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Thursday, August 18, 2016

Will Republicans Abandon Free Market Economics?

Trump’s reformulated tax plan still has some problems, but it has many positive elements, and is certainly far better than anything we can hope to see from Hillary Clinton. But if Trump really wants to be a “pro-growth candidate” the rest of his economic policy needs an overhaul, too. The essence of an economy, after all, is not how the government taxes economic activity. The essence of an economy is trade. Free markets have been a fundamental part of conservative philosophy not just on economics (they work as the free exchange of goods between people creates wealth) but also social and political philosophy (free markets recognize and promote the value of individual liberty).

Donald Trump has made a cornerstone of his presidential run the idea that free trade is a bad thing for America’s workers and trade deals like NAFTA have been a disaster. He calls the proposed Trans-Pacific Partnership (TPP), which would largely eliminate tariffs on goods traded between the United States and 11 Pacific Rim countries, “a rape of our country.” These arguments have been echoed by a bevy of professional “conservative” commentators who have jumped on the Trump bandwagon.

Trump’s arguments on trade are light on facts, and often full of fallacies (such that China’s currency is greatly under-valued), and betrays an ignorance of how trade works (as witnessed every time he talks about trade deficits). But is his basic premise, nonetheless, correct? Does free trade just benefit “elites” while harming everyone else? Should we really be abandoning agreements like NAFTA and instead throw up trade barriers like high tariffs and penalize U.S. firms that move production out of the country?

A report from Challenger, Gray and Christmas estimates that the fall in oil prices since mid-2014 has cost 195,000 U.S. jobs in the high-paying oil and oil services industries. Places like North Dakota that experienced a big economic boom from the exploitation of the Bakken oil fields are now hurting since the price of oil has fallen to levels that make operating these new U.S. wells, with relatively high extraction costs, unprofitable. So, should the U.S. government slap a large tariff on cheaper to produce oil coming into the country from places like Saudi Arabia or Mexico in order to boost the price of oil in the U.S. to a level (say $65 per barrel) that will keep most of these U.S. facilities in production and “save” most of these jobs? In the current language of the neo-protectionists that have rallied around the Trump banner, making Americans pay 50% more than what the rest of the world pays for oil would be putting “America first” while those opposed to such a move would be “out of touch elites” wedded to “globalism.”

Trump has not explicitly called for increasing the price of gasoline paid by every American household in order to help about 200,000 oil workers. But this, in essence, is what he is calling for when he espouses the idea that government needs to step in to keep cheap imports (of whatever product) coming in from China or Mexico or Vietnam. The neo-protectionists are advocating that all the consumers of these products should pay more in order to protect a much smaller subset of Americans. Indeed, a report recently prepared by three economists at Suffolk University for the National Foundation for American Policy estimated that Trump’s threatened punitive tariffs on China, Mexico, and Japan alone, would cost the average American household $11,100 over 5 years.

Conservatives and, to a large extent, Republicans used to defend the free market as the best economic system not because it produced no losers, but because it is through the dynamics of free trade that economies grow, that innovation thrives, and incomes rise. Those who suffer when they lose jobs as a result of competition or technological changes may be highly visible, whereas the beneficiaries, though more in number, may not be so easily recognized because the cause of lower prices, or jobs in new growing industries, may not be obvious. But conservatives have long taken up the role of trying to educate people that the workings of the market are, on the whole, healthy. Competition is good. Lower prices may be bad for one group of producers but good for everyone else who now has more money to spend elsewhere causing other industries to grow. Technological innovations that put some people out of work boost the wages of others by increasing their productivity and spur the growth of new industries. The philosophical underpinnings supporting free market capitalism, in general, are the same as for free trade in particular.

