30 May, 2016

In defence of Trump's trade policies

The orthodox view among economists is that restrictions on trade impoverish a country. And politicians on both sides of the aisle have absorbed that. So with his promise to "bring the jobs back home", Trump flies in the face of a very strong consensus.

So what will happen? Will Trump increase prices for all Americans?  Do his ideas have no real benefit at all?  The article below considers that and puts up various arguments as to why The Donald is not so silly.  We must remember that Trump is trained as an economist so we can be certain that he will not damage America inadvertently.  He knows the downside of what he proposes.

Economists do acknowledge certain exceptions to the argument for free trade -- the so-called "Australian" case, for instance. And the real world does have a way of upsetting all theories and predictions.  That 19th century America thrived mightily behind high tariff walls is always an embarrassing case, for instance.  So the arguments put forward below are along those lines:  That reality is different.

As a former High School economics teacher myself, I am still rather attached to the consensus view but concede the possibilities mentioned below.  My own view is that Trump will raise tariffs slightly on social grounds.  He thinks that America can afford to pay a small price to avoid social and economic disruption.  And that is a perfectly sensible argument.  Social stability is not guaranteed and may have a price.

And the big costs that Americans bear are from the huge weight of regulations that burden almost all economic activity.  Trump has pledged a heavy attack on such regulations so any price increases due to higher tariffs could be more than outweighed by cuts in regulations.  In other words, reduced regulation could cut prices by a lot more than increased tariffs raise them.  American living standards should resume their long-stalled rise under Trump


THE STRONG DOLLAR AND THE DANGERS of a globalized economy have combined in recent months to favor American manufacturers who sell their products domestically rather than internationally, according to the Wall Street Journal (May 23): "Global industrial giants are struggling under the weight of a strong dollar, reeling commodity markets and weak demand in emerging and advanced economies alike, from Brazil to Europe to China. But domestically oriented U.S. manufacturers are faring better, with steadier business buoyed by the relatively brighter auto, housing and job markets."

As became clear in 2008 (if it wasn't already clear before), interconnectedness in financial markets is a significant part of systemic risk, even though in some cases it ameliorates risk. Global connection within a market, connection across markets and the financialization of all markets bring both opportunity and risk. When sectors of the American economy are heavily connected, whether at the point of manufacture or at the point of sale, with far-flung parts of the globe, every part of their manufacturing and sale process is also made more fragile. It is not always a boon to "antifragility," as the book had it some years ago.

The companies that have weathered the recent turmoil in emerging markets and Europe have been those able to sell their goods domestically regardless of the vagaries of overseas market conditions. The strong dollar has weighed on exporters, but much less so on domestic firms selling their goods locally.

Such news doubtless comes as a shock to those knowing conservatives who knew all along and still know that globalization is the future and get on with it and let's build the future. It's a perplexing stance, in response to which Peter Thiel sensibly noted (in this week's Conversations with Bill Kristol) that the lead stages of globalization are already behind us. Yet the conservative horror at Trump's trade proposals pretends that globalization is all in the future. The Journal's simple report is no longer common sense. Why not?

IT DOES NOT REQUIRE "PRINCIPLES" to recognize that firsthand knowledge of one's countrymen often puts one at a market advantage over those who are from abroad. In making this observation, our purpose is not to argue that trade should only be domestic, or that exporters of products genuinely needed at a foreign market are at a permanent disadvantage. Coffee-growers in Latin America have to export their product to American roasteries, and individual coffee plantations are at no market disadvantage compared to selling on their home markets since in many cases a foreign market is required to move product.

Trading on one's strengths fully comports with the Greatness Agenda outlined by JAG. The Principled crowd for whom free trade is a Principle, however, wrongly assume that the global direction of free trade in many market sectors means that domestically focused manufacturing is increasingly unnecessary or even undesirable. They also wrongly point to the overall glossiness of American manufacturing statistics to excuse the decline in manufacturing employment, as though it doesn't matter if anyone works so long as we've got the things. The problem with elevating free trade into a principle of Principled Conservatism is not that protectionism is the proper opposing principle, but that the application of domestic principles to foreign trade inappropriately hamstrings American policy-makers.

Several years ago, the Harvard Business Review had to remind its readers that the advantages of domestic manufacturing would not necessarily show up in traditional discounted cash flow models designed to compare the costs of locating a plant at home or abroad. "The trouble with this approach," they wrote, "is that DCF typically undervalues flexibility. As a result, companies may end up with supply chains that are lean and low cost as long as everything goes according to plan—but horribly expensive if the unexpected occurs."

Domestic manufacturing has other benefits, as well. Nicholas Ventura, the founder of a small clothing company, employs six hundred people in textile manufacturing across a sixteen-block radius in Los Angeles. By focusing on manufacturing domestically, he wrote in the Washington Post, business owners can avoid the "extreme cost-saving minimums" required for overseas production. "The speed of domestic supply chains," he also noted, "is leaps and bounds quicker than that of overseas supply chains." Similarly, "Forecasting trends in the marketplace is more forgiving with a quick supply chain."

