I’m a free-trader and have generally supported most of the trade deals over the years. Lately I’m being asked if and how I can support Donald Trump when he appears to be opposed to free trade. My views are little different from Trump’s, but the differences are not that great when you go through the details.
First of all, the concept of free trade is a no-brainer and you’d be hard pressed to find an economist opposed to it. In fact, we engage in “free trade” all the time. I don’t grow my own food, manufacture my own car, or fix my own electrical problems. I specialize in a line of work I’m good at and use my earnings to trade for the goods and services of others who are better at other things than I am. Trading across borders follows the same logic. Everyone benefits, at least in theory.
In practice, however, there are other considerations. The first of these is national security. You can make the case that buying all of your munitions from China wouldn’t be a good idea even if it costs less. In war time, you must depend on a domestic industry. You can also make the case that security-sensitive products shouldn’t be sold to buyers in Iran or North Korea. These admonitions should be obvious, but they don’t affect most industries anyway.
Another consideration is enforcement, and here is a sticking point for many. Trade across borders should occur in an orderly fashion with both sides following the same rules. If one side isn’t doing so, the other side should insist on enforcement and retaliate if necessary until an agreement is reached. Wealthier nations like the U.S. often look the other way while poorer nations argue for special privileges while they “catch up.” Most like China argue that currency controls and regulatory enforcement should be relaxed while they build up their industries. I disagree, as this constitutes “managed trade” on one side, not “free trade.”
Trump is right when he says that China has been manipulating its currency as part of its “catch up” plan. By maintaining an artificially weak yuan over the years (rather than allowing it to find its own exchange rate on the global market), China has ensured that its products will be cheaper when exported to other markets, while imported good will be more expensive. This does enable us to buy cheaper goods from China, but I don’t believe the net result is positive and I have argued this for years. Kudos to Trump for having the courage to call China out on this.
Another concern is intellectual property. The U.S. has a sophisticated court system to enforce copyrights and while China has improved over the years, there’s still a big gap. Many Chinese use Word—the software I am using to write this blog—without paying Microsoft for it. Pirated copies are readily available for a few dollars on the street there, taking money of the pocket of the software developers.
Regulation is yet another concern. While we have a responsibility to reign in our own hyper-regulated industries, it’s reasonable to insist that manufacturers abroad not enjoy a cost advantage by acting irresponsibly. For example, it’s cheaper to dump waste into the river (where this is allowed) than to process it. Dumping allows a company abroad to pass the savings along to their U.S. customers. Identifying what constitutes significant pollution and other maladies isn’t always easy, it’s still important to take this into account.
Yet another concern is government subsidies. Should a government in another country be permitted to subsidize its competitors while our government does not? This gets muddled as well because our government also subsidizes certain industries, but it’s worth noting the many large Chinese manufacturers are owned—at least partially—by the state. Clearly, subsidization in China is a serious problem.
I admit that some of the issues I’ve raised don’t have simple answers; I will revisit some of these in the future. My point is that negotiating trade deals is complicated, and we should be promoting global trade to the extent that it’s reasonably fair. When it crosses the line, we need leaders who are willing to get tough and take action. Some argue that Trump will start a trade war with his strong rhetoric, but I’m not convinced. Read Art of the Deal and you’ll understand more about Trump’s approach. I don’t want heavy protectionism, but I think Trump’s end game is a middle ground. Besides, if he is elected, Congress would temper any anti-trade measures he proposes anyway. I might be wrong, but I think the net effect of a Trump presidency would be positive on this issue, although I’m sure I wouldn’t agree with him on every point.