Trump: Wrong On Free Trade

by | Nov 21, 2016

Protectionism is not a recipe for prosperity—free trade is.

The American people have now voted Donald Trump for their president-elect on a promise that he will make America prosperous—by restricting trade and making it “fair”. Among other things, he threatened to “trash” NAFTA, the North American Free Trade agreement. While freedom of trade is not the only thing that affects prosperity (and is only one of the many things about which Trump is wrong), it is among one of the most important and has significant implications for business and prosperity.

Why is free trade so fundamental to successful business and to our prosperity? The two functions of business are production and trade of goods and services, such as energy, cars, computers and medicines, insurance policies, and restaurant meals, among many others. For companies to maximize profits—to create wealth—from producing such material values, they must be free to trade with whomever they want. They must be free to produce goods and services wherever they can do it at the lowest cost (of labor and other inputs) and sell them wherever there is demand (ability and willingness to pay) and where they can obtain the best price the market is willing to pay.

What happens when governments increase protectionism and restrict freedom of trade, as Trump has promised to do? Companies move their operations elsewhere (as many American companies, including Apple, have done, to avoid the high corporate taxes in the United States), to escape the higher costs and curtailed demand in the United States. To bar them from leaving, which Trump also threatened to do during the election campaign, would be unconstitutional, as it violates the right to liberty. And if companies stay and have restricted access to markets outside of the country, their profits and even survivability are reduced. The prosperity of Americans will decline, hurting the poorest people the most.

In an excellent informative column, Mark Milke gives the factual evidence of the harms of protectionism and benefits of free trade. Presenting the evidence against protectionism, he cites the Smoot-Hawley Act of 1930, which imposed higher tariffs on 20,000 imported goods. The bill increased consumer prices in an economy that was already shrinking after the government-caused stock market crash of 1929. Other countries retaliated with tariffs of their own, decreasing demand for American goods. Unemployment went up significantly.Protectionism is not a recipe for prosperity–free trade is.

Protectionism is not a recipe for prosperity—free trade is.

Consider the evidence Milke cites: “…in the past 20 years, in inflation-adjusted terms, U.S. manufacturing output has increased by 40 per cent. Also, the U.S. economy now produces twice as many products as it has in any year dating back to 1984” (according to research by the Foundation for Economic Education in Atlanta). This increased productivity, thanks to technology and free trade, has translated into fewer American manufacturing jobs but has increased prosperity nevertheless, meaning more opportunities to those willing to retrain and work in other industries.

On a global scale, free trade has reduced poverty in an unprecedented scale—an continues to do so, as the poor become productive, increasingly prosperous consumers for global goods in open markets. Writes Milke, citing recent research: “… moving from more restricted trade to more open trade benefits all consumers, but some more than others. …higher-income consumers around the planet gain 28 per cent in their purchasing power when free trade expands. … for the bottom 10th of consumers: a 63-per-cent increase in real purchasing power.”

If Donald Trump truly thinks that he will ‘create’ jobs and increase prosperity by closing American borders to trade (and to immigrants), he is wrong. It is the global free trade that creates opportunities for prosperity, through a division of labor and free flow of capital and labor. Companies will invest where the costs are the most advantageous and workers have the requisite skills, and sell globally. This will mean job opportunities but also require retraining and upgrading of skills, as new innovations and business models—think robotics applications, 3D printing, Amazon, Apple, Netflix, PayPal, Uber—emerge, fueled by freedom to trade. (Manufacturing jobs everywhere will shrink as labor costs go up and robotics will be used increasingly).

Far better prosperity-enhancing action would be to increase the freedom of markets in all the ways the President can, with a likely supportive Congress: by cutting the corporate income tax, dismantling business regulations, and freeing—not restricing—trade. By doing that, Trump would be well on his way to deliver on his election promise to “make America great again.”

Jaana Woiceshyn teaches business ethics and competitive strategy at the Haskayne School of Business, University of Calgary, Canada. How to Be Profitable and Moral” is her first solo-authored book. Visit her website at profitableandmoral.com.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

5 Comments

  1. Reality check. The array of so called free trade agreements in place or proposed, are nothing other than global power cartels. Multi thousand page documents meant for the legal departments of the largest established players. Chock full of exceptions and loopholes for the connected. Each one sets up permanent power structures above the reach of any nation, and the latter then can only say “our hands are tied”. This is a transfer of political power to faceless operators, responsible to no one. This is the mixed economy objectivism used to warn about, but one entrenched at the global level.

  2. I’ve but one observation: that which you describe–I’m assuming an example would be the EU–is not a result of genuine free trade agreements nor is the goal of such–as you point out–open trade among capitalist nations. The goal of such agreements is a one world government to replace the naton state: collectivism writ worldwide.

    Couched in the term ‘treaty’ and ‘free trade,’ such legislation is neither contractual nor free.

    It’s not the first because no valuable consideration is exchanged, requisite of any genuine contract (a treaty being a form of contract). Agreements such as the one creating the EU are all one-sided (each nation surrendering its sovereingty for nothing that actual capitalism & free trade wouldn’t also achieve without surrendering sovereignty).

    And it’s not the second because such a world government is meant to rein in whatever nooks and crannies are left where genuine free trade exists.

    One minor counterpoint to your comment: These are not the result but the culmination of the mixed economy, wherein the mix becomes a distillation of total fascism or total socialism.

    Finally, Trump’s protectionism–if it is that–is not the solution. The solution is to remove all barriers to the importation of goods produced in other countries and all barriers to domestic production.

    As reason to avoid the first, critics (mostly American business & unions, e.g., steel manufacturers, automakers, bankers, AFL-CIO, etc., etc.) will point to unfair “dumping” or to “foreign” businesses “buying up” America–the former leading to superior, cheaper goods for sale in the USA and the latter leading to more jobs as such companies buy up domestic concerns (see, well, any number of examples) or construct new domestic facilities (see Honda’s in TN, etc.).

    Such actions break up the legislation created cartels (i.e., gov’t franchises, i.e., monopolies) of politically connected American businesses and the socialist guilds of politically connected American unions.

    Other critics (mostly at the Fed) will point to the dangers of a so called trade deficit, such a deficit undercutting the “balance of trade”–a concept of Mercantilism intended to protect the “Crown,” the king being, according to Mercantile theory and law, the actual owner of all property in a nation. It’s an outdated concept inapplicable to a capitalist nation in which exists only private property.

    (Note: Mercantilism and socialism are alike in this fundamental principle, with but one distinction: Under socialism, “Crown” is replaced with “Public,” which in essence means “Government.” Thus, under socialism, the government is–in the name of the “people”–owner of all property. It is a distinction without a difference, merely exchanging one king for many.)

    Still other critics (mostly in American academe) will cite any number of straw men to prohibit the second, all of which are rooted in their own historical myths & economic fallacies about capitalism.

    If Trump’s ideas involve tarriffs & quotas and the like, he won’t succeed in ‘making America great again.’ He might succeed, though, in helping create another great depression, as did Hoover (& then FDR) before him.

  3. What the hell you just said I don’t think you even know!

  4. What?

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