The Impact of Trade Policies on Economic Growth and Prosperity

The Importance of Trade for Economic Progress

Trade plays a crucial role in driving economic growth and improving living standards. At its most basic level, international trade allows consumers to access a wider variety of goods and services at lower prices, enhancing quality of life. As trade expert Scott Lincicome explains:

"When we go to our grocery store and we go to the produce section, especially in the winter time here in the States, a lot of what is imported. Over the last 30 or 40 years thanks to international trade, we are spoiled in terms of our access to fruits and vegetables and other things that we didn't even know existed or if we did, we'd get it like once a year."

Beyond just expanding consumer choice, trade is part of the "special sauce" that drives prosperity in free market economies. It injects competition into markets, spurs innovation, and allows for the exchange of knowledge and ideas across borders. Trade enables specialization and comparative advantage, allowing countries and companies to focus on what they do best.

From a geopolitical perspective, trade also tends to reduce conflict between nations. As Lincicome notes, "Nations that trade together go to war less." While trade doesn't prevent all conflicts, it does create commercial interests and cultural ties that can temper tensions between countries.

The Fallacy of Self-Sufficiency

Some argue that large countries like the United States should strive for self-sufficiency and "make everything we need" domestically. However, this ignores the tremendous benefits of specialization and comparative advantage. As Lincicome explains:

"One of the things that trade does by giving us access to all of these wonderful things around the world is it gives us time. Instead of making our own clothes and making our own shoes, growing our own food, we can outsource those things and we can focus instead on higher value production."

While the U.S. theoretically could produce everything domestically, it would make the country poorer overall. Resources and labor would be diverted to less productive industries, reducing overall economic output. For example, a t-shirt manufacturing job in South Carolina pays about $12/hour, while jobs at companies like Amazon or Costco pay significantly more. It makes economic sense to import t-shirts from countries where such manufacturing jobs are considered high-paying, while American workers focus on higher-value industries.

Additionally, trade allows wages to go further by reducing prices on many consumer goods. A study found that openness to international trade has given people in developed countries dozens of additional hours of leisure time, as they don't have to spend as much time producing basic necessities.

The Real Impact of Trade on Manufacturing Jobs

There's a common perception that trade, especially with China, has decimated U.S. manufacturing jobs. While increased trade with China starting around 1999 did lead to job losses in some manufacturing sectors, the overall picture is more complex:

• Estimates suggest about 1 million U.S. manufacturing jobs were lost due to increased Chinese import competition.
• However, those studies only looked at job losses, not jobs gained in other sectors due to trade.
• When accounting for jobs created by lower input costs, increased exports, and growth in services, the net effect on jobs was likely close to neutral.
• The vast majority of manufacturing job losses over recent decades were due to automation and productivity gains, not trade.

As Lincicome explains: "Most of the jobs lost over the last several decades in manufacturing were due to productivity - not just robots, but computers, improved business practices, all this type of stuff."

It's also important to note that the U.S. remains a manufacturing powerhouse:

"The United States today is, in terms of manufacturing output, the second largest manufacturing nation on the planet. We make more today in the United States than the next four countries on the list combined."

U.S. manufacturing workers are among the most productive in the world. The sector simply doesn't require as many workers as it once did to produce high output.

The Problems with Protectionism

Despite the benefits of free trade, protectionist policies like tariffs remain politically popular. However, such policies often backfire and harm the very industries they aim to protect. Some key issues with protectionism include:

Increased Costs for Manufacturers

Many U.S. manufacturers rely on imported inputs and raw materials. Tariffs on these imports raise costs and make American companies less competitive globally. For example:

"According to the United States International Trade Commission, we had about a $500 million a year net loss in manufacturing output because of the steel tariffs."

About half of all U.S. imports are actually inputs used by domestic manufacturers. Restricting access to these inputs via tariffs ends up reducing output and employment in manufacturing overall.

Loss of Export Markets

Protectionist policies often lead to retaliation by other countries, harming U.S. exporters:

"About 95% of all of the world's consumers live outside the United States, and so if you deny American companies the ability to access those markets or if you make them globally uncompetitive by raising their input costs, well then you're actually harming the manufacturing sector."

Economic Inefficiency

Tariffs and other trade barriers lead to inefficient allocation of resources in the economy. For example, the Trump administration's washing machine tariffs created about 1,800 new jobs, but at a cost of $815,000 per job annually to U.S. consumers.