All these points are intuitively obvious, yet they're overlooked when the cultural consensus regarding global capitalism points would-be manufacturers to look abroad. Even if Trump's call to "Make America Great Again" serves no other purpose, it assists however modestly in reorienting potential capital investment domestically. We harbor no illusions about the difficulty in doing so, not least from the pressure brought upon companies as they seek to finance their expanded operations.

The drive toward outsourcing manufacturing, geographically separating design and manufacture, separating production from market, and even separating each part of the manufacturing process are all aspects of culture and not simply market operations. Changes to American trade policy must be preceded by a cultural transformation toward identifying a link between economic production generally and national greatness. The attempts to minimize the phenomenon of Trumpism, to explain it away or to lob cheap (foreign-produced?) insults at its messenger overlook the importance of that simple change.

FORGOTTEN IN THE DISPUTES over Trumpian trade policy is the fact that in the United States, domestic trade is free trade—free across the borders of American states. The drive for free trade within the U.S. was a constituent part of the nation itself and not merely its constitutional settlement. That constitutional permission of trade across state lines formed the American commercial psyche and so formed the nation itself.

Foreign trade, however admirable and important it may be in particular market sectors, does not "form" the nation in the same way. The classical philosophers were regularly concerned about port cities, where citizens could consume foreign ideas and foreign sailors could consume, well, ladies of the night. Plus ça change ...

What distinguishes domestic trade and foreign trade is that foreign affairs are not subject to the same principles which operate in domestic context. Appealing to the "principle" of free trade as a part of the "principles" of Principled Conservatism™ confuses the relationship between conservatism and the American republic as well as the role of "principles" in domestic politics and foreign affairs. The point of the principles of conservatism (at this point, what difference does it make?), is to identify the ways to conserve the American polity. For ourselves, we are neither carte blanche in favor of free trade nor committed to a system such as Fichte's Closed Commercial State. (The matter of the closed commercial state is an important one, however, from the standpoint of identifying the tension between the political forms necessary to achieve domestic goals and those necessary to act effectively in matters of foreign affairs.)

This difference is found in other aspects of American constitutional practice, as well. One cannot say that "liberty of speech" is good such that the American government is equally obligated to protect the liberty of speech of its citizens and that of resident aliens, guest workers, travelers and the like. Similarly, the evident goodness of trade tells us, on its own, not a single thing at all about what our attitude toward Chinese steel dumping should be at a particular moment. (Much to the Cato Institute's chagrin, Reagan violated the principles of free trade on numerous occasions. George W. Bush did, too!) Similarly still, the goodness of living under a representative democratic government in itself tells us nothing about whether to allow some particular immigrant to apply for U.S. citizenship. A sovereign state has the right to close its borders to any group or to open them to any group.

None of these "nothings" tells us that these things are forbidden, either. We may well establish a mutual abolition of tariffs on certain goods with a certain country at a certain time. We may well admit high-skilled workers from European countries, or even Canada, to come to the U.S. and apply for citizenship. Our evaluation of those matters is one of prudence in the interest of American greatness.

Though we disagree with their analysis on other respects, conservatives who link trade policy to foreign policy are at least on the right track. Williamson's argument that "Free men do not have to beg the prince's permission to buy from or sell to whom they choose" is simple obscurantism.

Those who treat free trade as an absolute principle often seem to imagine that America is a very small state with limited national resources, almost entirely dependent on foreign trade to leverage its handful of industries in favor of purchasing basic goods from abroad. Yet the forty-eight contiguous states (and the additional far-flung pair) were gathered in time across a continent rich in natural resources, harboring a variety of climates, and filled with people with a knack for commercial ingenuity. America's commercial ingenuity is part of the strength that it can use for the purposes of preserving and extending national greatness.

A sly comment in National Review's most recent paean to free trade agreements admits that it would be "almost certainly impossible" for the U.S. to pursue protectionist policies even if it wanted to. The reason why is telling. "U.S. manufacturers," writes Scott Lincicome, "have evolved over decades to become integral links in a breathtakingly complex global value chain—whereby producers across continents cooperate to produce a single product based on their respective comparative advantages—that could not be severed without crippling both them and the global economy." The complexity of global manufacturing chains is part of the reality that Lincicome's glossy statistics overlook. Comparative advantages are becoming ever more fungible and easily replaced. Simply occupying a little spot in the global supply chain may not be enough to keep American manufacturers in the supply chain. When the whole supply chain is located domestically (and again, we are not elevating that as a Principle), the matter is different.

How the principle of American greatness became lost and regarded as the antithesis of a principle by Principled Conservatives is the story of conservatism's decline. "There shall be free trade on the part of the United States" is not a Principle but the abdication of political judgment in matters pertaining to American strength. When the Wall Street Journal has to call everyone's attention to the comparative advantage of domestic manufacturing itself, maybe our Principled friends will start to think of ways to shore it up.

SOURCE

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