Category Archives: Trade

Bastiat on Trade and National Security

From page 86 of the Liberty Fund edition of Frederic Bastiat’s collected works, Economic Sophisms and “What Is Seen and What Is Not Seen”:

“What will we do in case of war,” [French] people say, “if we are subject to England’s discretion with regard to iron and coal?”

Monopolists in England, for their part, unfailingly proclaim:

“What would become of Great Britain in time of war if she were dependent on France for her food?”

We tend to disregard one fact, which is that this type of dependence resulting from trade and commercial transactions is mutual. We cannot be dependent on foreigners without them being dependent on us.

Bastiat on the Balance of Trade

From page 14 of volume 3 of Frederic Bastiat’s collected works, Economic Sophisms and “What Is Seen and What Is Not Seen”:

But people will say: if foreigners swamp us with their products, they will carry off our money.

What does it matter? Men do not eat money; they do not clothe themselves with gold, nor heat themselves with silver. What does it matter if there is more or less money in the country, if there is more bread on the sideboard, more meat on the hook, more linen in the cupboards, and more wood in the woodshed?

Restating the Case for Free Trade

The case for free trade needs to be restated frequently. Politicians keep pushing the same protectionist policies, as though maybe this time the results will be different. President Trump copied Herbert Hoover’s Smoot-Hawley tariffs. President Biden is copying Trump’s trade policies. They do this in part because voters want them to. As economist Bryan Caplan has documented, most people have anti-market bias and anti-foreign bias, and vote for candidates who cater to those biases.

That means that year after year, market liberals need to keep making the case for free trade’s benefits for prosperity, peace, and its importance for resiliency against crises and shortages. Lasting change comes from the bottom up, not the top down, so that’s where we need to focus our efforts. The latest attempt at popular persuasion, “The (Updated) Case for Free Trade” by the Cato Institute’s Scott Lincicome and Alfredo Carillo Obregon, is worthy of its task. It consists of both a paper and a fantastic website that is worth a scroll.

They hit on several fronts, first by making the economic case for free trade: “The payoff to the United States from expanded trade between 1950 and 2016 was $2.1 trillion, increasing GDP per capita by around $7,000 and GDP per household by around $18,000.” With an economy still feeling the effects of COVID-19 and inflation at a 40-year high, trade’s benefits are essential for millions of families.

They then make the geopolitical case for free trade, as have thinkers from Montesquieu in the 18th century to former Secretary of State Cordell Hull during World War II. Countries that trade with each other rarely go to war with one another. This, not boosting GDP, was the animating principle behind the post-war rules-based international trading system anchored by General Agreement on Tariffs and Trade and then the World Trade Organization. Deep trading relationships are also essential for building diplomatic alliances, which are needed today against Russia and China.

Most importantly, they make the moral case for free trade. Too many economists ignore trade’s moral goodness; Lincicome and Obregon emphasize it. Post-WWII trade liberalization was a significant factor in reducing worldwide extreme poverty from 2.2 billion people in 1970 to 705 million in 2015. That’s a two-thirds reduction in absolute terms, even as global population roughly doubled. In percentage terms, the change is even starker. Extreme poverty was 42.6 percent of world population in 1981 and 8.6 percent in 2018. That’s a four fifths reduction in the proportion of people in extreme poverty, in less than 40 years. Never in human history has anything like this ever happened before, and trade is one of the engines behind it.

That progress is measured in dollars, but it’s not really about money. It’s about reducing infant mortality, and sending kids to school instead of to work in the fields. It’s about access to sanitation, electricity, and medical care. It’s about each generation finally living better than the one before it, even in the poorest places on Earth. Hans Rosling’s book Factfulness shows how deeply trade-enabled growth has improved people’s lives. Trade gives people hope, opportunities, and progress.

The authors then make the case against protectionism, which has guided trade policy for both the Biden and Trump administrations. In addition to puncturing myths about manufacturing, the balance of trade, and self-sufficiency, they point to good policies that policy makers should adopt.

Free trade is about more than removing obstacles. It is about creating an institutional structure under which people—not politicians and special interests seeking protection—can cooperate, compete, and resolve disputes in ways that they choose.

Cato’s web team put together an excellent website summarizing the case for free trade; Lincicome and Obregon’s paper is also a good read.

These are not the only resources for people interested in the case for free trade. Iain Murray and I wrote the report “Traders of the Lost Ark” a few years ago. Pierre Lemieux’s What’s Wrong with Protectionism?is a fantastic short book. The magnum opus of America’s complicated relationship with free trade is Doug Irwin’s Clashing Over Commerce, the paperback edition of which blurbs my review on the back cover.

Trade, Mission Creep, and the Indo-Pacific Economic Framework

President Biden announced this week a major economic agreement with a dozen countries in the Indo-Pacific region, to be called the Indo-Pacific Economic Framework (IPEF). Its goal is to provide a larger diplomatic and economic counterweight to China and increase America’s presence in Asia.

