Wednesday, June 8, 2016

Trump’s Trade Fallacies

By David R. Henderson

One of the biggest policy victories for the United States—and, indeed, for the world—over the last 60 years has been on international trade. Both the United States, which was relatively protectionist in the first half of the twentieth century, and most other countries have steadily reduced trade restrictions. And the blossoming of freer trade has made both Americans and foreigners better off. Just as free trade between Californians and Alabamans makes people in those two states better off, so too does free trade between Americans and Chinese people, Mexicans, and Canadians make all sides better off. People gain from trade, or else they wouldn’t trade.

But many people don’t understand the case for free or, at least, freer trade. Unfortunately, among them is the putative Republican candidate for President, Donald Trump. (See this part of his website for his views on trade.) I hasten to add that he is not alone. Virtually every fallacy he believes about trade is one that many people, including many other politicians, believe. Trump believes, for example, that if other governments subsidize their exports to the United States, we Americans are worse off. He believes that if people in poorer countries work for lower wages and have fewer environmental protections, it is bad for Americans. He believes that outsourcing call-center services to places like India is bad for Americans. He seems to believe that if we open our borders to other countries’ exports, it hurts us unless they open their borders to our exports. All of these claims are false.

Consider, first, Trump’s objection to China’s subsidies to its exporters. Assuming that he’s right that these subsidies exist, there are reasonable grounds for objecting to them, but they are not the ones that Trump gives. It’s the hapless Chinese taxpayers who pay the subsidies: people in China’s highest individual income tax bracket, for example, pay a hefty 45-percent marginal tax rate. So they are the big losers from these subsidies. It’s true that, to the extent that subsidies reduce American firms’ market share in the United States, these competing U.S. firms lose. But it’s a fairly straightforward exercise, using demand and supply curves, to show that the gains to American consumers from these subsidies exceed the losses to American firms. As the late Milton Friedman pointed out, foreign governments’ subsidies to their exports to the United States are a form of foreign aid—given to Americans. We should object to this foreign aid to the extent we care about Chinese taxpayers, but we should not kid ourselves that it makes us Americans, on average, worse off.

Trump is with the environmentalist left in believing that it hurts Americans to allow imports from countries that have less-strict environmental laws and fewer safety regulations in the workplace. The list of such countries, by the way, includes virtually all poor countries. There’s a reason for that. Environmental quality and safety of all kinds are what economists call “normal goods.” These are goods that, as our income increases, we buy more of and are willing to pay more for. So workers in poorer countries would rather have more income than the meager amount they start with and less environmental quality and workplace safety. And the market responds. We in America buy imports produced by workers who are willing to work in those conditions. And our comparative advantage is in other areas. Each side produces the goods in which it has a comparative advantage, and both sides are better off. Again, this does not mean that trade does not hurt any competing workers; it means, rather, that the losses to the hundreds of thousands of them are less than the gains, all in dollar terms, to the hundreds of millions of U.S. consumers who pay lower prices.

Read the rest here.

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