The Trump administration recently announced a trade agreement that will replace the 24-year-old North American Free Trade Agreement with the United States-Mexico-Canada Agreement. The new agreement is not that different than NAFTA, and given the president’s affinity for government-managed trade, that’s a good thing. Although the negotiations missed some significant reform opportunities, the new agreement leaves intact the mostly tariff-free relationship between the United States, Canada and Mexico.
The most obvious missed opportunity is that recent U.S. tariffs against Canadian and Mexican steel and aluminum will remain in place, allegedly for national security reasons. These tariffs are unjust and harmful to American consumers, while American businesses are going under because of them. Jobs are being lost, prices of consumer goods like dishwashers are going up and the ever-increasing tariffs on imports from other countries like China, will further exacerbate these problems. To fully understand why these tariffs are not the win the president and his supporters make them out to be, we have to think clearly about what international trade actually is.
We often talk about trade between nations as if it is done through the medium of government. But “Mexico” does not trade with “America.” The actual trade going on is between individuals, to the tune of billions of transactions a year. That trade is by definition win-win. Individuals only give something up if they expect something better in return.
That means the term “trade deficit” is incredibly misleading. When Americans buy $592 billion worth of goods from the European Union, and the EU buys $500 billion worth of goods from the United States, both sides are better off. Americans have gotten $592 billion worth of value from trade with the EU, while sending only $500 billion of goods across the Atlantic. The “deficit” is actually a surplus of value. Both sides win.
Governments can prevent that win-win from happening by imposing a tariff or regulatory standards that raise the cost so much that their citizens are no longer willing to pay. In doing so, governments are denying their citizens the opportunity to improve their lives. When governments impose retaliatory tariffs, they are essentially saying, “We are going to hold our citizens hostage until you stop holding yours hostage.”
Yet, the full effects of tariffs are worse than that. They amount to government intervention in the market to favor some forms of economic activity over others. Thus, the new steel plant has to be viewed alongside the increased costs to industries that use steel as an input. Some of those businesses may close. Some people gain jobs, others lose them, but the jobs that are created are the wrong jobs – jobs that exist purely because of the government’s industrial policy masquerading as trade policy.
The president’s stated goal of reducing all trade barriers to zero is a worthy one. He also has a point when he says that China’s predatory practices should be held to account. Forced technology transfer and insisting that companies doing trade in China include the Chinese Communist Party in their charters are examples of bad trade practices that need to be stopped. Yet, trying to achieve these objectives by imposing pain on Americans is simply bad policy.
This administration has provided significant relief to American businesses and consumers in the form of getting rid of burdensome regulation and reducing onerous taxes. A prolonged trade war will negate the gains of these policies. Indeed, the Tax Foundation calculates that the effect of tariffs imposed so far already outweighs the benefits of the tax cuts.
There are other ways to achieve the administration’s goals that do not require imposing pain on American citizens. America and the European Union can together use the World Trade Organization to put pressure on China, by, for instance, revoking its status as a developing country, which it uses to justify many of its worst practices. The steel industry can be encouraged by deregulation, especially in relation to its energy needs.
What the administration should not do in the name of America is impose significant pain on American citizens. And, that’s exactly what is happening with Trump’s tariffs. This is one big reason why the president’s trade policy is not working.
Originally published at the Morning Consult.