Some Thoughts on Free Trade

In many ways, President Trump is a policy tumbleweed. He doesn’t seem able to remain focused for very long on a single issue. However, this vacillation does not seem to be the case with his economic nationalism. He does seem able to focus on protectionism; whether he is attempting to restrict immigration or global trade, his intuition maintains a laser focus.People trade. In A Splendid Exchange, William J. Bernstein ranks trade amongst our most basic needs. “Trade is an irreducible and intrinsic human impulse, as primal as the needs for food, shelter, sexual intimacy, and companionship.” There is a reason people’s earliest recorded writing has to do with exchange. Among economists, Adam Smith is well-known for authorship of the Wealth of Nations. A famous passage discusses people’s “propensity to truck, barter, and exchange”.

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Trade is central to our social structure. By specializing (focusing on one endeavor) we are able to produce more goods and services than we would be able to if we were required to be a jack of all trades and produce everything that we consume. We produce a valuable surplus that we trade for something that we want more deeply. Much of what we do in life, and how we relate to others, concerns our specialization at work, play and in additional areas (church, voluntary civic institutions, etc.) of our lives.

I teach economics at Cedarville University. I specialize in doing this one thing. When seen in the broad context of a university education, economics education has a particular value. I help create that value and trade what I have created for other things that I find more valuable. You and I trade with one another. People engage in trade all the time. Tonight for supper we plan to have chicken quesadillas. In essence, I traded some of the value I created through my job at the university to Tyson chicken for frozen breast tenderloins with Sam’s Club acting as an intermediary to help facilitate the trade. I ended up with something I wanted more –  the chicken. Tyson traded the chicken and will be able to take the value that I created here at Cedarville, represented by money I paid for the chicken, and turn the value into something that they want more than the chicken. Both parties in the exchange benefit. We know that when we make an exchange we are trading something of lesser value for something of greater value. Of course, the person (we might think of a chicken farmer) with whom we are conducting the trade is also gaining value. When you understand that trade is mutually beneficial, you’ll be able to understand the implications of restricting trade. When trade is restricted, some of the value that comes from exchange is destroyed.

The United States is a huge free trade zone. The chicken for tonight’s quesadillas comes from a different region in the country than where I live in Ohio. Maybe the chicken’s origin is Arkansas, Tyson’s corporate headquarters. There are no special “trade taxes”, tariffs, imposed when goods are sold from one state to the next. The state of Ohio does not place special taxes on goods simply because they were not created in Ohio. I am free to eat Arkansas chicken, if I believe that Arkansas chicken is a good value for me. The larger the political footprint for free-trade, the larger the market in general, and greater the possibilities for trade. Constitutionally, individual states cannot impose tariffs against imports from other nations and the Supreme Court has applied the import-export clause to interstate commerce. Ohio would never think of imposing tariffs on goods shipped from Arkansas, and not simply because it is illegal. It is because the legal environment has enculturated US citizens to believe that we should would be able to trade freely within our national borders. The United States is a large free trade zone. Trade between different regions of our country contributes to the peace and stability within the nation.

Since the end of World War II, spearheaded by the United States among other western countries, nations have been moving to make the entire world a free trade zone. In the United States, average tariff rates have fallen from approximately 50% prior to World War II to less than 5% today. As a result of globalization many billions of people have benefited from being able to trade the surplus wealth they create for something that they value more highly. Free trade has greatly increasing the standard of living across the globe. Absolute poverty has been taking a nosedive during the period of globalization. Diagram: Cato Institue

The remaining pockets of the worst global poverty occur in nations we are the national leaders exploit and repress their people or the government is so weak that it cannot provide the necessary political institutions for trade. Let us hope and pray that President Trump’s laser focus on protectionism does not erupt in retaliation from our trading partners. The world is a much smaller and safer place when we trade with people from other countries.

13 thoughts on “Some Thoughts on Free Trade”

  1. Would there be cases where economic retaliation was a sensible, or even a good, move? If the EU were to respond by selectively restricting trade in ways that would be obvious with the goal of tearing down the barriers in the long run, it would seem like that could be a good idea.

  2. What are the ulterior political motives at work in these moves on trade? I find it very hard to believe that Trump does not understand the benefits of free trade. There must be something else motivating him to abandon economic reason. I’d imagine that he hopes to use this as a bargaining chip or put pressure in some other area.

    1. Why couldn’t he just disagree with you about whether free trade is good? People can have different opinions on these things.

      1. It is possible that he disagrees, but there is very little data to back up an anti-trade opinion. Mainly, I believe that he is a showman and a deal maker. I do not think Trump does much of anything without considering how it can advance himself. He got elected by folks who want to protect American manufacturing no matter the cost, so it will benefit him to employ tariffs, but there may be something more.

      2. Just on this point, it’s possible that Trump really doesn’t understand this. He has a BA in Economics from Wharton, but if his teaching was in the Keynesian style, it’s entirely possible that he has a misconceived view of free trade. Moreover, Trump has been fairly consistent on his trade views. Even back in the ’80s, he was complaining about trade deficits. Of course, he probably still has an ulterior motive, but he’s likely got an incorrect view anyway.

      3. It wouldn’t even be a Keynesian thing, since (as far as I know) virtually everyone agrees that trade is generally good. It’d just be an intuition, I think, more than anything else, the same way most nativists come to their position. Like Vader said below, it’s a logical thing to think if you are looking at it on a superficial level.

        But yeah, I’m inclined to agree. Either he doesn’t really care and is trying to win over nativists, or he is genuinely convinced that trade is bad unless we’re ‘winning.’ Given his history, that would probably be a bad thing for our partners, since Trump’s wins usually come at his partners’ expense.

  3. Protectionism at the expense of inclusive institutions and free trade does nothing to help our economic freedom or economic prosperity. Further, I don’t see why President Trumps laser focus on protectionism won’t disrupt our relations with our trading partners. This act is akin to closing the door to relationship and interaction with our trading partners which will inevitably disrupt the free flow of commerce and the sentiment our partners hold concerning our commitment.

    1. I think he has a zero sum worldview that keeps him from seeing things your way. Trade has to have a loser to him, so it’s only a good thing if we’re ‘winning’ at it.

      1. Theo, you’re absolutely right. And his view is logical.

        Let’s say the US is a company, we produce a bunch of products, we sell those products to other companies and we buy products from other companies.

        If we buy more than we sell, we’re not going to be operational for very long.

        Now of course I understand where this line of thinking is misguided, but I feel like it’s a logical worldview for someone with Trump’s past to have.

  4. I agree that in general protectionism will hinder the free trade that is so advantageous to efficient market economics and creating the most value for market participants. To what extent, however, should we consider that some businesses in foreign countries are being heavily subsidized, and often even owned by foreign governments that are willing to use their power to unfairly eliminate competition? In cases like that, are protectionist policies useful?

  5. What is Trump’s justification for his protectionist policies? Has this garnered support from other powerful party members? I would like to see if he truly thinks that this is the best thing for the US or if he is just playing some other angle to win popularity or to make it seem like he is all for the success of American businesses.

  6. Trump clearly thinks that the benefits of protectionism will outway the downfalls. Clearly he does not understand just how crucial trade is and how much it benefits us. I am afraid that this is going to make our trading partners retaliate and then we will take the hit. Trade has helped with so many things including poverty and there is no reason that it should be changed.

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