When economists are polled on whether free trade creates net benefits for an economy, the vast majority, sometimes over 90 percent, answer that it does. Politicians, though, are another story. In 2018, President Trump proudly called himself “tariff man” and was true to the label: he imposed many tariffs on imports, even though one of the usual, if mistaken, rationales used to justify restrictions on imports, high unemployment, did not apply. Many economists hoped that whatever other harms President Biden might impose, he would reverse all or most of Trump’s tariffs. Although Biden has had over three years to reverse those measures, he hasn’t done much.
It was only natural, then, to wonder how Biden’s economists at the Council of Economic Advisers (CEA) would discuss trade. They could ignore trade, always an option for economists who want to maintain their professional integrity but not dump on the boss. They could call for reducing tariffs: although that would be nice, it might cause some of them to lose their jobs or, at least, be ignored. Or they could talk about the benefits of trade without addressing whether it should be restricted or liberated by tariff reductions. The last, discussing the benefits, is probably the least bad choice. Fortunately, that’s the choice they made in the 2024 Economic Report of the President.
These are the opening two paragraphs of my latest Hoover article: David R. Henderson, “Biden’s Economists Are Mostly Open to Free Trade,” Defining Ideas, April 4, 2024.
In this paragraph, I bring in my own back-of-the-envelope calculation to make the point they make:
In 2016, I computed the gains from freer trade in clothing. The downside is that the US economy lost 650,000 apparel jobs between 1997 and 2007, which is when Chinese imports increased so rapidly. Not all those people found jobs at a pay as much as they earned before. The good news is that, with the increase in international trade, clothing became much cheaper. In his book The Rise and Fall of American Growth, Northwestern University economist Robert J. Gordon reported that between 1980 and 2013, clothing prices fell by an average of 2.6 percent per year. Compounded over that whole period, that’s a 58 percent drop. At the time, households in the bottom two income quintiles had an average after-tax income of $19,266. I computed their gain from lower prices for clothing, both on clothing they would have bought and on the extra clothing they bought because of the lower price. The gain averaged $935 per household. At the time, there were about fifty million households in the lowest two quintiles, so the overall gain was about $46.8 billion annually. Assuming that the 650,000 people who lost their jobs lost as much as $10,000 each per year, which is probably an overestimate, their loss was $6.5 billion, which is less than 15 percent of the gain.
There is more than one but:
The other disappointment is its celebration of the US government’s interference in Mexico’s labor market.
Read the whole thing.
READER COMMENTS
Jon Murphy
Apr 5 2024 at 12:15pm
I agree with your point in the piece about Doug Irwin being both a staunch free trade advocate and one of the top (if not the top) trade economists. In my International Trade class this semester, one of our two required books is his Free Trade Under Fire. Not only is the book throughly researched (covering literally centuries of study) but he focuses on the unintended consequences and the incentives created by trade policies. It’s an economist’s book well-written so that anyone can understand it.
In the report itself, Figure 5.9 (pg 191) is interesting. It shows FDI in manufacturing (which accounts for about 2/3rds of FDI) from 2014 to 2022. One thing jumps out immediately:
The trend was rising from 2016 until 2018. But 2018 was when the trade wars began. We see FDI fall through 2021 (some of that is driven by the pandemic, but not all). Coupled with other research and evidence on the trade war, it shows pretty conclusively that the Trump administration’s trade war failed.
Warren Platts
Apr 6 2024 at 5:17pm
FDI that results in greenfield new factories is a small fraction of total FDI (it’s defined as merely acquiring a 10% share of an American company) that is in turn a small fraction of total foreign capital inflows. Thus the boosting of actual overall manufacturing output in terms of new factories, FDI is rather trivial.
Jon Murphy
Apr 6 2024 at 5:48pm
“Trival” is a funny word to use given you were just celerbating such inflows not too long ago as protecting American jobs. But hey, you want to cut off billions of dollars to American firms, that’s on you.
vince
Apr 5 2024 at 1:48pm
Trump isn’t against trade. He’s against unfair trade. His policies clearly were part of a long-term negotiation strategy.
I can already hear the dogma about the greatness of unilateralism.
Jon Murphy
Apr 5 2024 at 1:54pm
He explicitly says otherwise. It was a major part of his platform in 16, 20, and this year.
I’m willing to take Trump at his word.
Craig
Apr 5 2024 at 6:21pm
He’s no different from Biden really or St. Reagan himself.
https://reason.com/2021/10/07/the-first-semiconductor-trade-war/
“”The health and vitality of the U.S. semiconductor industry are essential to America’s future competitiveness,” he said, announcing huge new tariffs and setting the stage for subsidies to domestic microchip makers. “We cannot allow it to be jeopardized by unfair trading practices.” — Ronald Reagan
Goes back to the Founding Fathers really and the Madisonian concept of ‘aggressive reciprocity’ the concept that the Union itself, one of its very purposes, was to compel foreign nations to treat with the US the same that they were treated.