At first glance, it seems like an odd move. President Obama had already negotiated the Trans-Pacific Partnership (TPP) with many of the same countries in IPEF. President Trump pulled out of the TPP when he took office, but all the other member countries continued on without U.S. involvement under the renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Negotiating costs for rejoining TPP/CPTPP would likely be minimal, while the economic benefits of more open trading relationships will help offset America’s high monetary inflation. As a political bonus, President Biden would be undoing a major part of the Trump trade agenda. So why is Biden starting with a new agreement from scratch? I argue that it’s part of a long-term evolution in how governments are treating trade policy.

One difference is that IPEF has a different regional focus. The TPP/CPTPP focuses on the Pacific Rim, so it has members in South and Central America, not just Asia. IPEF focuses on China’s neighbors, most significantly India. America is IPEF’s only non-Asian member. So, the different diplomatic focus explains part of it.

Another factor for choosing IPEF over rejoining TPP/CPTPP is political: It will not require Senate confirmation. That is a large hurdle at any time, but with Republicans likely to take over the Senate, they would be unlikely to give President Biden a victory, despite their sharing a protectionist trade outlook.

But the broader reason, about which I am more concerned, may be mission creep. I will hold off on further judgments on IPEF until more details become public, but the point about trade policy’s loss of focus on trade is important enough to discuss now.

The North American Free Trade Agreement (NAFTA), which went into effect in 1994, was accompanied by side agreements on non-trade issues, specifically environment and labor. This was a first for major trade agreements. Those side agreements are why CEI originally opposed NAFTA. Our analysts at the time favored the free trade parts of the bill, but they did not like the precedent set by the trade-unrelated side agreements. They had a point. In the years that followed, trade-unrelated issues took on greater prominence in new agreements, and their page lengths ballooned accordingly.

By the time President Trump replaced NAFTA with the United States-Mexico-Canada Agreement (USMCA), NAFTA’s non-trade side agreements were folded into the main agreement, which is now more than 2,000 pages long. During the Obama era, trade agreements began to lose the word “free” from their names. President Trump took it even further. As I pointed out at the time, “USMCA’s name does not contain the words ‘free’ or ‘trade.’ This is symbolism, but also important.”

It also accurately reflected the contents. This shift in emphasis is why Iain Murray and I came out against USMCA. We liked that it would mostly preserve NAFTA’s zero-tariff relationships with Mexico and Canada, but those were already in place, and all the new trade-unrelated provisions meant more net burdens and more opportunities for cronyism.

IPEF represents the next logical step in that process. Again, details to come. But the administration’s early remarks make it seem that rejoining TPP is not on the agenda and that IPEF will have little to do with trade. At least TPP treated trade relations seriously. USMCA’s bad precedent has likely borne bad fruit.

We’ll soon see what IPEF contains. But if it is a multi-issue thicket of ideological wish list items and special favors for politically connected interest groups, its member countries may end up bickering about small provisions when they should be cooperating on the big picture of building together a counterweight to China.

On the TV: Baby Formula

Newsy interviewed me recently for a segment on baby formula. The video and accompanying article are here.

U.S. to Lift Tariffs against Ukraine for One Year: China Next?

In 2018, President Trump enacted a 25 percent tariff on Ukrainian steel, on what he claimed were national security grounds. They remained in place throughout Trump’s subsequent (and unrelated) Ukraine drama over withheld military aid. President Biden left the Ukraine tariffs in place even as he undid other Trump administration policies. They even stayed in place for more than two months after Vladimir Putin invaded Ukraine. Now the Biden administration finally announced it will lift the tariffs—but only for one year. Possible relief on the China tariffs may also be on the way.

America’s trade policy is overdue for a course correction, but the Ukraine liberalization is one of the smallest possible trade actions possible. Ukraine is only America’s 12th-largest source of steel imports. It will have only a small positive effect on steel prices in the U.S., which are currently the world’s highest, due in large part to the Section 232 metal tariffs, of which the Ukraine tariffs are a part—but it’s a start.

Tariffs are what we seek to do to our enemies during wartime. There is no good reason to impose them on allies—especially they are attacked by a common enemy. The Ukraine tariffs are an obvious example that is hopefully raising an outcry for further action. The Biden administration should also remove other tariffs against allies such as the United Kingdom, Europe, and others. In addition to the economic benefits for everyone involved, trade liberalization would strengthen diplomatic efforts in countering Russian and Chinese geopolitical influence.

It’s not just allies—tariffs are also ineffective against rivals. China, which will be the next big trade issue to come up on the agenda, is a case in point. President Trump’s China tariffs are required by law to expire after four years unless they get renewed.

