Lanterns: Fair Trade or Free Trade: What is Best for America?

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Fair Trade or Free Trade: What is Best for America?

The United States is currently undergoing a spectacular evolution during the opening days of Donald Trump’s first term. Trump, who ran as a populist, sprinkled his campaign with promises of both liberal and conservative policy. Those policies are now being proposed during what is to be the beginning of a period of judgment of the Republican Party and those that voted for him. The stakes are high for those that have proudly worn their “Make America Great Again” caps as well as for those that fought on the front lines of his historic campaign. It is Judgment Day in America. Let the squirming begin.

To be fair, I must point out that just because you voted for Donald Trump does not mean you support everything that is the golden brand “Trump”. I also know there will be a lot of people that voted for him that will twist themselves into pseudo-intellectual pretzels to protect the political ground that they feel they conquered, despite all logic, reason, and intellectual honesty. Whether you are a conservative or a modern liberal, now is a time for introspection and to ask yourself whether it is wise to galvanize yourself into a political party or graft yourself to a politician.

Will Americans pay for the wall after all?

Recently, White House press secretary Sean Spicer stated that the Trump administration is considering a 20% “border tax” applied to goods crossing the Mexican border to help pay for the wall. The comment by Spicer is likely a political trial balloon that appears to be an attempt to query public opinion.

"When you look at the plan that's taking shape now, using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico"

"It clearly provides the funding and does so in a way that the American taxpayer is wholly respected," Spicer explained. "Right now we are focused on Mexico, but I think as we look comprehensively at our trade situation and countries that we have a deficit for, this is something the president has been talking about holistically. He has talked about a border tax,"

NBC News National Correspondent Peter Alexander reports that Spicer told him that the 20% tax on Mexican import is one example of how to pay for the border wall between the United States and Mexico.

 

The above option would mean that Mexico, which sells 80% of its goods to the United States, would suffer with a 20% tax on the goods coming into the United States. The American people would also see an increase in cost as the government-imposed tax will reduce the competition by American manufacturers and a rush of demand towards more expensive American manufactured products. There should not be much debate over the results of taxes like these. They are tariffs being packaged in a political meatball to aid in American's swallowing the desires of the protectionist and pro-union political left.

The Peterson Institute for International Economics published a report in 2012 outlining how a tariff on Chinese tires instituted by the Obama administration saved few jobs and escalated costs for the American consumer.

The report shows that there was barely a 1% uptick in employment in American tire manufacturing, while prices of American manufactured tires increased by nearly 20%. While it appears that the American tire manufacturer worker received a small boost, the American people were drastically and disproportionately negatively affected with the rise in prices of American tires. Therefore, in this instance, the Chinese were punished by the tariff with a loss of American business while American consumers were punished with higher tire prices. All for a 1% gain in employment in the American tire manufacturing industry.

"Trade Deficit" or "Capital Account Surplus?"

It must be said that we cannot address American trade deficits without looking at the other side of the economic coin. Trade, or commerce, does not happen in a vacuum. There is no supply without demand. There is no such thing as a capital surplus without a trade deficit. If we truly wish to understand trade deficits, we also must understand the concept of capital account surplus.

With any trade, there is a balance where value is exchanged. In the world of economics, that balance is called the “Balance of Payments” (BOP) where the result is always theoretically zero. To simply explain the two sided coin of international trade, we have to recognize what is called the “current account” and the “capital account.” The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account. The capital account is where all international capital transfers are recorded.

If a country has a trade deficit, it is also said to have a capital account surplus. The deficit is a result of other trading nation’s investing in the owner of the deficit. As explained by Mark Perry of AEI, the trade deficit also brought about 8 trillion dollars of foreign investment since the 1980s.

While this “balance of payments” is always theoretically zero, it doesn’t mean that it is a zero sum game. Japan has had mostly a trade surplus since the 80’s and Japan has consistently seen a rise of unemployment since the 80’s. While much of the world is purchasing Japanese products, the adverse effects are the lack of investment in Japanese assets. Since 2010, Japan appears to be reemerging to a better economic footing as capital investment has begun to return. The fact, is trade deficits are not a bad thing, despite what many politicians including Donald Trump have alluded to.

 

Once again logic, reason, and critical thinking will show that government should not be in the business of managing the means of production. Countries like China, North Korea, Venezuela, and other socialist nations are glaring examples of the results of what happens when government interferes with the free market to try and implement a fair market. With regards to Trump and his 20% “border tax,” it is clear he and his administration are caving in on the gimmicky campaign promise that Mexico was going to pay for the wall. Unless “paying” means punishing. That punishment, however, would not only be felt by Mexico but also the American consumer.

The American people want Mexican products for various reasons including the price. Shouldn’t the American people have the freedom to purchase the products they want for whatever reason they want? Shouldn’t American business be compelled by this demand of Mexican products to find ways to entice American consumers to buy their products? Should the job of government be reducing the burden on American people and American business by making the channels of exchange free of obstacles rather than creating more?

Taxes are regulations. When you regulate something, you get less of it. If you tax tires or the tire industry, there will be fewer resources to make tires and as a result fewer tires. This does not change the demand for tires, but it only distorts the market and the fundamental aspects of supply and demand. In return for this distortion, Americans face an increase in tire. The resources are directed to the government and redistributed through the wasteful bureaucracy and into the benefactors of government control. Tariffs, therefore, are fundamentally a socialist mechanism for controlling means of production.

A free market, however, is not necessarily a fair market. If it was fair, it would not be free. There are many poor quality products that enter the country from places like China and Mexico. Does that mean that Americans do not have the right to purchase those bad products? Does that mean that the American people as a whole are too stupid to determine what value decisions they can make in regards to quality and quantity? The goal of "fairness" in the market is not a principle of liberty, but a principle of tyranny. A government that tries to protect its people from poor decision making eliminates the people’s ability to learn to make good decisions. It also eliminates the competitive nature of the market.

In sum, the challenge for conservatives that supported the campaign promises of Donald Trump is to recognize that protectionism is an expression of populism. Populism is a political expression of progressivism. Free trade can not exist within the confines of mechanism intending to make trade fair. Donald Trump's policies on trade as he campaigned on as well as what he appears to be implementing do not coincide with conservative principles of economics.

Liberals, here is something to revel in. Trump is embracing progressive economics. Let's leave the realm of identity and party politics and enter onto the battlefield of ideas. Let us use our minds instead of our flabby political muscle.  

Written by Chris Pilie

Freedom Loving American

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