Tariff policy shows need for basic economics lesson
Contrary to the beliefs of President Trump, trade barriers will not “Make America Great Again.” The goal of imposing tariffs is to make American products more attractive by seeming like an inexpensive alternative, which supposedly will lead to an increase in American jobs. The problem with the idea that trade barriers will stimulate the American economy is that it’s a very limited view.
Sound economic analysis examines the effects of public policy on all groups, not just on some groups. While the president, some other politicians and domestic special interest groups argue that the steel and aluminum tariffs will save American jobs, the truth is that it will simply save some specific jobs. A tariff on foreign steel and aluminum will lead to higher productions costs in other industries, which will lead to higher consumer prices for products made with these metals. The problem is that good economics and good politics many times do not go hand-in-hand. Public choice analysis — the use of economics to analyze political decisionmaking — explains that because of concentrated benefits and dispersed costs, often special interest groups win at the expense of the majority — American consumers.
When two individuals voluntarily trade, both parties expect to benefit or the trade would not have taken place. Therefore, by definition, voluntary trade is a win-win situation. The same principle applies when two countries trade. The problem with the president’s rhetoric is that he believes that when the United States trades with nations such as China, Canada and Mexico, they are “winning” and we are “losing.” However, Trump has a faulty view of trade. Obviously, millions of American consumers are winning by having the ability to buy products from these countries at low prices; such bargains leave those Americans with more money to spend on other American businesses. Moreover, by selling Americans a high volume of goods, Chinese citizens have more money to invest in the United States.
Trump makes a mistake by focusing on the word deficit when it comes to the trade deficit. Typically, the word deficit has a negative connation; however, when it comes to trade, there is nothing bad about a trade deficit. I have a trade deficit with my grocery store, my local Starbucks and my Apple store. I have only purchased from them (i.e., imported) and I have never sold anything to them (i.e., exported). Am I worse off because I “imported”? I think not. I much prefer to purchase items from those that have a cost advantage — a comparative advantage — in providing food, coffee and electronic products instead of having to make everything myself. If it doesn’t make sense for an individual person to pro- duce everything himself or herself, then why does it make sense for a country to make everything itself? When the headline reads, “U.S. has a trade deficit with China,” it could instead be stated as “China is investing in the United States.” The former sounds negative especially compared to the latter. But it’s two sides of the same coin. You can’t have the investment without the trade deficit.
Good economic analysis looks at the effects of a policy on all groups, not just some groups. If the president is trying to gain favor with voters in “steel” states, believing that they will help him win the next election, then his position is rational. However, if he really thinks that tariffs are good for the economy, he either skipped his economics class at the Wharton School of Business or he needs a better economics education immediately, perhaps at San Jose State University or De Anza College.