While we as a nation confront the spread of a novel coronavirus within the United States, the easiest path is to blame others and turn our backs on the rest of the world. Fear often lends itself to isolationism. This is exactly the policy espoused by President Donald Trump, who, in a speech on March 24, took the opportunity to criticize America’s interdependence with other countries: “This crisis has underscored just how critical it is to have strong borders and a robust manufacturing sector. … Our goal for the future must be to have American medicine for American patients, American supplies for American hospitals, and American equipment for our great American heroes.” The speech incorporates the pathogen that threatens both our lives and our way of life into the typical refrain of the Trump administration. We are bringing back American companies and jobs. We will make others pay to trade with us, and we will guarantee that we are not being cheated. This isolationism, undergirded by economic arrogance, is called economic protectionism and forms the centerpiece of the Trump administration’s policy agenda.
President Trump’s inclusion of this remark, about manufacturing and economic independence, in a speech about the coronavirus speaks to the political weight of economic protectionism. Supporting protectionist policies and viewpoints is politically advantageous, yet all available evidence and an overwhelming majority of economists support the notion that economic protectionism is a mistake. It does not work, and it leaves Americans worse off economically than before. To better protect the American economy, more focus needs to be given to educating voters and helping the “losers” of free trade so that the country can begin turning its back on protectionist policy.
The Consumer’s Conundrum
Economic protectionism constitutes a policy agenda of protecting American producers from foreign competition. Through carefully targeted tariffs and taxes, the government can make it relatively more expensive for foreign companies to sell their goods within the United States. This prevents cheaper foreign goods — perhaps made in countries with lower wages or cheaper materials, or simply made more efficiently — from undercutting domestic prices.
From a domestic company’s perspective, this policy is fantastic. Mark Perry, a professor of economics at the University of Michigan, explains in an interview with the HPR that “in an ideal world for the producers, they would like to be a monopoly, have no competition, and have the highest price possible.” Economic protectionism gets them significantly closer to that ideal world, pushing out competition and artificially inflating prices.
On the other hand, one could view these policies from the perspective of a consumer, in some sense the more common perspective of the two. While only a fraction of the population works for these large production companies, everybody living in this country is a consumer. Any changes to the experience of the consumer will have a far broader effect on people and on the economy as a whole.
So how are consumers affected by a protectionist trade agenda?
In a word, negatively. Through unrestricted trade, new ideas and innovations are able to flow freely between nations. Consumers get access to choices that were previously unavailable, new goods and services that might be better than or preferable to the standard. Perhaps most importantly, competition from foreign producers keeps domestic industry on its toes, decreasing the cost that consumers face and freeing up money for other expenditures. Whatever is not spent on groceries or clothing at the store can instead be spent going to restaurants or movies, creating new jobs in other areas. As former Chairman and President of the Export-Import Bank Fred Hochberg identifies in an interview with the HPR, these are the primary benefits of free trade: innovation, variety, and price reduction.
The economic value of these benefits is huge. As Hochberg points out, “the amount of money Americans spend on food and clothing has dropped to 20% [of their incomes] due to trade,” compared to 60% at the beginning of the 20th century. Protectionist policies, on the other hand, can be incredibly costly. Perry points to the cost of sugar as an example of protectionism hurting the consumer. Around the world, the price of sugar is about 14 cents per pound; in the United States, the price of sugar is double that at 28 cents per pound. Perry explains that “because we keep most of the foreign sugar out of the country, the cost of higher sugar prices is spread around two or three hundred million consumers. We all pay a little bit more, every day, for anything that has sugar in it.” In 2012, these protectionist policies on sugar alone cost Americans $3 billion. Now imagine how much money is lost due to protectionist policies on steel and corn, on washing machines and solar panels. President Trump’s recent trade war with China, for example, cost the economy 300,000 jobs and $46 billion in increased costs. It is clear that these protectionist policies hurt not only the consumer but the overall economy.
Enacting protectionist policies is equivalent to constructing a moat around the United States to keep foreign products, even those that would make us better off, out. “Last time I checked,” Hochberg quips, “moats went out of style around the 13th century.”
Still, protectionism might be a fair trade after all if the jobs “saved” from outsourcing labor to other nations contribute more value to the economy than lower prices; however, that does not seem to be the case. If manufacturing jobs were truly moving en masse to China or Mexico, then domestic production would be declining. And yet, as Perry notes, manufacturing output is at an all-time high. Instead, a recent study indicates that 88% of manufacturing job losses are due to rising American productivity resulting from automation and technological advances — not due to free trade, outsourcing, or foreign competition. Overall, from their negative impact on consumers to their marginal effects on the labor market, protectionist policies harm the economy far more than they help.
When Politics and Economics Disagree
Alan Blinder, an economist at Princeton University, once proposed a rule he calls Murphy’s Law of economic policy: “Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.” That certainly seems correct with regards to trade. A poll conducted after the 2016 election found that 77% of Americans felt it was very or somewhat important to establish tariffs to discourage companies from relocating to other countries. And yet, on May 3, 2018, over 1,100 economists of all political ideologies signed an open letter to President Trump, warning against the imposition of trade tariffs. Though economists overwhelmingly believe that free trade is far superior to protectionism, protectionist policies remain a political win.
