Antony Davies and James Harrigan: Myths of trade
This month, President Trump replaced President Clinton’s signature trade agreement, NAFTA, with the unfortunately named United States-Mexico-Canada Agreement, or USMCA. The Trump administration touts this as an improvement over NAFTA, but, at 1,809 pages, this “free trade” agreement is exactly 1,809 pages longer than necessary.
Free trade happens when governments leave people and businesses alone to make their own decisions. When governments write trade agreements, what they’re really doing is describing various ways in which trade will not be free.
Politicians love trade agreements because they get to hand out special treatment to favored groups. But to sell trade agreements to voters, politicians have to perpetuate a few myths.
Myth 1: Countries trade with each other. Politicians and economists say things like “the U.S. trades with China.” In point of fact, the U.S. doesn’t trade with China or any other country. People and companies in the U.S. trade with people and companies in China. The governments aren’t involved unless they insert themselves into the transactions.
Myth 2: Tariffs can create a level playing field. Tariff advocates point to dumping — foreign governments subsidizing exports to the United States — as an unfair practice that can be righted with tariffs. But when foreign governments subsidize their exports, they are offering Americans discount prices courtesy of the foreign taxpayers. Dumping is to trade what Black Friday is to shopping. It’s unfair to the foreign taxpayers. To us, it’s a bargain.
Myth 3: Tariffs protect nascent industries. If a nascent U.S. industry has a comparative advantage over foreign competitors, tariff protection isn’t necessary. As the nascent industry grows, it will quickly outperform and under-price foreign competitors. But if a nascent industry doesn’t have a comparative advantage, then it will never be able to compete on its own, and shouldn’t exist in the first place.
Myth 4: Tariffs protect industries that are important to national security. It turns out that free trade itself is one of the best national security tools. The more people from two countries trade, the more they come to know and to rely on each other, and the less tolerant they become of bellicose moves by their respective governments.
Myth 5: Trade deficits are bad. A trade deficit occurs when Americans spend more on foreign goods and services than foreigners spend on American goods and services. But that excess spending comes back into the United States in the form of foreigners purchasing American stocks and bonds. Countries export things at which they have a comparative advantage, and Americans have a comparative advantage in entrepreneurship. While entrepreneurship can’t be exported, the fruits of entrepreneurship, companies, can be. We create companies like Facebook, eBay, Dell, Nvidia, Amazon, Netflix and Google, to name just a few that are younger than most Americans. We then sell pieces of those companies when foreigners buy our stocks and bonds. This is exporting the fruits of entrepreneurship.
By regulating trade, politicians can hand out special favors. And to regulate trade, politicians need people to believe these trade myths. But we would all be better off trading in the truth, which is that trade is good unto itself. We don’t need governments crafting agreements for us. We need them to leave us alone so we can craft deals for ourselves.
Antony Davies is associate professor of economics at Duquesne University. James Harrigan teaches in the department of political economy and moral science at the University of Arizona. They host the weekly podcast, “Words & Numbers.”