From the Hoover Institution, Richard Epstein writes:
The great mystery of Trump’s mindset is that he does not carry over the market-driven principles of his sensible domestic policies into the realm of international trade. The introduction of national borders does not mean that the gains from competition, certainty, and administrative simplicity no longer apply. The key principle of comparative advantage applies in both contexts. A good analogy is trade between states in the United States: Open trade among our states has produced growth and lowered costs for goods and services—and it could do the same at the level of nations. It would be a national disaster if states erected barriers to goods and services coming from other states. Trump’s views on international trade represent outright invitations to the worst mercantilist excesses found in Obama’s protectionist trade policies.
At the root of Trump’s intellectual confusion lies his statement that “I believe strongly in free trade but it also has to be FAIR TRADE.” (The all-caps are vintage Trump.) The former term is easily defined. Each government allows cross-border transactions in goods and services to take place on the same terms and conditions as ordinary domestic trades: no tariffs or quantitative restrictions on the flow of goods, services, or cash. The net cash balances, plus or minus, are of no particular concern. Let them fall as they may. Where there is a trade deficit with a particular country, it only means that the United States has persuaded individuals and firms from other countries to invest their money in the United States, where it can help fund new domestic businesses that generate growth, jobs, and products.
Unfortunately, Trump’s key trade advisor, Peter Navarro, does not understand this point. He took to the pages of the Wall Street Journal to explain why the White House worries about trade deficits. In his static view of the world, forcing U.S. automakers to use American parts and labor will improve our position in export markets. But that is not so. The reason American firms go overseas is that the cheaper parts and labor allow them to sell more effectively both domestically and abroad, which is why it is presidential foolishness to badger companies like Carrier to maintain plants in the United States. The market responds to incentives that the protectionists ignore.
Ideally, of course, all nations should follow the same policy, but often, for a variety of protectionist reasons, many nations try to prop up exports with subsidies and drive down imports with tariffs or quantitative restrictions. The hard question is how to improve the position for the United States in this second-best world. Trump is keenly aware that we often face tariffs and taxes overseas, while foreign goods come into this country virtually free. But, notwithstanding his distaste for this practice, there is a huge virtue in adopting a strict policy of non-retaliation that seeks to lift tariff barriers overseas without raising tariffs at home. The subsidies that foreign governments confer upon their export industries redound in part to American buyers, who in turn increase their levels of consumption, or reduce the costs of the goods that they make for sale in both domestic and export markets.
The term “fair trade” is less easily defined, though it covers a multitude of bad policies, like the imposition of tariffs and restrictions on the free flow of goods. And when that phrase is used, as Trump did in withdrawing from the Trans-Pacific Partnership negotiations, “to promote American industry, protect American workers, and raise American wages,” he is asking for trouble. By putting a tariff wall around the United States, he is removing the pressure that state and local governments have to make their own businesses more productive and competitive by internal deregulatory reform. His approach to bilateral negotiations could easily lead to a downward global spiral that will engulf the United States.
Trump’s backward views on international trade are reflected in his constant refrain that we should “Buy American and Hire American” domestically.
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