David R. Henderson  

Trump's Trade Trifecta

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Well, it's now obvious that Canada has not dodged a bullet. One of President-elect Trump's most sincerely held views is that free trade is suspect. He buys into virtually every mercantilist myth, even claiming in a recent tweet, "China has been taking out massive amounts of money & wealth from the U.S. in totally one-sided trade."

This goes way beyond mercantilism into incoherence. No trade can be a little one-sided, let alone "totally one-sided." The reason is that when you trade, you give something up and get something in return. Trade is necessarily two-sided. Even more flabbergastingly, Trump is not complaining that Americans don't get enough from China in return. He's complaining that it gets too much! This massive amount of wealth that he thinks China is taking from America is, mysteriously, in the form of goods that we Americans buy from China at low prices. What nerve those Chinese people and firms have, selling us things at low prices when, Trump seems to be saying, we should prefer to buy them at high prices.


This is from my most-recent blog post at the Fraser Institute blog. The post is titled "Trump's trade trifecta will likely target China, Canada and beyond."

In it, I highlight the threat from the trifecta of Navarro, Ross, and Lighthizer.


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COMMENTS (19 to date)
Kitty writes:

Canada?

AntiSchiff writes:

Dr. Henderson,

Yes, and not coincidentally, Canada is trying to prepare to possibly have to renegotiate NAFTA. Even people like Pat Buchanan have no problems with free trade with Canada and other developed countries.

TMC writes:

Free trade certainly does generate a 'free lunch', but why does it need to be even? I take Trumps anti free trade rhetoric as we should be capturing more of the surplus.

Gareth writes:

Chilling. We haven't had ideological protectionists as the principal trade advisers to an American president since Hoover. And it fits so neatly with Trump's zero-sum scammer attitude to business and negotiation.

How far do they go? Do they take the US out of the WTO? Does it survive if they do?

I don't think people are alarmed enough.

I theorize that Trump is not as ignorant as he sounds about trade. I want to hold hope, so I imagine that Trump makes a political calculation. He panders to the factory-worker constituency in order to win an election and keep adequate support for his top priorities. He was able to snatch this constituency off the plate of Democrats who had neglected it, since many Democrats seem to have learned some economics.

Gareth writes:

Richard,

I don't think your hope is consistent with (a) what Trump has said on the subject for decades or (b) who he has appointed to trade-relevant positions. Trade is a top priority, and any market-friendly noises are strategic to get Republican support for what is actually important to him.

I hope you are right, but I would bet you are wrong.

On the other hand, there are various international institutions in place that were designed to constrain protectionist politicians. On the third hand, these institutions were designed under the assumption that the US President would be on the side of freer trade, so they are about to be put to the test.

Go long canned goods and bomb shelters.

Jon Murphy writes:

@TMC-

His rhetoric may be that, but tariffs, by their very nature, reduce surplus, not increase it. If I may engage in some shameless self-promotion, I wrote on the impossibility of capturing more surplus through tariffs today on my blog.

If Trump really wants to increase surplus, tariffs are not the way to do it.

Michael Crone writes:
No trade can be a little one-sided, let alone "totally one-sided."
I disagree with you, David. One-sided trade is a meaningful (if not absolutely literal) phrase for a trade where one of the parties receives too large a share of the surplus. "Too large" is, of course, open for debate, but it's not impossible or incoherent.

(I disagree with Trump that trade between the US and China is one-sided.)

Jon Murphy writes:

@Michael Crone:

Since all trade is mutual, and to trade you need to give up something to get something, I do not understand how trade can be "one sided" or how one party can "receive too large a share of the surplus."

Glen Smith writes:

@Jon Murphy

Unless trade can be one-sided or nearly so, wealth would be distributed nearly evenly. Are you saying wealth is nearly distributed evenly?

Jon Murphy writes:

@Glenn Smith-

Why would wealth be nearly evenly distributed? If I buy $30 worth of goods from you, that is a two-way trade (I got $30 worth of goods and you got $30). Let's say you repeat this process three more times, with Kate, Joe, and Aaron. You now have $120 where each of us have $30 worth of goods. The wealth is not evenly distributed; you have 4x as much as each one of us has. But all the trades conducted were two-way trades.

Jim S writes:

Trump understands that a high U.S. corporate tax acts as a de facto export tax on American goods.

When you throw in regulations, the war on energy, labor unions, state-based healthcare monopolies, minimum wage increases, etc., there is little to no way that American businesses can afford to stay in the U.S.

U.S. businesses gave up hope long ago of ever seeing either Republican or Democrats making the type of changes needed to make the U.S. a business friendly environment. Rep. and Dem. lobbyist have assured that impossible. But the fact that Trump is not owned by Lobbyists makes real change possible. Why do you think the Rep. establishment was so against him? Because of the Rep. Lobbyist.

Our "free trade" agreements reflect this lack of hope of making the U.S. business friendly. China is not a free market, so any discussion that we are engaged with "free trade" with either China or Mexico is to engage in an Orwellian use of the English Language. Does anyone believe that Ford has to spend 2 or 3 years of environmental impact studies and meet endless zoning, osha, ada, epa, deq, dot, etc., etc., etc. regulations?

