While it is true that former President Ronald Reagan was mostly all talk and no action, his words still had considerable meaning because he was a great communicator. He understood the principles of liberty, free markets, and peace, but it was too bad that he rarely put those ideas into practice.
In August 1985, President Reagan delivered a radio address to the nation that highlighted the benefits of free trade and warned about the destructive nature of protectionism.
It’s something that President Donald Trump needs to listen to.
Here it is:
(H/T Mark Perry of AEI).
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Wherever the politically powerful are able to favor some favored industries at the expense of the rest of the population, there is the potential for protectionism. China has a large $375 billion trade surplus with the United States. That makes China useful as a villain for both branches of protectionism. The “progressivism of fools” branch would not mind a trade war in which both sides imposed ever-increasing tariffs, as long as those who they favor benefit. Senator Reed Smoot and Representative Willis C. Hawley probably did many things in their careers, but history only remembers them for the Smoot-Hawley tariff of 1930, which remains the prime example of the damage that protectionism can do.
Today, the elasticity of internationally traded goods is much lower than in the 1930s. Thus, even in a trade war with much higher tariffs by both countries, China would still buy almost as much soybeans and pork from America, and we would still buy almost as many electronics assembled in China as now. The tariffs would essentially be a very regressive tax imposed on the residents of both countries. This would raise prices and reduce standards of living in both countries. The net trade deficit with China would remain nearly the same, whether tariffs were increased or decreased by both sides or by only one side. The higher inflation from higher tariffs could force the Federal Reserve to raise rates more than otherwise.
Trump at times advocates for both branches of protectionism. This, mixed with political pragmatism, may mean that Trump’s bark may be worse than his bite in the trade area. Even though the President ominously asserted that trade wars can be easily won, the Trump version of protectionism and trade wars could be called the “professional wrestling” version. Pundits who really hate him like to say that the core Trump voting base consists of people who believe that professional wrestling is real. In some respects, protectionism and trade wars, as directed by Trump, are similar to the combat that takes place in professional wrestling. Professional wrestling is a show for entertainment where usually no real injuries occur. An example of the difference between really dangerous protectionism and the “professional wrestling” version can be seen with regard to the tariffs on steel and aluminum. When those tariffs were first announced, Wilbur Ross and Peter Navarro explained why there could absolutely not be any exceptions made for any countries, including American allies.
The new Trump version of the tariffs on steel and aluminum will exempt Mexico, Canada, Australia… and the list is still growing. Ross and Navarro know that if there are exemptions, the countries exempted from the tariffs can simply buy steel and aluminum at lower world market prices and then ship it to the United States. They might employ some fig-leaf subterfuge by shipping the steel and aluminum produced in their countries to the United States and then using steel and aluminum from China or other world market producers to satisfy their domestic needs for steel and aluminum. The net result is that the tariffs on steel and aluminum will have very little net effect, but might impress those who believe that professional wrestling is real.
All protectionists profoundly lack an understanding of the concept of comparative advantage which underlies international trade. When signing the $1.3 billion spending bill, Trump stated that the US Military will be the most powerful ever – that would include World War II. Trump also decries the trade deficit and repeatedly gives incorrect figures for the deficit by saying only the import figures, rather than the correct deficit amount, which is net imports, i.e. imports minus exports.
During World War II, the US ran enormous trade deficits with the non-combatant countries. Thus, essentially, all steel and aluminum made in the US during the war went towards military uses. Civilians could not buy new cars, etc. No steel or aluminum, and much of anything else was exported to countries not actively involved in the war. However, countries such as Mexico and Brazil were happy to export as much to the US as they could produce. Thus, the US ran enormous trade deficits with those countries.
Regardless of one’s opinion on the proper amount of military spending, the old “guns and butter” analogy still holds. One aspect of that analogy is that resources used for military purposes cannot be used for civilian purposes. This is especially true as an economy nears full employment. Thus, a way to have a society have the most powerful military ever and still not deprive civilians of anything is to buy the resources from foreigners. Paying for the net imports that replace resources devoted to the military with borrowed money makes it even less conspicuous.
A similar “professional wrestling” version appears to be present with the recent announcement of tariffs on Chinese goods to counter Chinese theft of intellectual property. There are two categories of intellectual property that have been stolen by the Chinese. Some have asserted that the Chinese culture has historically been antagonistic to the concept of copyrighting art or films. Certainly, Hollywood has lost billions of dollars to bootlegged and pirated Chinese copies of American movies.
The Chinese government discriminates against films not produced in China. However, as was discussed in the article “CEFL Yield Of 17.2% Still Attractive”, worldwide total box office gross receipts in 2018 show that the Chinese may now be eager to cooperate in efforts to crack down on bootlegged and pirated copies of movies and eliminate discrimination by countries against films not produced locally. Of the 15 top-grossing films so far in 2018, 6 were Chinese. Hollywood has the most to gain from a get-tough policy on China. The American farmers have the most to lose. The politics of having farmers sacrifice so that the Hollywood elites can get richer may make Trump reconsider some of his possible policies regarding China…”
https://seekingalpha.com/article/4164735