Trumpian Trade, are we going to be “The Winner?!”

I wanted to post on Friday, but somehow I thought I ought to give supporters of Mr. Trump at least a day to enjoy his inauguration before critiquing him as our new president.  So, here we are on Monday morning and we’re now in the brave new world of Trump. His inauguration speech was nationalist to its core, and from an economic perspective, it couldn’t be more wrong-headed.  Mr. Trump is getting increasingly explicit over the ways he wants to conduct trade, with specifics and philosophy that likely would have led to a different result had he made these in the primaries a year ago.  Emblematic of the troubling inauguration speech is this:

Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.

Rich Lowry over at National Review has it right–just add three letters to the last sentence:

Protection(ism) will lead to great prosperity and strength.

Of course, the exact opposite is true.  History is clear that the gains from trade and associated division of labor are precisely the driving factors that have led to the tremendous economic growth of the last few hundred years.* When I was a younger boy, my late father would always have country music playing.  I was similarly a music aficionado, although my taste was more the mild rock of the late 70s and early 80s, but I nevertheless could appreciate and like some of my father’s country music.  As I hear Mr. Trump calling people losers, and insisting we’re going to be winners again, I can’t help but recall one of those country songs from my youth:  The Winner, by Bobby Bare. And thanks to the wonders of YouTube, available to us all. Rather long at over 5 minutes, its still humorous and worth listening to once. Hey, if Mark Caleb Smith can give movie reviews here, I’m going to recommend a song every now and then!

When Mr. Trump insists we’re going to win at trade with China, and slap 35% Tariff’s on German car manufacturers that don’t build in the U.S., and we’re going to build a wall to stop Mexican imports, I can’t help but think that we’re going to end up being winners like the protagonist in Bobby Bare’s song.

For those that didn’t bother listening to the song, the main character is an old bar room brawler that had never been beat; he was a winner even though all his “victories” were Pyrrhic–they came at great cost, with broken limbs and bones and loss of teeth.  When he describes the woman he stole from another man, he says “she gets uglier and she gets meaner every day.  But I got her boy, that’s what makes me a winner!”  That’s a great description of protectionism–it’s going to get uglier and meaner every day.  If Mr. Trump somehow wins at trade, we’re all going to be losers.

*Happy to elaborate on the benefits of trade and perils of protectionism in the comments if you have questions.

 

27 thoughts on “Trumpian Trade, are we going to be “The Winner?!””

  1. Dr. Haymond,

    I wonder what you think the effects of Trump’s proposed reduction of the corporate tax rate and his already-in-motion initiative to slash the regulatory state will have?

    Do you think it is possible that these two things could, assuming they succeed in keeping companies here and making it easier for industry and business to flourish, would preclude some of the more protectionist actions from actually being considered?

    1. I think both of the items you mentioned are tremendously positive (as I’ve remarked before). But this focus on trade is very destructive. What he gives with the right hand, he may be taking away with the left. And more broadly, he may end up creating his own form of regime uncertainty, where firms will not know what he is going to do and hold back on new investment. For one example, if you are thinking about expanding investment in a politically favored industry–say automobiles–you many not want to make that investment since Mr. Trump’s view is you can never move the capital later. In the words of the Eagles, “you can check out any time you like, but you can never leave.” His actions on trade may have a whole series of unintended consequences. Don Boudreaux over at Cafe Hayek has been–as usual–brilliant on these, you may want to check it out.

  2. Dr. Haymond,

    I did not listen to the song. So I wanted to thank you for your summary.

    I’m kind of curious, given these events, do you think Trump’s actions will be a net positive or negative on the US?

    1. Hard to say…we’re still in “the art of the deal.” What does Mr. Trump really want to do? My gut feel is that we’ll be net positive by a fair amount, but that there is more uncertainty and potential significant downside risk because of the trade issue.