Trump, as a developer, knows how hard it is to get anything built in the U.S.

Jon Murphy writes:

@Jim S

Trump, as a developer, knows how hard it is to get anything built in the U.S.

So why does he want to make it even harder?

David R. Henderson writes:

@Jim S,
Those are all good points. None of them argues for restrictions on trade or increased taxes on trade.

Jim S writes:

I see in my above post about Ford, I forgot to add that Ford does not have to follow all those regulations when opening a plant in Mexico.

If Trump can carry thru on his stated policies, his administration will be a success.

1) Lower corporate taxes.

2) Make health care providers compete across state lines.

3) Push for portable health care savings accounts and catastrophic health care plans. (Doctors will get paid cash, they will love it and not order so many useless tests, and patients will care about the cost of their health care services. Businesses will love it. Health Care lobbyists, not so much...)

3) He gave notice to Labor in his tweet exchange with the Union rep of the Carrier plant that Unions will have to make changes to be competitive to keep jobs in America.

4) End the strangle hold of the NEA on education - a major Democrat lobbyist/cash cow.

5) Open up mineral rights on Federal lands for development and reduce regulations.

6) Reduce regulations.

7) End the DoE and EPA war on energy. Put the global warming nonsense behind us once and for all.

8) Make nuclear, hydro and coal economically viable energy options by reducing regulations.

9) Remove Davis Bacon wage requirements on Federal Projects.

As an Architect who has worked with Developers for many years, and as someone who has also worked as a General Contractor, I can assure people that Trump is not stupid. Development is still about as labor intensive as it was 100 years ago, and many building materials are still manufactured/fabricated in the U.S. Government regulations can directly add 20% to 30% to the cost of buildings. The "hidden" costs are even higher. Trump is aware of it and sick of it.

And does anyone really believe that Cruz, Rubio, Ryan or Jeb Bush would have to cojones to tackle all (or any) of the above? Would they even be free from their lobbyists purse strings to do so?

BP writes:

If NAFTA was scrapped the US and Canada could return to the FTA signed by Reagan and Mulroney (a Republican and Conservative).

Tillerson as CEO of Exxon had big investments in Canada. Exxon owns 70% of Canada's Imperial Oil, 25% in Syncrude and is 50% owner of the Kearl Oil Sands project. In addition the approving of Keystone makes the idea that the US will punish Canada on trade unlikely in my mind.

Plus there is a Trump Hotel in Vancouver and Toronto. Cutting off Canada would damage the property values of those hotels.

My Trump theory is that he will be friendly with any nation that has one of his buildings.

BP writes:

Take a look at this map
http://www.businessinsider.com/state-and-country-trade-maps-2015-7

Now compare the US 2016 electoral map with the states that have Canada as their larges EXPORT market.

The states that EXPORT to Canada overwhelmingly voted Republican. States that export the most to China or Mexico tended to vote Democrat.

This is why Trump has never mentioned Canada and trade in the same sentence. He has mentioned NAFTA because NAFTA was the Clinton expansion to the Reagan FTA. NAFTA could be renegotiated and scrapped and the FTA between Canada reinstated.

Trump and Tillerson will not harm the business prospects of their "former" firms.

All this is an overreaction (with respect to Canada).

Michael Crone writes:

@Jon Murphy

Suppose Alex is a college student who needs a gallon of gas to get to her college and take her last final exam. She knows the material and is almost assured of passing the exam and graduating if she takes arrives to take the exam. If she doesn't get the gas, she will have to attend another semester, so Alex values a gallon of gasoline at $10,000.

The only gasoline available in Alex's vicinity is at Bailey's gas station. Bailey purchases gasoline wholesale at $2/gallon, and values the gasoline at that price.

Thus, the transfer of the gasoline from Bailey to Alex will generate a $9,998 surplus. How will that surplus be divided?

So Bailey and Alex divide the surplus evenly, Bailey charges Alex $5,001 for the gallon of gas and both parties go on knowing that they are $4,999 better off than they would have been without the trade. Oh wait, just kidding. Most people would view the trade as unfair ("one-sided") if Bailey merely doubled his normal price because of Alex's situation.

This is what I take the claim of one-sided trade to mean: not all trade, not even all mutually beneficial trade, is fair.

Jon Murphy writes:

@Michael Crone:

Ok, let's take for given that Bailey has perfect price discriminatory power and knowledge. This is still a two-way trade: Alex gets gas so she can attend her class, Bailey gets money.

Whether or not something is "fair" does not mean it's one-sided or not. Further, I'd argue this transaction is fair since both parties agreed to it. Therefore, even if we define "one-sidedness" as equal to "fair", this transaction is still two-way.

But, let's bring this into the context Trump uses it:

Let's say Bailey sells gas for $5,000/gal. Bailey sees Alex, and instead of charging $5,000/gal, Bailey charges Alex $2/gal. Would we say this trade is one-sided in favor of Bailey, and further that Bailey is "getting away with murder"?

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