Trump's Dangerous Game By David Henderson

The importance of two asymmetries.

Some of my pro-Trump friends argue that Trump is right in threatening tariffs on other countries as a way of getting governments of other countries to reduce their tariffs on imports from the United States. They point out, correctly, I think, that tariff rates that other countries’ governments impose on U.S. goods tend to exceed tariff rates that the U.S. government imposes on imports from those countries. Therefore, they argue, it’s justified to threaten higher tariffs on their exports to the United States until those countries’ governments reduce their tariff rates.

But even if it is justified–and I can understand their case–that leaves one huge question unanswered: will it work? What if those countries’ governments respond, as some are threatening to do, not by reducing their tariff rates but by raising them? In that case, what would the U.S. government accomplish? Together with those other governments, it would produce a world that is slightly poorer than otherwise. With less trade, there is less gain from trade. That’s not a good outcome.

When I taught comparative advantage and gains from trade, I would move beyond that and explain the asymmetry between consumers and producers and how that distorts both trade talks and trade talk, i.e., discussion of trade. The producers who want barriers against foreign imports have a lot to lose per firm and per worker if imports are allowed and consumers have little to gain per person. It’s pretty easy to show that the gains to consumers from reducing tariff barriers, in total, exceed the losses to producers in total. But the asymmetry in gains and losses per person or per firm cause producers to have a LOUD voice in the discussion and consumers to be very quiet or even silent. So we get a very distorted discussion and potentially distorted outcomes.

After saying all this, though, I found my students, who got the point, playing “ain’t it awful” about all the restrictions on trade. Then I had to backtrack and explain that while free traders in politics were losing some battles, over time they were winning the war. Restrictions on trade around the world have come down a lot since the Great Depression and continued to come down after World War II. Virtually every major country–the United States, Japan, Germany, and France, for example–has lower trade barriers than it had in 1945 and, moreover, has lower trade barriers than it had in 1970, in 1980, or in 1990. So somehow the war for free trade is being won.

But why is it being won? The answer I gave my students is that trade negotiations in each country line up the various concentrated interests that expect to gain from trade–in the United States, a key bloc would be farmers–and get them on board to offset the power of the concentrated interests that would lose, e.g., steel producers.

And that’s a good explanation, as far as it goes.

But I had a discussion yesterday with fellow economist and friend Francois Melese in which he pointed out another reason that the war for free trade has largely been won. It’s an historical reason, or, as one might say in current economic history jargon, a path-dependent reason.

Think about when the push for free trade began in a serious way. As noted above, it was late in the Great Depression and continued in a big way after World War II. Is that significant? Yes. The kinds of tariff increases various countries imposed during the Great Depression were something that most countries’ governments did not want to continue because of the bad consequences for world trade and for world peace. Various policy makers saw the potentially huge stakes in getting countries to trade more with each other, understanding, probably explicitly but at least subconsciously, that trade tends to generate peace.

Which brings me to the second asymmetry: the difference between how long a time it took the international trading system to develop–about half a century or more–and how short a time it might take to unravel. If President Trump succeeds in getting other countries to cut their tariff rates, that would be great. But if his actions lead other countries’ governments to raise their tariff rates, then, within a few years, we could have a substantially less-free-trade world to contend with.

The old line is that a reputation takes decades to build and can be destroyed in an hour. Free trade is not that fragile. But it may be more fragile than many of Donald Trump’s supporters believe. I hope they are right, but I fear and, more important, I believe they are wrong.