently rising since 1995 (Figure 2). The result, a growing economy and less labor participation.
Proposing barriers to trade with countries who lack institutions like rule of law, property rights, free speech, prices, profits, losses, and stable currency however, is not a fix all. Republicans dealt a huge blow to countries like China by lowering the corporate tax rate from 35 percent (the highest in the world), to 21 percent. This will make doing business within our borders more affordable for companies, encourage them to invest domestically, and see those companies employ more Americans. We can see with companies like AT&T, Boeing, Bank of America, and Wells Fargo, who are now giving raises to many of their employees, and promising to invest domestically in ways that will directly benefit both employees and American consumers:
- AT&T pledged $1 billion
- Boeing pledged $300 million
- Wells Fargo pledged $400 million
- Comcast pledged $50 billion
If this tax cut did come with tariffs on certain goods produced overseas that we can create here, then we should also consider it. When paired with a massive 15 percent tax cut, like the one that Republicans passed in the Senate and House, the damages to pricing caused by subsequent shift in comparative advantage can be minimal, and we can get Americans back into jobs where they are able to work full time and provide for their families. This puts the pressure on countries like China and other job stealing nations to reevaluate their social institutions in order to become competitive once again in the market they’ve been shut out of, and yes the tariffs will hurt.
According to Geopolitical Futures, with the exception of 2013, the U.S. has been the top destination for Chinese exports for over 15 years (in 2013 the U.S. was a close second to Hong Kong). In that period, the size of the Chinese economy, measured in terms of GDP, has increased by a factor of 10, from $1.3 trillion in 2001 to $10.9 trillion in 2015. This is why we need to put fire to the feet of the Chinese government and let them know we still have a hand in this game, and that we are still capable of being the manufacturing giant we’ve been for almost 150 years.
The message is not to say free trade is bad, in most cases it is very good, however, when another nation decides to use dirty tactics to cheat us out of the market, we should certainly reserve the right to defend our job markets in order to keep the competition both fair and reasonably friendly. We need to consider the job loss at the hands of outsourcing and work to keep our jobs here, and get able-bodied American citizens back into the workforce.