Prior to leaving the Group of Seven summit, President Donald Trump told foreign leaders that every country should remove every tariff, quota and other trade barrier. Trump wants truly free and fair trade because he knows it benefits all of us.
The negatives of free but not fair trade are easy to see. Jobs are lost and factories are closed. Cities that were dependent on the manufacturing sector for jobs experience extremely high rates of unemployment.
Because of the unfair NAFTA, the manufacturing of automobiles was moved from Detroit to Mexico and overseas. Detroit was eventually forced into bankruptcy.
The benefits of free and fair trade, which far outweigh the negatives, may be difficult to see but they are really quite clear. Here’s an example:
Suppose we select two countries: the U.S. and Colombia. Next, we select two representative consumer products: wheat and coffee. Primarily because of climate conditions, the U.S. is very efficient at producing wheat while Colombia is very efficient at producing coffee.
Utilizing all of the resources available to manufacture these two products, the U.S. finds it has two options. One, the U.S. produces both products and gets 9 tons of coffee and 84 tons of wheat per year. The second choice is to specialize in just producing wheat. At this point the U.S. can produce 120 tons of wheat per year.
Similarly the smaller country of Colombia can produce 9 tons of coffee and 33 tons of wheat or can specialize and produce just coffee. At this point, Colombia get 20 tons of coffee per year.
If the countries do not trade, each country produces at the first point.
However, suppose they sign a free and fair trade agreement. Then each country specializes and produces what it does best. The U.S. produces just wheat and Colombia produces just coffee. The agreement also sets the terms of trade at 10 tons of coffee for 35 tons of wheat.
When specializing Colombia produces 20 tons of coffee and trades 10 to the U.S. It gets 35 tons of wheat in return.
The U.S. produces 120 tons of wheat and trades away 35 tons, leaving 85. The U.S. gets 10 tons of coffee in return.
Notice that both countries are better off specializing in what they do best and then trading for other goods.
With the trade agreement both countries are able to consume more than they would have been able to produce. The greater output means a higher standard of living for the people in each country. Everyone wins. Well, almost everyone wins.
In the example above, while the country as a whole benefits from free trade, there could be a “structural” unemployment problem. In the U.S. the workers who produced coffee would be without a job and may lack the skills necessary to produce wheat. This causes wheat producers to automate in order to increase wheat production, thus reducing the need for additional labor.
The opponents of free trade want to protect the jobs of the displaced workers. They do have a legitimate concern that must be addressed, especially in the case where a worker is in the later stages of his or her career and retraining is difficult.
The politicians’ solution is to place a tariff on imported goods for specific industries. They argue this will raise the price and allow domestic companies to compete. The poor result of that action would find consumers paying higher prices and the country moving away from specialization. This means fewer goods available to consumers and higher prices.
While thousands of workers may benefit from tariffs, hundreds of millions of consumers lose.
In addition, Trump is right that countries like China manipulate their currency so that their goods are less expensive in the U.S. and U.S. goods more costly in China. The solution would be to have a trade agreement whereby China agrees to let its currency float as almost every other country does.
The positives of free and fair trade are sometimes difficult to see. But spending only $600 for a smartphone instead of $1,800 — which is what the phone would cost if all components were made in the U.S. instead of China — gives consumers $1,200 more to spend on other goods. This stimulates growth, raises the standard of living and allows more people to purchase smartphones.
Trump is right to suggest an end to all tariffs, especially considering that our trading partners generally place higher tariffs on U.S. made goods, than the U.S. places on their goods. The result of unfair trade policies is that the U.S. loses hundreds of billions of dollars each year.
“We’re the piggy bank that everybody is robbing,” Trump said. “And that ends.”
Dr. Michael Busler, Ph.D., is a public policy analyst and a Professor of Finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.
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