The Economic Case for Free Trade Is Stronger Than Ever
But working-class identity politics threaten to ruin everything.
"This is a cultural issue as much as an economic issue," explained Chris Matthews on MSNBC's Morning Joe in March.
Matthews and I had been invited to discuss Donald Trump's punishing new tariffs on imported steel and aluminum, a policy Matthews was convinced would resonate with "the retired person in Pennsylvania." After Joe Scarborough teasingly introduced me as a "sophisticate from Boston," one of those guys who has "never done work with their hands," I argued that this was "dumbass economics"—Trump's tariffs will be terrible for Americans, low-skilled workers very much included. Asked to respond, commentator Mike Barnicle acknowledged that I had all the facts on my side but concluded that "loss is the key, and loss triumphs over facts…loss is emotion, loss is nostalgia, and loss sends people to the polls."
And that is where we are. The case for protectionism is weaker than at any moment in this century. Neither the Trump administration nor its supporters have any valid economic or national security reason for these tariffs, and even tariff supporters admit it. Still, actual trade policy will get worse in the short run. The current schism on the issue has little to do with economics and everything to do with identity, and the metamorphosis of this debate spells trouble for defenders of the open global economy.
The economic arguments in favor of freer trade are pretty darn strong. Free trade permits each economy to focus on its comparative advantage, thereby increasing the productivity of all countries. Expanding the size of the market incentivizes greater economies of scale and technological innovation. Globalization also widens the variety of goods that are available to the ordinary consumer. The Peterson Institute for International Economics estimates that the U.S. economy benefits to the tune of $2.1 trillion every year from trade expansion. (The political arguments—you know, how greater interdependence tends to tamp down the likelihood of war—ain't beanbag either.)
That Peterson Institute analysis also notes, however, that "expanded trade results in losers as well as winners, and losers are seldom compensated." And this leads us to an uncomfortable fact: The economic case for free trade in America has taken some serious intellectual hits over the past decade.
Paper after paper has been written about the "China shock"—the effect of China's integration into the global economy on the developed world. Before China, when developing countries such as Mexico or South Korea joined the global trading system, there was minimal disruption. None of those countries were all that big. China is, and its membership in the World Trade Organization (WTO) had big effects.
Consistent with longstanding economic theory, China's liberalization benefitted capital and hurt labor in the developed world, as Chinese workers suddenly became available as substitutes for union workers in, say, Scranton. Labor economist David Autor and others have found that local labor markets more exposed to Chinese imports experienced "increased unemployment, decreased labor-force participation, and increased use of disability and other transfer benefits, as well as lower wages."
To be clear, the China shock was not a net loss for the U.S. economy, as anyone who's shopped at a Walmart or Target can tell you. Lots of Americans benefited from cheaper consumer goods and greater opportunities for exporting products to China's 1.3 billion customers. Indeed, Economics 101 says that trade liberalization can be a "Pareto-improving" move: It can make some people better off without making anyone worse off.
That argument glosses over a key point, however: For trade to be Pareto-improving, the winners have to compensate the losers out of their windfalls. This did not happen during the China shock. American corporations gained access to a new market and less expensive labor and materials, even as regular citizens were seeing factories shut down and jobs dry up. So you can understand why Rust Belt steelworkers have been pissed off for more than a decade. Economist Dani Rodrik has mused that for every dollar of extra output that trade liberalization produces, it redistributes $4–$5 from the losers of globalization to the winners. That is a surefire recipe for contentious politics.
In the past, the arguments against free trade have been littered with bad logic and dubious data, gussied up with references to Alexander Hamilton and Friedrich List. In this century, though, free trade critics have amassed some intellectual heft and political punch. Little wonder that all of the leading presidential candidates advocated withdrawal from the Trans-Pacific Partnership (TPP) during the 2016 campaign. "We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs," Trump declared in his inaugural address. "Protection will lead to great prosperity and strength." It was one of the few parts of the speech that earned bipartisan applause.