Reduced Innovation

Lack of foreign competition can reduce the incentive for domestic companies to innovate and improve efficiency. Open trade injects competition and new ideas into markets.

The Myth of Reciprocal Tariffs

One popular argument for tariffs is the idea of reciprocity - matching other countries' tariff levels to create a "level playing field." While this may seem fair on the surface, it ignores some key economic realities:

1. Matching high tariffs makes both countries poorer. If India has a 20% tariff on certain U.S. goods, the U.S. imposing a retaliatory 20% tariff just raises prices for American consumers without helping the overall economy.

2. Most workers aren't in export industries. Broad tariffs essentially tax the many to benefit the few.

3. It lets other countries dictate U.S. trade policy. Lincicome gives the example of coffee - the U.S. doesn't produce much coffee, so matching Colombia's coffee tariffs would just hurt U.S. consumers for no benefit.

4. Administering a complex system of reciprocal tariffs across thousands of products and hundreds of countries would be a logistical nightmare requiring a massive bureaucracy.

As Lincicome argues, the U.S. should set trade policies based on what's best for America as a whole, not on matching other countries' suboptimal policies.

The Broader Economic Impacts of Tariffs and Trade Uncertainty

Beyond their direct effects on prices and specific industries, the recent waves of tariffs and threats of tariffs have created significant economic uncertainty. This uncertainty itself can drag down economic growth:

"As any investor, as any lawyer will tell you, the thing that companies hate more than taxes is uncertainty because they can't simply predict what's going to happen next. And without that predictability and consistency in the market, they can't hire, they can't invest."

Studies have shown that spikes in policy uncertainty, especially around trade, tend to depress business investment. Companies may delay expansion plans or new hiring when they're unsure about future trade policies.

The unpredictable nature of recent tariff announcements - sometimes imposed or rescinded via tweet - has been particularly disruptive. Lincicome notes that "economic policy is not supposed to be done via a switch in the Oval Office" and that the current environment makes it very difficult for businesses to plan.

This uncertainty seems to contradict the stated goal of accelerating economic growth. While regulatory reform and tax cuts may boost growth, the drag from trade uncertainty could offset those gains.

National Security and Trade

National security is often cited as a justification for tariffs and trade restrictions, especially for industries like steel production. However, this argument often rests on flawed assumptions:

1. The U.S. already has a robust domestic steel industry. It's the 4th largest steel producer globally.

2. The Department of Defense has stated it only needs about 3% of U.S. steel production for defense purposes.

3. The top foreign suppliers of steel to the U.S. are allies like Canada, Europe, and Japan - not potential adversaries.

Rather than imposing broad tariffs, a more effective approach to national security would be targeted policies to address specific vulnerabilities in defense supply chains. Collaborating with allies on defense production and innovation agreements would also be more productive than engaging in trade disputes with them.

The Importance of Economic Dynamism

While trade and technological change can cause painful disruptions for some workers and communities, attempting to freeze the economy in place is ultimately counterproductive. As Lincicome argues:

"Losing a job is painful, whether it's trade or robots or changing consumer tastes. It's never not painful, but it is an essential part of economic progress and of improved living standards that we make more stuff in less time."

Rather than futilely trying to protect specific jobs or industries from change, policy should focus on making it easier for workers and businesses to adapt:

1. Reform occupational licensing laws that make it harder to switch careers.
2. Improve education and retraining programs.
3. Remove barriers to geographic mobility like restrictive zoning laws.
4. Reform safety net programs to better support transitions between jobs.

The goal should be to embrace the dynamism that drives long-term prosperity while mitigating the short-term pain for those most impacted by economic shifts.

Conclusion

While free trade can cause disruption in some sectors, the overall benefits to economic growth, innovation, and living standards are immense. Protectionist policies may seem appealing in the short term, but they ultimately make countries poorer and less competitive.

Rather than imposing tariffs or restricting trade, policymakers should focus on helping workers and businesses adapt to change. By embracing economic dynamism and global engagement, countries can best position themselves for long-term prosperity in an evolving global economy.

As economies and technologies continue to evolve, maintaining flexible, adaptive policies will be crucial. Fostering an environment of innovation, competition, and openness to new ideas - both domestically and internationally - offers the best path to sustained economic progress and rising living standards.

Article created from: https://www.youtube.com/watch?v=SiG_60f7ltw