Fraser Forum

Trump’s trade trifecta will likely target China, Canada and beyond

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In my last post on this site, back in October, I stated that the odds that Hillary Clinton would beat Donald Trump in the November election were high. I went on to say:

If your concern is trade between Canada and the United States, Canada dodged a bullet. Donald Trump is hostile to trade, mainly with China but also, it appears, with anyone outside U.S. borders. He has never shown an inkling of understanding about the benefits of trade and, although he’s inconsistent on many things, Trump has been a steady opponent of foreign trade.

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.

Now, if this were mere bluster, it would be bad enough. But, unfortunately, Trump is backing up his views with one White House staffer and two major appointees, all in positions involving trade. The three are: Peter Navarro as head of the National Trade Council, a new organization to be formed in the Trump White House; Wilbur Ross as Secretary of Commerce; and, most recently, Robert Lighthizer as U.S. Trade Representative. All have been critics of free trade.

During the fall campaign Navarro and Ross wrote a position paper that shows a mind-boggling misunderstanding of the effect of trade on GDP. They wrote:

To score the benefits of eliminating trade deficit drag, we don’t need any complex computer model. We simply add up most (if not all) of the tax revenues and capital expenditures that would be gained if the trade deficit were eliminated. We have modeled only the impacts of implicit profits and wages, not any other economic aspect of the increased activity.

What just happened? Here’s what they did. They took a GDP accounting identity that we teach in introductory macroeconomics classes. The identity is: GDP = C + I + G + (X – M), where C is consumption expenditures, I is investment, G is government spending on goods and services, X is exports, and M is imports. Then they treated this identity as if the government can simply use trade policy to adjust one item in the identity, namely M. Since M (imports) has a negative sign in front, they concluded that cutting imports would raise GDP. If that were true, then the way to prosperity would be to cut off imports altogether. Then we would replace imports with more-expensive domestic production, making ourselves worse off. And you don’t need “any complex computer model” to understand that.

Imagine, for example, that the U.S. government cut off all oil imports. Then oil would be substantially more expensive in the United States, probably priced at more than $100 per barrel. We would put resources into producing expensive oil when we could have bought cheaper oil abroad.

The bottom line is that you can’t do any economic reasoning about causation from looking at an identity. Instead, you need to go to first principles. People gain from trade, or else they wouldn’t do it. So when the government taxes or restricts trade, it makes both sides worse off. This is true whether we’re talking about trade between the U.S. and Canada, trade between California and Nevada, or trade between British Columbia and Ontario.

As for Lighthizer, the Cato Institute’s Dan Ikenson correctly calls him an “economic nationalist with deep disdain for free trade.” Lighthizer has long been an opponent of free trade and an advocate of protectionism.

So there you have it: three major players who will try to implement Trump’s vision of trade, or, more accurately, anti-trade policy. China is their main target. But trade with Canada could easily be a target also. Fasten your seat belts.