U.S. Trade Representative Katherine Tai is pushing for President Biden to extend them, even though the tariffs are raising consumer prices on thousands of goods above what inflation is already doing (inflation is a separate issue that concerns the money supply, not trade).

Tai still believes in a “tariffs as leverage” theory, even though four rounds of tariffs plus the Phase One agreement failed to net a single substantive reform from Beijing; the real world has a lesser opinion of the leverage theory than Tai does. It is telling that among her few allies on the leverage theory are Trump officials such as her predecessor, Robert Lighthizer.

What should Congress do? In the short term, it should repeal as many tariffs as possible. During an election year where inflation is the top issue, tariff relief would lower prices on all manner of goods (though, again, inflation is a monetary, not trade, issue).

In the longer term, presidents should not be able to enact tariffs by themselves. In our system of government, taxing authority belongs to Congress. Congress should repeal Section 232 of the 1962 Trade Expansion Act, which delegated some of that authority away. Under Section 232, presidents may enact tariffs without Congress, so long as they cite national security reasons. The Ukrainian steel tariffs are Section 232 tariffs.

Congress should also repeal Sections 201 and 301 of the 1974 Trade Act, which give the president similar unilateral tariff-making authority on competitiveness or treaty violation grounds. The China tariffs were enacted under Section 301. Repealing these would mean that no future president could abuse these powers again. They are harming American economic and diplomatic interests.

Repealing national security tariffs against Ukraine, of all countries, is low-hanging fruit. There is much more waiting to be picked. We found out—the hard way—that tariffs provide no leverage in convincing Beijing to reform its unfair trade policies. It is time to cut our losses and move on to policies that work.

Sorting Out Some Confusion on Trade and GDP

While inflation is the biggest economic problem right now, trade policy is another reason why GDP shrank last quarter. It is also a common source of misunderstanding. This post attempts to clear some things up.

University of Central Arkansas economist Jeremy Horpedahl notes two overlooked factors in today’s bad GDP news: 1) a decline in government spending and 2) a decline in net exports.

The spending decline was expected, as temporary COVID spending programs have begun to expire, though other big spending bills will partially take their place as the infrastructure bill and other recent trillion-dollar packages begin paying out over the next several years. While this can cushion short-term GDP numbers, those government spending projects will create less value on average than alternative private uses of those resources. Short-term stimulus means long-term harm.

The decline in net exports is more complicated. The Trump-Biden tariffs and the retaliations they sparked put a damper on global trade even before the pandemic. They added to existing friction points in trade, such as excessive regulations on ocean shipping, ports, and trucking.

As things go back to normal, the supply network problems exacerbated by these policies are still being untangled. If Congress and the administration are looking for ways to boost growth without raising spending, they should liberalize trade and reform regulations.

GDP measures how much stuff people create. Trade regulations block people from making stuff, often for no good reason. Moving toward freer trade would boost GDP in both the short and long run.

Trade also confuses some pundits. There will be talk on economically illiterate cable news shows about how America’s trade deficit is causing today’s economic troubles. As usual, those pundits should be ignored. Economists going back to Adam Smith know that the trade deficit has nothing to do with economic health. It is neither good nor bad. For example, Russia’s economy may shrink this year by as much as 45 percent, but it has a massive trade surplus. In America, the trade deficit went up throughout the gangbusters growth of2021. It tends to be highest during booms and lower during recessions.

Americans buy all those imports with dollars. Foreign sellers in China or Japan can’t use dollars at the grocery store—so they send them back to America. Some of those dollars buy American exports. Most of the rest goes to investments in American businesses and government bonds. Every dollar of trade deficit is a dollar of capital surplus. It’s a wash. People spend their dollars one way instead of another, but they get spent just the same. It doesn’t matter for GDP.

The only reason net exports are in the GDP equation is to avoid double counting. When an American buys a foreign import, she first has to earn the dollars to pay for it by making something here in America. That earlier production was already counted once in GDP. Similarly, exports count toward GDP, even though Americans don’t consume the final product. Exports are the price we pay for imports. Any imports beyond that are paid for by cash earned from other domestic production that doesn’t get exported, and was already counted in GDP.

As with most other issues, do not listen to hysterical, hair-pulling cable news pundits on trade deficit issues. The economy has serious problems, but the trade deficit is not one of them. Policy makers should instead focus on liberalization—perhaps starting with repeal of the Jones Act.

Podcast: Inflation

I was recently the guest on the Of Consuming Interest podcast, hosted by Shirley Rooker. We talked about common misconceptions about inflation and a few other economic issues. After we wrapped, the producer said I was “very understandable,” which is easier said than done in monetary economics.

The audio is here.