Bernie Sanders doesn’t like free trade because in his world view, production, or at least capitalist production, is based on exploitation. And so those who benefit the most from free trade are simply those who exploit the best. Bernie Sanders is a socialist who views trade as a “zero sum game” where one side can benefit only at the expense of the other. But his view on trade is shockingly similar to that of Donald Trump’s and numerous commentators who think of themselves as conservatives. In both cases, the free market isn’t a good thing, but a corrupt thing, controlled by elites who profit at the expense of workers, and therefore needs to be heavily controlled and restricted by government in order to protect the “little guy.” Is this the future of Republican economic policy? Is the next logical step for Trump Republicans to come out against “right to work” laws because non-union shops result in lower wages for the benefit of “elites” like business owners and shareholders? Will Republicans (like Trump has) reverse themselves on opposition to increasing the federal minimum wage, since working class people vote for such increases every chance they get, and those that argue against such moves citing economic theory and obscure studies are obviously “out of touch elites”?

Now, Trump supporters will counter that they are all for “fair” trade. But no, they are not. By largely reducing (or eliminating) tariffs to roughly equal levels to all parties, TPP is not an “unfair” monument to “globalism.” The fundamental problem with TPP, in their eyes, is that in addition to making our goods cheaper in places like Australia and Malaysia, it would make goods coming in from those countries less expensive in the U.S. And that, according to Donald Trump, is “rape.”

Trump calls for a 45% tariff on Chinese goods, but his excuse for doing so, that the Chinese have unfairly manipulated their currency to make their goods cheaper in the U.S., is a fallacy, as has been continually exposed in the financial press during this campaign. Yes, one can argue that lesser developed countries can produce at lower costs because labor is relatively cheap in these countries and they don’t have to abide by the same environmental, or health and safety, or other standards, that producers in the U.S. face. But this is not an argument about “fairness.” Would it be fair for Sweden to tell the U.S. that it can’t have access to Swedish markets unless it adopts all the taxes and mandates that it imposes on its businesses? No, that is called protectionism.

There is nothing wrong with using trade policy to pressure countries to observe very basic labor and environmental standards — as Congress did with a side agreement to NAFTA. But trade critics, like Trump, often cite any discrepancy in levels of various regulations as “unfair.” But there is nothing “fair” about telling a poor developing country that it has to have the same wage rates, labor laws, and environmental regulations as does a rich, advanced, country like the U.S. or face punitive tariffs on its products. Britons opted out of the European Union, after all, in large part due to all the burdensome regulations the EU placed on British companies.

According to the GAO, NAFTA reduced trade-weighted average tariffs on U.S. goods going to Mexico (which stood at about 12% just prior to NAFTA in 1993) by a much greater amount than it did for Mexican goods coming into the U.S. (which was about 2.1% in 1993). Is an agreement that essentially eliminated a 10 percentage point unfavorable average tariff differential really a “horrible” deal? Is every factory that is moved from the U.S. to Mexico the result of NAFTA? Hardly. Many jobs that left the U.S. for Mexico were destined to be lost not because of NAFTA, but because the cost of manufacturing in the U.S. was high compared with many other places in the world. They were going to go somewhere else; NAFTA may have caused them to end up in Mexico rather than in China or Indonesia or Bangladesh. If you really want jobs not to leave the U.S., your focus should be on undoing those government policies — tax rates, protected unions, regulations, expensive mandates like Obamacare and high minimum wages — that make manufacturing relatively expensive in the United States, not on keeping out imports or penalizing U.S. firms struggling to stay in business by trying to escape some of these burdens.

So where do Republicans go from here? If Trump wins, do they sign-on to a new anti-trade, protectionist world view? A surprising number of “conservative” commentators already have, just as they seem to have abandoned the idea that they used to trumpet so loudly, that character was important in presidential candidates. But does this represent a real philosophical shift or simple opportunism from a group looking to be among those replacing the old “establishment”? And what happens if (as appears more likely) Trump loses? Do Trump Republicans come back home to Adam Smith and Milton Friedman or do they search out a new populist cult hero to wage war against the “economic elites” who don’t care about the “victims” of a “rigged” economy? A proper analysis of the rise of Trump would take far more space than what I have here, but I think the evidence suggests that many people have flocked to Trump more out of emotion rather than due to his specific positions on trade policy. Therefore, I am hopeful that the Republican Party will not abandon its general philosophical support of free trade and free markets that has been an important part of its identity for the past 75 years.

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