      BTW, to all anonymous’s out there–can you pick a pseudonym instead so we can kind of keep your comments straight from other anonymous posters? Elmer Fudd, Donald Duck, Peter Parker are all available. You can have Darth Vader or Lord Aragorn too.

  3. It will definitely be interesting to watch what happens when his plans are implemented. One of the first principles we learned in Microeconomics was that trade benefits everyone. Protectionism is obviously not the solution to the problems that Trump thinks he needs to fix.

  4. Dr Haymond,

    I understand that trade usually benefits everyone, however trade is dependent on each participant having valuable goods available to trade. It seems today that many jobs and industries are being shipped over seas and many products sold in the U.S. are made in every country but the U.S. My question is, what industries keep the U.S. competitive in international trade and how can the U.S. keep jobs from leaving the country without imposing higher tariffs or other trade restrictions?

    1. You can’t keep all jobs, but you’ll keep the jobs we do comparatively better. Chemicals, Financial Services, Aircraft, pharmaceuticals, energy, agriculture, etc. are all just some of the areas where the US is dominant. The U.S. is a dominant exporter on the world stage and, contra Mr. Trump, we have a tremendous number of jobs that are due to exports. What Mr. Trump (and most politicians do on most issues) is lump everything together. “American jobs” have been lost. Really? There are millions of people working–many in good, satisfying jobs. The reality is that trade does create winners and losers, and Mr. Trump is trying to placate that part of his electoral base that consider themselves left behind. But the trick is how does he help the prior trade “losers” without causing harm to prior trade “winners?” Its a tough battle. I think he should just focus on the other reasons why manufacturing is in decline (other government regulations); a strong growing economy would lift all boats.

  5. I thought the same thing after listening to his speech, it will be interesting to see what happens if Trump can implement his ideas.

  6. I am not sure there are any real ideas in that so-called speech. I saw a lot of populist slogans and simple-minded, feel-good fodder for bumper stickers. The address seemed to be written to an audience with an attention span of a ladybug.

    Indeed, I really haven’t heard any real coherent ideas from the Donald yet. Any day now.

  7. I recall talking about this in class last week. One of the principles of economics comes to mind, that is the principle of incentives matter. If domestically produced items can’t be exported (because trade benefits everyone) then those producers won’t have the incentive to produce a great amount/quality. They won’t reap the benefits if Trump puts his own hand over the economy. It will definitely be interesting to see how these plans work out in the short run and long run.

  8. Three days after the inauguration, Trump is already asserting his plan on limiting trade with other countries. Today, Trump used an executive order on the Trans-Pacific Partnership trade deal meaning the US will no longer be involved in the TPP trade deal with the other 11 countries in the Pacific area. I read on BBC news that these 12 countries represent 40% of the world’s economic output. All 12 countries needed to ratify the deal for it to be in effect. It looks like this could potentially be big blow for the countries in the TPP since the US is now out. For Dr. Haymond or anyone, how will this terminated trade deal impact the US economy? The world’s economy?

  9. I think I understand the problem with protectionist tariffs. I am curious what you would with of a tariff in place with the intention of gain tax revenue. I know that is not the main goal Trump has in mind, but do you think if a 5% or 10% (not 35%) could be beneficial to the government without causing too great of a dead weight loss. My other question is how much do you think Trump is really going to follow through with his claims. Do you think he will really push for a 35% tariff on car manufacturers?

  10. Dr. Haymond,
    To what extent IS congress on board with Trump’s leaning protectionist desires and is there anything it might do in order to stop him? Since congress is dominated by Republicans, does that mean it will likely roll with what Trump is proposing?

    1. I think the Congress will try to make his actions less harmful. However, adding 5 lbs of harm to the bag instead of 10 lbs is still harmful. The Congress will likely deal with him to get the other things Mr. Trump is offering that are good–regulatory and tax reform.

      1. Tax reform? Like tax cuts? While increasing spending in order to build a wall, increase defense spending, and ensure, as the president put it, insurance for all?