There are a number of reasons why the public is wary of free trade. On the surface, the words we use to describe trade may play a role in affecting the way it is perceived. Words like protectionism carry positive connotations, reassuring voters. In contrast, the idea of a trade deficit sounds scary, clinical, and dangerous.
More significantly, trade is associated with foreigners. This, according to Bryan Caplan, a professor of economics at George Mason University, is why a disparity exists between the views of the general public and those of economists. In an interview with the HPR, he explains that “when the public hears about foreigners, they picture bad stuff and … let their imaginations run wild.” This phenomenon biases people against the idea of free trade, creating a disconnect between what economists agree to be the ideal trade policy and the trade policy most favored by American voters. Caplan adds that “without [anti-foreign bias] it would be easier to get people to just think about the possibilities [of trade].” Instead, the bias creates a mindset where people are quick to leap to negative conclusions.
At the same time, the harms of trade are far more visible than are the benefits. People can look outside and point to factories that have closed down or companies that have moved overseas, but it is far more difficult to conceptualize the jobs that have been created due to lower input costs and the industries that exist only because of international trade. Like Perry mentioned, the benefits of trade are spread around an entire economy, decreasing their visibility. Voters likely find it easier to believe the anecdotal evidence that is right in front of them, even if the empirics might indicate that protectionism will do even more damage.
While anti-foreign bias and visibility explain how protectionism appeals to individual Americans, two additional factors must be taken into account to understand why the economic policy enjoys such prominence in government. The first is the relative organization of producers compared to consumers. Whether it be the American auto industry, local steel companies, or any other domestic industry, production tends to be dominated by two or three big companies. Consequently, Perry finds that there are massive stakes for those companies in getting protectionist policies passed. These companies are also few enough in number to band together, forming a powerful special interest group. The U.S. steel industry, for example, has spent more than $180 million on lobbying in the past decade, likely leading to the recent imposition of massive steel and aluminum tariffs. In contrast, because the benefits of free trade are diffused over such a large consumer base, individuals find it challenging to rally against these special interest groups, or even identify where they are losing money. “Consumers don’t recognize if prices are down for groceries, clothing, and so on, that trade actually has anything to do with it,” Hochberg remarks. “They just think that they’re good shoppers.”
The second reason for the continued prominence of protectionism in U.S. policy is a geographic accident. In general, Hochberg indicates that the states that have been most detrimentally affected by the short-term repercussions of trade — Ohio, Pennsylvania, Michigan, and Wisconsin — also happen to be battleground states, states that wield disproportionate influence in the American electoral system. Consequently, policy tends to be drastically skewed by the interests of existing industries within those few states, leading to protectionist policy. Altogether, even though economists are almost unanimously opposed to protectionism and tariffs, it remains politically advantageous to support those ideas.
Do Politicians Knowingly Promote Bad Economic Policy?
In some ways, the most important question is whether or not politicians know about the downsides of economic protectionism. Are they simply uninformed, or are they deliberately deceiving the public in order to score political points? And, as Caplan askst in his book, The Myth of the Rational Voter, “What happens if fully rational politicians compete for the support of irrational voters — specifically, voters with irrational beliefs about the effects of various policies? It is a recipe for mendacity.”
According to Perry, many current members of Congress already genuinely support free trade. However, when confronted by anecdotal evidence of factory closures, when offered political support to promote protectionist policies, when aware of popular antagonism towards free trade, it may seem easier to not question the downsides of protectionism. Instead, politicians find it easier to put aside broader, long term effects in favor of more visible and immediate concerns. In the case of the U.S.-China trade war, for instance, former Chief Economic Advisor Gary Cohn told President Trump about the damage it would do to our economy. Yet President Trump chose to ignore him. Caplan describes the result of this discrepancy between good politics and good economics bluntly: “politicians are just not doing very careful intellectual hygiene.” To expect otherwise is, perhaps, asking too much.
In order to strengthen our approach to the economy, we must look past the politicians and toward the structural failures that have led to the increased popularity of detrimental protectionist policies. We must educate voters, show them the numbers and the facts that prove they are worse off under protectionist regimes than under free trade policies. We must focus on the losers of free trade, provide training programs and improve the social safety net. We must reduce the power of special interest groups and money from massive corporations in politics. Perhaps then, the public — and by extension, politicians — will be willing to listen to the experts.
In the wake of the outbreak of COVID-19, it has been heartening to see Americans and others around the world not going along with President Trump’s attitude of blame and isolation. Solidarity and unity, it seems, are unintended byproducts of this disease. Doctors are leaving their home countries to help in those areas most stricken by the coronavirus. China, Malaysia, Thailand, Vietnam, Taiwan, India, Honduras, and Mexico, all dealing with their own crises of varying magnitudes, are churning out personal protective equipment for use in the United States. Though we all hope that the virus is beaten and the crisis is ended as quickly as possible, perhaps it would be advantageous if this attitude of international solidarity, this acknowledgement that other nations have much to offer us and vice versa, lasts.
The implicit assumption in agendas of economic protectionism is that America would be better off if we operated alone. That assumption is categorically untrue. “We don’t have a monopoly on every good idea,” Hochberg concludes. “That kind of thinking is not good for America and is not good for the world.”
Image source: Flickr/Got Credit
