Trump's Trade Snake Oil
How exactly will high import taxes help "make America great" again?
Donald Trump may think the media stenographers are out to get him, but if they were really doing their job, his head would be spinning. He doesn't know how good he has it. Or maybe he does.
One need only think about the questions Trump is not asked to see what I mean. Take Trump's position on trade. He's given a forum to spout the hoariest fallacies without even a raised eyebrow from Anderson Cooper, Chris Cuomo, et al. Maybe they don't know any better, or maybe they think that challenging Trump's crackpot economics is not their department. Either way, they do their audience a disservice.
How great would it be if some reporter asked, "Mr. Trump, didn't Adam Smith refute all this in 1776?"
Or: "Mr. Trump, show me where Henry George erred when he said, 'What protection teaches us is to do to ourselves in time of peace what enemies seek to do to us in time of war'"?
If that is too highbrow, they might ask: "Mr. Trump, if your import taxes force Americans to pay more for cars and other foreign-made products, won't they have less money to spend on other things or to invest? How would that help make America great?"
Trump says American presidents have been played for chumps by foreign countries in trade (and all other) matters. His proof? Americans send the Japanese corn and wheat, and the Japanese send Americans cars in return. To him this is—on its face—an outrage. Strangely, he adds that the Japanese don't want the corn or wheat. No one bothers to ask him why, then, they accept those commodities. I thought Americans were the ones being taken advantage of.
Before we get to the core of the matter, let's point out that Trump's story is rather oversimplified. No American pays for a foreign car with corn or wheat. Americans use dollars. Car dealers also use dollars. So do wholesalers, etc. True, at some point, Japanese handlers of cars are paid in yen, or if paid in dollars, they convert them to yen (if they do not invest the dollars in American stocks, bonds, or real estate). Eventually, someone in Japan buys American wheat or corn (or something else), but those commodities are not bartered for automobiles. At any rate, what would be wrong if they were? In fact, what would be wrong if the Japanese refused to accept the commodities and sent the cars to us for free? Would greatness lie in rejecting free cars? Would free cars free up resources and labor for things we can't afford today because we have to pay for cars? Trump needs to read Bastiat.
Let's ignore, at least for now, that "the vast majority of the cars and trucks made in North America are still produced in the U.S. for domestic consumption and export to other countries" and that many foreign cars have American parts. Let's also ignore the rather key fact that foreign automakers long ago built factories in the United States. From the way Trump talks, you'd think it was 1980, but you don't hear reporters mentioning that to him.
Those are relevant facts, but they are not critical to exposing Trump's protectionist snake oil. So let's assume that Americans import all their cars from Mexico, Japan, Germany, Sweden, and South Korea. So what?
As long as the government does not subsidize or penalize consumer choice either directly or indirectly, we have no reason for concern about Americans' auto-buying. (If the government were distorting the market—which of course it does—the proper response would be to eliminate the interventions, not to micromanage us, as Trump would do.)
The purpose of production is not job-creation; it's consumption. If Americans find foreign-made cars a better value than American cars, so be it. To the extent they save money, they have more discretionary income with which to buy other things or to save and invest. For those who (needlessly) worry about jobs, this new ability to buy and save ought to be comforting. If Americans' direct auto-making talents aren't valued in the marketplace, Americans will make other things that consumers (here and abroad) will want. That's the law of comparative advantage in action. (Again, this assumes no government distortions, such as those created by subsidies, taxes, occupational licensing, zoning, central banking, intellectual property, and other special-interest political mischief.)
Under these circumstances and contrary to Trump, it would be wrong to say, "Americans don't make cars." Of course they do. What does it mean to "make cars"? It surely does not mean to produce cars out of thin air, like magic. No one does that, not even Detroit in its heyday. Rather, it means to use labor and the forces of nature to transform raw and semi-finished materials into cars, converting a pile of matter from a less-useful form to a more-useful form from the consumers' perspective.
In economics we have the fable of the mysterious factory that turned wheat into cars. Farmers would deliver the wheat to the door on the left, and a few days later cars would roll out from the door on the right. How could this be? It turned out that the factory was located at a harbor. Foreign ships docked at the factory, where they unloaded cars and loaded wheat. Voila! Cars from wheat. This is not a verbal trick. The process of production consists in a variety activities, and trade is one of them.
So an American who grows wheat and trades it to an automaker for a car (as if it happened that way) has indeed produced a car—indirectly to be sure, but he produced it nonetheless. From the consumer's perspective, it doesn't matter if the car seller made the car or acquired it through trade, as long as he sees a net benefit in the transaction.
But this is old news. It was spelled out centuries ago by David Hume, Adam Smith, David Ricardo, Frederic Bastiat, John Stuart Mill, and others. No doubt the late Spanish Scholastics had figured it out before them. Most economists today accept it, including Paul Krugman. I guess Trump never got the memo.
We don't need a deal-maker in the White House. We need the freedom to trade with anyone we please, anywhere in the world, on any terms we find agreeable. Government should butt out. Hear that, Mr. Trump?
Trump traffics in the stalest of stale trade fallacies, just as he traffics in the stalest of stale immigration fallacies. It's what demagogues do. When will a reporter call him on it?