        In other words, massive deficit spending that will make the relative improvements during the Obama administration a historical footnote.

      2. Mr. Adams,
        Pretty much everybody agrees that the corporate tax rate is an abomination. And everyone (Republican and Democrat) agrees what the fix is–lower the rate and broaden the base. We don’t need reform to result in less revenue. We have the highest corporate tax rate in the world, and we generate precious little tax revenue from it. This is an easy reform to make.

  11. I think it can be frustrating listening to Trump talk about trade. Trade can benefit us a country and Trump acts as if other countries are stealing everything from us. There doesn’t always have to be a clear cut winner or loser. Trade benefits both sides. I think it will be interesting to see Trump in presidency these next few years.

  12. I do not think it’s possible for the country to lose when we have a press secretary that has access to these mysterious “alternate facts”. All kidding aside, I do think it is possible, and I just hope that Trump’s apparent refusal to understand basic fact does not extend to his advisers.

  13. “Mr. Adams,
    Pretty much everybody agrees that the corporate tax rate is an abomination. And everyone (Republican and Democrat) agrees what the fix is–lower the rate and broaden the base. We don’t need reform to result in less revenue. We have the highest corporate tax rate in the world, and we generate precious little tax revenue from it. This is an easy reform to make.”

    I would agree that corporate tax reform is needed, but it is absurd to say that it is an easy reform to make. There would be winners and losers with the plans that are being floated, and we don’t know what the effects would be after the dust has settled.

    Some of the potential problems are discussed here: https://www.nytimes.com/2017/01/07/upshot/the-major-potential-impact-of-a-corporate-tax-overhaul.html?_r=0

  14. If you are arguing, Jeff, that corporate taxes should be abolished, there is no way a reasonable person could agree to that. Too simplistic, as most ideas that can fit on a bumper sticker tend to be. Also, too many incentives to do wrong, including hurting shareholders.

    Not saying that you are saying that, but if you are, you probably need to rethink your position. :-)

  15. Very interesting article. Trump’s positions on trade were one area that I was not well informed about in his policies. The article was very informative. I hope that President Trump will have some good economic advisors tell him that he is making a mistake with his policies on trade.

  16. I agree with your analysis of Trump’s economic policies. I find it hard to believe that someone who received an economics degree from the Wharton School could have such a poor understanding of international trade, and it pains me to see him completely ignore the concept of comparative advantage. If only Trump could take Principles of Macroeconomics this semester, America might go in a better place economically.

  17. I do think that the Congress will restrain some of his actions, and I can’t help but wonder if time will begin to soften Trump on his trade antics. I am fondly reminded of Milton Friedman’s analogy in Free to Choose that if a company wants to dump cheaper products into our country, we should oblige them and use the saved resources to invest in other projects (I think the example he used was lower steel prices). Such actions are generally not politically popular, though, because that requires a sliver of patience to see results, an attribute that is sorely lacking in politics.

  18. I’m still a little confused. How are we still gonna lose if he wins trade. If he increases tariffs on German manufacturers made outside of the U.S., can’t we just make the same car within the U.S.? I know people who only buy American made products and they have everything they need.

    1. Kate–
      Of course we could build the same care in the U.S. But the fact that we don’t currently is evidence that we cannot do it as efficiently as the Germans. So to do so would take more resources from areas where we are relatively more efficient, and transfer them to areas where we are relatively less efficient. This will lead to a reduction in total output, thus making us poorer than we otherwise would be. This is the basic argument of comparative advantage, which has been a staple of economics since David Ricardo in the early 1800s. But you really don’t need economic doctrine to become convinced of this. Just look at what gains from specialization and globalization have led to in the last 40 years or so. I don’t want us to be the “winners” Mr. Trump wants us to be, precisely since that will make all of us losers somewhat (higher prices and lower quality) and it will make winners of the less efficient protected industries and associated workers while making losers of the unprotected export industries and their workers. Why should government be the arbiter through the political process of which workers should win and which should lose?

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