The arguments in favor of freer trade are pretty darn strong. The Peterson Institute for International Economics estimates that the U.S. economy benefits to the tune of $2.1 trillion every year from trade expansion.
Trump is now fulfilling his campaign promises on trade. He withdrew the United States from the TPP, started renegotiating the North American Free Trade Agreement, threatened to withdraw from a trade deal with South Korea, bashed the WTO, slapped tariffs on washing machines and solar cells, and announced those steel and aluminum import duties. More tariffs directed at China are likely coming.
Yet in his own blinkered, unintentional way, Donald Trump is making free trade great again. By employing the crudest, dumbest forms of protectionism imaginable, he has managed to alienate his erstwhile political and intellectual allies.
How will the steel and aluminum tariffs not lead to great prosperity and strength? Let me count the ways.
First, we have seen this story before and know how it ends. Sixteen years ago, George W. Bush levied up to 30 percent tariffs on steel. These were in place for nine months before the administration complied with a WTO ruling to remove them. Reputable economic analyses, including from the U.S. International Trade Commission, concluded that the result was a net loss in output and jobs. The tariffs succeeded in raising the domestic price of steel, since American producers were able to jack up their prices without fear of competition from cheaper imports. This in turn hurt the competitiveness of America's steel-using industries, which employ roughly 40 times as many workers as domestic steelmakers. Approximately 200,000 jobs were destroyed, a figure that exceeded the total number of steelworkers in the entire country.
Fast-forward to today, and the numbers tell the same story. The Trade Partnership, an economic consulting firm, estimates that the Trump tariffs will create about 33,000 jobs in the steel sector—and will destroy roughly 180,000 other jobs, including more than 36,000 in manufacturing. The Council on Foreign Relations estimates that 40,000 automaking jobs will disappear because of higher input prices. In some industries, the layoffs have already started (see "Protectionism vs. Cheap Beer" on page 26). The University of Chicago asked its expert panel of 43 economists whether the tariffs would improve America's welfare. Not a single one agreed—including David Autor.
Indeed, what is striking about Trump's tariffs is the degree to which even free trade skeptics have rejected the policy move. Rodrik called Trump's tariffs "a gimmick, not a serious agenda for trade reform." The liberal New York Times columnist Paul Krugman—who has been sympathetic to the idea that freer trade can widen economic inequality—nonetheless concluded that "there's no way to bring back all those steel plants and steel jobs, even if we stopped all imports.…The Commerce Department came up with an obviously bogus national security rationale for tariffs Trump wanted to impose for other reasons."
Those alleged national security arguments are particularly absurd. Administration officials have relied on a section of U.S. trade law that permits import restrictions on such grounds. But the case here is shaky to nonexistent. The Defense Department noted in a memo that the Pentagon only requires 3 percent of indigenous steel production for its operations, and expressed concern about tariffs' "negative impact on our key allies."
Those concerns are justified. China is the primary source of overcapacity in the global steel market; over the past decade, its subsidized producers have expanded output while every other country's production has held steady. But since the United States gets just 3 percent of its steel from China, the proposed tariffs would have hit Japan, South Korea, and the European Union (E.U.) much harder than Beijing. Rather than foster cooperation with trading partners who have also been adversely affected by China's rise, Trump sabotaged the chance for a united front.
In his rhetoric, the president appears to be targeting America's friends abroad. (One tweet from March referred to "the European Union, wonderful countries who treat the U.S. very badly on trade.") I teach international relations for a living, and I can tell you that sanctioning allies does not improve our national security.
In contrast to every president since FDR (including both Obama and Bush, despite what their respective critics may have said), Donald Trump does not believe in the benefits of trade. Previous presidents have at times taken protectionist actions, but everyone understood they were committed to greater liberalization in the future. No one thinks this about Trump, and that makes his protectionism even more dangerous to the global trading system.