“If we continue united, we may counteract a policy so unfriendly to our prosperity in a variety of ways. By prohibitory regulations, extending, at the same time, throughout the States, we may oblige foreign countries to bid against each other, for the privileges of our markets. This assertion will not appear chimerical to those who are able to appreciate the importance of the markets of three millions of people–increasing in rapid progression, for the most part exclusively addicted to agriculture, and likely from local circumstances to remain so–to any manufacturing nation; and the immense difference there would be to the trade and navigation of such a nation, between a direct communication in its own ships, and an indirect conveyance of its products and returns, to and from America, in the ships of another country. Suppose, for instance, we had a government in America, capable of excluding Great Britain (with whom we have at present no treaty of commerce) from all our ports; what would be the probable operation of this step upon her politics? Would it not enable us to negotiate, with the fairest prospect of success, for commercial privileges of the most valuable and extensive kind, in the dominions of that kingdom? When these questions have been asked, upon other occasions, they have received a plausible, but not a solid or satisfactory answer. It has been said that prohibitions on our part would produce no change in the system of Britain, because she could prosecute her trade with us through the medium of the Dutch, who would be her immediate customers and paymasters for those articles which were wanted for the supply of our markets. But would not her navigation be materially injured by the loss of the important advantage of being her own carrier in that trade? Would not the principal part of its profits be intercepted by the Dutch, as a compensation for their agency and risk? Would not the mere circumstance of freight occasion a considerable deduction? Would not so circuitous an intercourse facilitate the competitions of other nations, by enhancing the price of British commodities in our markets, and by transferring to other hands the management of this interesting branch of the British commerce?” – Hamilton as Publius – Federalist 11
Trump is nothing new and he’s no better or worse than his current contemporaries. Trump of course has a much different facade.
Jon Murphy
Apr 6 2024 at 8:12am
I agree with the point about Biden but Reagan was far more free trade than Trump. Trump is staunchly anti trade. Reagan did do some bad things with trade, but he also actively reduced tariffs, the opposite of Trump.
Warren Platts
Apr 6 2024 at 5:09pm
{citation needed}
Jon Murphy
Apr 6 2024 at 5:54pm
I’m surprised you need a citation. You said so yourself just the other day.
Anyway, there is an easy way to test this hypothesis:
Let’s say there is current legislation on the US books that is widely considered unfair trading practices. This has been condemned by the WTO, US trading partners, US businesses, and even politicians as being grossly unfair. This legislation unfairly advantages US firms at the expense of foreign firms and domestic consumers.
Would Trump be willing to repeal such legislation even though it would make American firms be less advantaged?
Indeed, would vince or Warren Platts support such a repeal?
vince
Apr 7 2024 at 2:18pm
As part of a negotiation strategy, of course. That’s exactly what Trump is doing with tariffs! It’s a long term game, not short term!
Jon Murphy
Apr 7 2024 at 2:34pm
Right…
Let me know how that works out for ya
Jon Murphy
Apr 7 2024 at 2:52pm
I would think after the past 8 years that people would stop believing the myth of Trump as the master negotiator. I mean, as I and others have extensively documented, Trump’s policies on trade have utterly failed by their own stated goals. His negotiations on immigration also failed spectacularly in their stated goals.
Major failures in two of his most significant policy platforms indicates he is not a good negotiator. Either 1) he doesn;t know how to achieve his goals, so negotiation is pointless, or 2) he is so easily dupted that other people can just manipulate him into doing what they want. The latter seems to be the case as more information is coming out about White House action during COVID.
MarkW
Apr 6 2024 at 5:53am
“Trump isn’t against trade. He’s against unfair trade. ”
That’s what protectionists have always claimed. Similar claims include “I’m not against immigration, just illegal immigration”, and “I’m not against free speech, just hate speech and disinformation”. The subterfuge is always the same–claiming to uphold the ideal in principle while busily subverting it in practice.
And, yes, previous presidents have imposed trade barriers too for temporary political advantage, but none have been as consistently and enthusiastically as Trump. Trump (and lots of Trump fans) really don’t like foreign immigration, foreign trade, or, really, foreigners much at all.
vince
Apr 7 2024 at 2:21pm
Always?? OK, thanks for our opinion.
Grand Rapids Mike
Apr 7 2024 at 7:56pm
Angus Deaton, 2015 Econ Nobel prize winner, recently said he was rethinking his view on globalization ie free trade. Recently article posted here that most Americans think feel the American Dream is dead. While I’m not against free trade or globalization per se, one has to look at the total implications for the US, which is easy for academics to dismiss.
Jon Murphy
Apr 7 2024 at 7:59pm
The implications of free trade and globalization are pretty well understood by academics (and, at least in an intuitive sense, the general public). Politicians, on the other hand, have a much weaker grasp.
vince
Apr 8 2024 at 4:47pm
That’s what Angus Deaton said … until he got older. Samuelson, too? There’s more too it than mere economics.
Comments are closed.