Opinion: Time to end the trade war
When President Trump imposed tariffs on aluminum and steel there was a strong reaction from much of the economics profession, arguing that the tariffs were bad both for the American economy and for the world economy in general. Indeed, I was one of more than 1,100 economists, including 15 Nobel Prize winners, who signed a letter to Trump and Congress opposing protectionist actions.
The letter quoted extensively from a similar letter, also signed by more than 1,000 economists, that was written in 1930 warning of the economic consequences of the now infamous Smoot-Hawley, an act implementing protectionist trade policies sponsored by Sen. Reed Smoot and Rep. Willis Hawley and signed into law on June 17, 1930. The act raised tariffs on over 20,000 imported goods.
Unfortunately, the 1930 letter was ignored and the consequences at the national and international level were dire as the world ended up in a trade war that was an important factor in the length and breadth of the Great Depression.
The ramping up of tariffs by the administration and our trading partners in recent weeks suggests that it will take more than a letter from economists to end the harm to our economy from a trade war. As the Austrian economist Ludwig von Mises once wrote: “Economics is too important to be left to the experts.” It is important that the average American understand the negative effects of protectionist trade policy.
Barriers to international trade must result in a decline in economic activity. Just imagine what your living situation would be if you could only purchase goods and services that were fully made in Michigan. Imagine how uncompetitive Michigan manufacturers would be if they could not use inputs that were made outside of Michigan.
It should be obvious that if consumers and producers must pay taxes on goods and services that are produced outside the United States prices will be higher for consumers and costs will be higher for American producers. The higher costs for American producers will result in their being less competitive in the worldwide market and fewer employment opportunities for American workers. About half of all U.S. imports are either inputs into the production of goods in the U.S. or machinery used to produce goods in the U.S. How can taxing imports be beneficial to the U.S. economy?
It is true that if you produce a particular good, say aluminum, then you will benefit from a tax that is imposed on your competitor. But everyone else in the economy is made worse off. Notice that the country whose citizens are made worse off by the tariff is the country imposing the tariff.
A final point is that we hear talk of “trade deficits” as if they were a bad thing. But it is important to know that a trade deficit is what happens if you have a “capital account surplus.” A capital account surplus is when foreigners are investing more in your country than your citizens are in other countries. We would expect a country to have a capital surplus when its economy is doing well relative to other countries, since people would rather build a factory in an expanding economy than one that is not doing well. So if the U.S. has a capital account surplus it should be something people are celebrating. Indeed, we do have a capital account surplus in basically the same amount as our trade deficit.
This is because the only way Germans can get dollars to build a factory in the United States is for them to sell us more than we buy from them. Thus a trade deficit is a necessary factor for a capital surplus.
Taxing people for buying goods from foreigners, that is, imposing tariffs, not only makes our economy weaker by increasing the costs of production and raising prices in the U.S., it results in less investment in the United States and the resulting drag on productivity, wages and economic growth.
It is time for the president to claim victory and end the trade war.
Gary Wolfram is William Simon Professor of Economics and Public Policy at Hillsdale College.