The administration eventually responded to outcry against the tariffs by exempting some key allies and renegotiating the Korea-U.S. free trade agreement to allow for voluntary export restraints in steel. This has taken the immediate sting out of Trump's protectionism, but moves like these also create wounds that are certain to fester. Allies can tolerate the occasional hypocrisy—the short-term safeguard for a domestic industry—but not the wholesale evisceration of the rules of the game by its leading player.
Over the past year, countries around the world have responded to Trump's bluster mostly by plowing ahead with their own free trade deals: between the E.U. and Japan, the E.U. and Canada, and the remaining TPP members. All of these steps disadvantage American producers trying to gain greater access to markets in these places. And all of it comes just as the developing world is starting to desire U.S. wares. As The New York Times recently noted, Trump's protectionism risks damaging the ability of the U.S. "to sell advanced goods and services to the rapidly expanding global middle class."
Even many free trade skeptics have rejected the move. "The Commerce Department came up with an obviously bogus national security rationale for tariffs Trump wanted to impose for other reasons," concluded New York Times columnist Paul Krugman.
Now is the point in the story when free trade boosters normally lament that the siren song of protectionism resonates louder with the public than do experts' arguments for freer trade. But here, things get very screwy. The polling on this is quite clear: Free trade has gotten way more popular in the United States during the Age of Trump. The Chicago Council on Global Affairs, which surveys Americans annually, found 72 percent saying international trade was good for America's economy in 2017, up from 59 percent in 2016. Gallup, too, has found positive attitudes on trade skyrocketing—from 58 percent thinking foreign trade presents an "opportunity for growth" in 2016 to 70 percent feeling that way in 2018.
The polling on Trump's recent announcement has yielded similar results. Both Quinnipiac and Marist surveyed Americans on the steel and aluminum tariffs in the past month. In both cases, pluralities opposed the move and majorities disagreed with Trump's claim that "trade wars are good, and easy to win." Even in the Rust Belt, reporters are finding anxiety about the president sparking a larger trade war and fear about the effect of higher steel prices on factory workers' jobs. Note well that the steel tariffs did little to help Republicans in Pennsylvania's 18th congressional district, where Democrat Conor Lamb won the House seat previously held by a Republican in a special election in March. For all the talk about economic populism, Trump's protectionism does not seem to be popular at all.
This does not mean that protectionists are losing. Rather, they are scorching the earth. The current debate is not really about economics or national security; it's about identity. Trump has distilled his case for the tariffs into a simple phrase: "If you don't have steel, you don't have a country!" As usual, the implication is factually incorrect—the United States already produces about 70 percent of the steel it consumes. But that does not really matter. The president is evoking a bygone era when steel was a major employer in the Rust Belt. Never mind that new industries are arising all the time; at present, the University of Pittsburgh Medical Center employs nine times as many people as U.S. Steel. Trump is appealing to nostalgia for a world in which factory workers have children who then go on to work in the same factory.
In taking this approach, Trump has alienated an awful lot of the country, which explains the public shift in attitudes. Americans are more enthusiastic about free trade because Democrats are reacting negatively to the president—and to his tariffs.
Much of the country views trade policy through the lens of race and identity. Temple University political scientist Alexandra Guisinger has demonstrated that support for protectionism correlates with who is being protected. Simply put, tariffs are more popular with Americans when they are thought to benefit white workers.
It is difficult if not impossible to change anyone's mind when people's positions on an issue are grounded in political identity. Trade policy is threatening to turn into the same quagmire as immigration policy. The aggrieved voices of the few will outweigh the preferences of the many, and most of us will be poorer as a result.
In response to Trump's tariffs, European Union President Jean-Claude Juncker summed up the state of transatlantic trade relations: "So now we will also impose import tariffs. This is basically a stupid process, the fact that we have to do this. But we have to do it.…We also have to be this stupid."
What we are witnessing is the triumph of politics that privilege the emotional well-being of a subset of Americans over sound economic policy for everyone. It will cost an untold number of jobs. It compromises our national security. And it threatens to poison the political debate about this issue for the next generation.