Costly Political Assumptions and Actions on Trade Hurt Small Business and the Economy

By SBE Council at 27 June, 2023, 7:37 am

SMALL BUSINESS INSIDER

by Raymond J. Keating –

The death of free trade is being proclaimed far and wide. But such declarations aren’t rooted in sound economics and market realities. Instead, the so-called death of free trade is rooted in nothing more than assertions and assumptions rooted in politics. And when politics overrules sound economics, things never turn out well. In fact, things get confused and costly.

Opening Markets and Lowering Trade Barriers Has Benefitted U.S. Entrepreneurs and Our Economy

From the end of World War II through the administration of President George W. Bush, the general direction (though with periodic setbacks along the way) on trade policy for the United States was to advance free trade, that is, to generally reduce governmental barriers, such as tariffs and quotas, that raise the costs of entrepreneurs, businesses and consumers being able to trade with each other.

To sum up, free trade boosts economic growth, lifts people out of poverty, creates wealth, increases incomes, enhances freedom, and expands mutually beneficial commerce. Free trade reduces costs through enhanced competition and lower trade barriers; expands choices and lowers prices for consumers; keeps U.S. firms competitive; opens new markets and opportunities for U.S. entrepreneurs, businesses and workers; and again feeds economic growth.

Regarding U.S. enterprises and workers, keep in mind that exports effectively are measures of sales and opportunities for American entrepreneurs, businesses and workers in the global marketplace, while imports measure inputs of U.S. domestic businesses, from manufacturers to retailers. That is, nearly every import into the U.S. is an input to a domestic business – from retailers to manufacturers.

Therefore, tariffs and quotas that increase the costs of imports mean increased costs for U.S. businesses. And in the end, consumers pay for trade protectionism via higher prices, reduced choices, diminished quality, and less innovation.

And if you doubt the importance of trade to our economy overall, consider that real total trade, i.e., real exports plus real imports, registered 7.6 percent of real U.S. GDP in 1960, and that grew to 32.1 percent in 2022.

Again, when government raises costs via tariffs and quotas, for example, there are clear negatives for consumers; for the small businesses that overwhelmingly populate the universe of exporters and importers, and all industries affected by exports and imports; and for the U.S. economy.

U.S. Drifts Away from Trade Agreements, Costly Barriers Emerge

After the administration of President George W. Bush, the U.S. has backed away from free trade. During the Obama administration, the U.S. largely moved to the sidelines in terms of reducing trade barriers, except for coming to work for the Trans-Pacific Partnership (TPP) late in his administration. But then, during the Trump and Biden administrations, the U.S. has moved to a protectionist-leaning position on trade for the first time in more than 90 years.

President Trump argued against free trade and assorted U.S. trade agreements; backed the U.S. out of free trade agreements altogether (such as the TPP) or to degrees; threatened to raise assorted trade barriers; and managed to inflict trade restrictions on various goods from China, as well as on steel and aluminum imports from U.S. allies.

While altering the tone of the rhetoric, President Biden not only has embraced Trump’s protectionism, but expanded on it. The Biden administration has put forth an assortment of old, mistaken arguments in favor of protectionism, and has advanced additional protectionist measures, such as subsidies and domestic content mandates. There’s nothing new here. The only difference is that those who have long lobbied against free trade, namely, labor unions, green activists, and certain businesses seeking favors (i.e., protection) from government, have found receptive ears with politicians unfortunately on both sides of the aisle.

The economics, though, remain unchanged.

For example, the Tax Foundation has noted: “While the Trump tariffs were intended to protect American industries, they have largely hurt the U.S. economy by burdening U.S. industry and workers. And they invited retaliatory tariffs, primarily from China, on U.S. exports, which have damaged the economy even more. Historical evidence and recent studies show that tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers, which results in lower income, reduced employment, and lower economic output.”

In a recent article in Foreign Policy, James C. Capretta and Stan Veuger, both of the American Enterprise Institute, pointed out that President Biden “has made no moves suggesting even modest support for existing or new free trade agreements and many moves that point to a willingness to undermine the free trade edifice that was carefully erected over seven decades.”

