Looking Backward and Losing

President Trump is attempting to tilt trade in our favor at the expense of our trading partners.  His focus, using national security as the justification as well as the assertion that our trading partners are taking advantage of us, is based on discredited economics and policy.

Other nations are focusing on the fast growing sectors that reflect advances in technology, which is what his predecessors did because new industries contribute to being the world’s leader.   The President is looking backward and focusing on  once iconic industries that are shrinking as a share of our economy.

The President wants to increase exports at the expense of imports.  What he ignores is that increased exports come from increased production.  In a global economy we get those increases by being a more efficient producer than our competitors.  As economists have repeatedly pointed out, we need the market and not government to generate winners.  The president thinks that because we are the world’s largest economy, we can bully our way to achieving his export objective.

He’s wrong, just as nation states of prior centuries were wrong in pursuing mercantilism which is based on the belief that maximizing net exports is the best approach to national prosperity.  To make mercantilism work, nations engaged in protectionism which is what the President’s tariff policy is trying to do. Mercantilism was a flawed and failed policy in the 18thcentury and it just as flawed today. Adam Smith’s Wealth of Nations demonstrated that trade could be mutually beneficial and that exports should be driven by a nation’s comparative advantage, which is based on productivity.

In 1978, Milton Friedman pointed out that if the Japanese flood us with steel, it will reduce employment in the steel industry but increase employment in industries that use that steel.  The dollars that the Japanese got from selling us subsidized steel eventually found their way back here as demand for US goods and services.  In his concluding remarks, he asked, “ why should we object to their giving us foreign aid.”

In an interconnected global economy, it is a fool’s errand to attempt to protect declining industries.  Attempting to shield them from global competition simply makes them more dependent of government and stimulates crony capitalism.

President Trump and his economic Svengali, Peter Navarro, claim that the tariff policy is being pursued for national security reasons. But that has been widely shown to be totally bogus.  Further, A review of industrial policy initiatives decades ago in the journal Science, ended this way. “Here the historical record seems, for a change, unequivocal. Unequivocally negative.”  Nothing has changed since then.  The President’s policy is producing bads; not goods and the bads will just get worse.

 

 

Author: billo38@icloud.com

Founder and president of Solutions Consulting which focuses on public policy issues, strategic planning, and strategic communications.

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