The Trump Administration Confuses Trade With a Football Game
The problem with the Trump Administration’s approach to free trade is that they seem to have it confused with a football game, where the goal is to rack up a higher score than the other team. But under free trade, the score goes up for both sides whenever either team crosses the goal line.
Many can’t get away from the notion that trade is a competitive sport, with the objective being to “beat” the other team. The political economist Robert Reich, not the biggest fan of an unmanaged economy, used to tell a story that illustrates how many people think the goal of economics is to post a higher score. He would ask his undergraduate political economy class for a show of hands: Would they rather have a 4 percent national economic growth rate with the world averaging 5 percent? Or would they prefer only 3 percent growth with the world average at only 2 percent?
Amazingly, most hands went up for the latter – for slower national economic growth just so long as it wasn’t as slow as the rest of the world. As though one doesn’t mind being poor, just so long as everyone else is even poorer.
Hopefully, the undergrads knew better by the time they graduated from Reich’s class. If they did, that alone would have justified the steep tuition cost. If they didn’t, they should have considered asking for a refund. Because one’s goal shouldn’t be to do better than the other guy if the other guy is doing poorly. The goal is to create as much wealth as possible.
Comparisons with other economies are valuable, as an indicator of how well one is doing in relative terms, and to learn what others are doing better or worse. But the goal isn’t to cheer at how your country’s economy is doing. The goal is to enjoy the its fruits. What one wants is a big slice of a big pie, not to try to horde more of the crumbs.
Still, some seem to think that the goal of trade is to export more to the other country than they export to you. But how important is the trade balance? The last time the U.S. posted a trade surplus was in 1975, when the country was in the midst of a recession in the middle of a decade characterized by stagflation. Over the past 40 years the United States notched its biggest trade deficits during years when the country’s economy was roaring, and unemployment was at its lowest.
The U.S trade deficit soared between 1992 to 2006, from $39 billion to $762 billion – while the unemployment rate fell three points. The trade deficit came down significantly in 2009, when the economy had sunk into a deep recession. Which would you rather have, growing trade surpluses or a growing economy?
We are seeing the schism between smaller trade deficits and a bigger economy play out in the current NAFTA negotiations. Focusing on smaller trade deficits is the Administration, which is seeking trade “balance” through such measures as a new rule of origin requiring minimum national content in autos.
This mercantilist approach might – emphasizing ‘might’ – be a sound strategy to pursue if one just wants to do better than the other guy. But if the goal is to create more wealth and spread more prosperity at home, it is hard to see the advantage of beggaring one’s neighbors rather than partnering with them.
Mercantilists might prefer to try to cling to every last job. But that would only make U.S companies uncompetitive. Offshoring some aspects of production keeps costs down and sales up. In the highly-integrated auto industry, for example, cross-border supply chains have enabled a six percent increase in U.S. employment during the current economic expansion – triple the pace of overall employment gains.
No wonder nearly every major automaker and auto parts supplier has joined together in a coalition to urge the president not to withdraw from NAFTA. This puts them on the same side as the Chamber of Commerce, the Farm Bureau, retailers and other business organizations.
Past trade negotiators seemed to recognize that a negotiating table is not a football field. Instead, they played three-dimensional chess, understanding that the goal was to create more wealth, not simply post better trade balances. The Trump Administration, on the other hand, seems to be playing Russian roulette, with a bullet in every chamber.