The Updated Case for Free Trade

Trade is a core value of civilization. The very act of trade implies respect for people’s rights. Suppose you have something I want. I could take it by force or I could offer to trade you something in exchange. Not only that, but since you have the right to say no, I have to offer you something you value even more than what you give up. Civil exchange puts the civil in civilization—both morally, by rewarding peaceful behavior, and economically, by making possible the division of labor.

Stanford University historian Josiah Ober argues that one cause of Ancient Greece’s cultural flowering was a relatively liberal attitude toward trade and commerce—and its decline was caused in part by a turn inwards. The great Belgian historian Henri Pirenne made a similar claim about Ancient Rome. Dartmouth University economist Doug Irwin traces free-trade arguments through Saint Augustine and Thomas Aquinas up to the first modern defense of free trade in Henry Martyn’s 1701 Considerations Upon the East India Trade. Adam Smith made a moral and economic case for trade in 1776 that economists have been refining ever since.

The 30-fold improvement in living standards since around 1800 is due in large part to gradual popular acceptance of the benefits of trade. The process has not been smooth. In the first half of the 20th  century, growing nationalist sentiment and a rejection of bourgeois virtues helped lead to two world wars and the Great Depression. The free world came to its senses after those horrors, and spent the next 75 years lowering trade barriers, helping hundreds of millions of people to rise out of poverty. That era may now have ended with the Trump administration’s protectionist turn, the Biden administration’s normalizing of that change, and rising nationalism here and abroad.

The case for free trade may be an old one, but it needs to be restated often. To that end, the Cato Institute’s Scott Lincicome and Alfredo Carrillo Obregon this week released “The (Updated) Case for Free Trade,” an accessible restatement of the moral and economic case for free trade that offers a stark contrast to the protectionist alternatives politicians from both parties are now proposing.

They also take a look at how trade policy can affect America’s most important foreign policy challenge going forward: China.

China represents real challenges, but dealing with it does not warrant abandoning free trade. Instead, historical and recent evidence demonstrate that China’s economic threat to the United States has been exaggerated, that aggressive unilateralism will prove less effective in influencing the Chinese government’s behavior than multilateral engagement, and that the United States will be better positioned to respond to a rising China if it embraces the openness and confidence that made America an economic powerhouse.

The whole paper is worth reading.

Trade might not be a front-page issue at the moment, but it underlies nearly every issue that is getting significant ink, including supply chain problems, housing prices, the pandemic response, and foreign policy challenges such as those involving Russia and China.

Sound trade policy and the liberal values that undergird it need as many able defenders as they can get; Lincicome and Obregon’s contribution is essential in that regard. Readers interested in another easily accessble defense of free trade should also check out Iain Murray’s and my paper “Traders of the Lost Ark.”

New Export-Import Bank President Has Opportunities for Reform

Reta Jo Lewis is about to become the next president of the Export-Import Bank. The Senate confirmed her nomination yesterday. Called Ex-Im for short, the bank seeks to boost U.S. exports by guaranteeing loans for buyers of U.S. aircraft and other goods. In many years, Boeing has been the beneficiary of as much as half of Ex-Im’s business. Around Washington, Ex-Im is informally known as the Bank of Boeing.

Unlike most other agencies, Ex-Im’s charter expires every so often. If Congress does not reauthorize it, it will close. The last two reauthorization rounds were contentious, with members of both parties calling out Ex-Im on grounds of corporate welfare and ineffectiveness. Ex-Im’s charter lapsed for a good part of 2014 and 2015, mostly closing the agency. It was only allowed to administer its existing portfolio, and was unable to take on new projects. These can exceed $20 billion per year when the agency is at full strength.

During Ex-Im’s shutdown, Boeing, the company most heavily affected, was easily able to find other financing options for its foreign buyers, and posted record profits. Ex-Im has remained open since, survived another reauthorization battle in 2019, and is due for its next reauthorization in 2027.

CEI has a long track record of favoring Ex-Im’s closure. See, for example, my 2014 paper giving 10 reasons to close Ex-Im, and op-eds for American Banker, the Washington Examiner, and Inside Sources, among other outlets.

Since 2027 is a ways off, incoming Ex-Im President Lewis may be interested instead in my paper about ways to reform Ex-Im. There are several ideas she can pursue during her term as Ex-Im’s president and board chairman:

  • Ex-Im should be required to use the same accounting standards as other federal agencies. This would prevent funny business that Ex-Im has used in the past to show a profit while actually losing money.
  • Ex-Im should have a 10 percent cap on how much of its business can benefit a single firm. This would prevent its capture by companies such as Boeing.
  • Ex-Im should remove its quota for green projects so it can choose projects on the merits.
  • Finally, Ex-Im’s in-house definition of “small business” includes companies with up to 1,500 employees. This definition needs to be made more realistic, so its quota of small business projects actually goes to small businesses.

The best Ex-Im reform is to end it. But that will have to wait until 2027.