Regarding the China factor, Capretta and Veuger raise a key point:

“Both the Biden and Trump administrations often cite China and its market manipulations as a reason for abandoning free trade, but if China were the primary cause of concern, the solution would be to provide a workaround rather than to abandon free trade entirely. As it happens, President Barack Obama provided the solution, which was to deepen trade relations with key partners in the region while excluding, and thus isolating, China. The TPP, with Australia and Japan among the signatories, would have created an immense trading bloc that could have checked the power of China. Both Trump and Biden rejected this strategic option because it would involve passing another free trade agreement through Congress over the objections of the labor movement, and neither was willing to do that. The result is that the TPP has been reworked by the non-U.S. participants and recast as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.”

What about supply chain issues that somehow have been twisted recently against free trade agreements? That doesn’t make much sense if we’re looking to diversify and strengthen supply chains.

Indeed, it was noted in a report from the Brookings Institution that international trade improves economic resiliency in difficult times: “…the COVID pandemic provided novel arguments against free trade based on global supply chain resilience, but neither the pandemic nor short run policy response had enduring effects on trade flows. We demonstrate that global trade was remarkably resilient during the pandemic and that supply shortages would likely have been more severe in the absence of international trade.”

Capretta and Veuger ably highlight the benefits of free trade and the ills of moving in the direction of increasing governmental barriers to trade:

“The historical evidence shows that expanding trade was central to the most successful run of wealth expansion and poverty reduction in history, and it delivered tremendous value to the American consumer. A recent overview of the relevant research from scholars at the Peterson Institute for International Economics summarizes the impressive record. Among other things, trillions of dollars in economic benefits have accrued to Americans from global commerce. Further, as more countries joined the world trading system in the 1980s and 1990s, some 1 billion people were lifted out of extreme poverty, according to U.N. estimates. Enacting increasingly stringent Buy America provisions, undermining the rules-based global trading system, and engaging in below-zero-sum state aid arms races jeopardize all of these gains. Other countries will not simply accept higher barriers to their products in the U.S. market without responding in kind.” 

The Moral Components of Trade: Lifting People Out of Poverty, Enhancing Freedom, Peace Through Commerce

Finally, it must be noted that there is a moral component to the economics of trade. I explained it this way in my book Free Trade Rocks: 10 Points on International Trade Everyone Should Know:

“So, let’s review key points making clear the moral superiority of free trade over protectionism. First, there is an unmistakable moral component to establishing and expanding an economic system – that is, the market economy – essential to lifting people out of poverty; to the wealth creation that enables, for example, improved food production, housing, health care and overall quality of life; to greater leisure time; to a cleaner environment; and to incentivizing the private investment, innovation and exchange that allow for greater specialization, productivity and income growth. Free trade is central to the entire market process, and the free market is essential to economic and income growth, including poverty relief.

“Second, the freedom to trade and exchange as one sees fit is a basic economic freedom that makes clear the value of each individual, with that same freedom serving to spur economic growth forward. Decades ago, my eighth grade teacher noted that the United States was the most prosperous country on the planet, yet she had no idea why that was the case. She failed to understand that it fundamentally was about economic freedom, that is, individuals being free to spend, save and invest their earnings as they see fit; free to start up, build and invest in businesses; free to gain education and skills needed to achieve their goals; and free to improve their lives by trading with whomever they choose.

 “Third, free trade points to individuals being able to improve their lives thanks to greater choices and lower prices in terms of consumption; thanks to enhanced productivity; thanks to a diffusion of technological advancements; and thanks to expanded opportunities by serving customers not only in their own town, state or country, but around the world. In contrast, protectionism is about the politically powerful influencing government in order to gain special treatment, such as U.S. steelmakers looking to be protected via tariffs or quotas. Such cronyism means that voluntary trade is being replaced by political dictates. It means that political power is reducing individual opportunity. When a country moves away from free trade, the people with lobbyists and political connections make out better than – and at the cost of – the average person.”

Advancing free trade is an economic imperative, and the U.S. needs to return to its position of global leadership – for the benefit of U.S. entrepreneurs, businesses and workers, and likewise for the benefit of entrepreneurs, businesses and workers in other nations, as free enterprise and free trade drive economic, income and employment growth forward.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.