Bourbon Doesn’t Matter (and Other Hard Truths About Trade)

President Trump promised to put America first when it comes to foreign trade. Most conservatives think this is a good thing: why should we let Japan manipulate its currency with impunity? Why does the U.S. government allow China to dump below-cost goods into the American market, killing local industries? These concerns are reasonable.

And yet many libertarians, and establishment Republicans, are unwilling to take action. They fear that by imposing tariffs, or simply enshrining reciprocity in our trade deals, we will start a trade war. Strong words. They claim that American exports, such as beef or bourbon, will suffer if we tax Chinese semiconductors. Beyond that, they argue international free trade is always good, reciting the mantra trade is not zero sum, everyone wins.

Of course, reality is more complex than slogans. Modern scholarship, from Michael Porter and Daniel Kahneman to Benoit Mandelbrot and Nassim Taleb, has completely debunked the presumptions underpinning classical, liberal economics. We now know that free trade is domain-specific: it only applies when certain preconditions are met. There are a number of technical reasons for this, but the main point is that not all industries are of equal value—some are better long-term investments than others.

Businessmen understand this; economists do not.

Understanding Economic Growth
To understand why some industries are better than others, let’s revisit how economies grow. Economic growth occurs when—and only when—either more stuff is made or better stuff is made.

For example, America’s economy grows when it produces more cars or bushels of wheat, or better cars and more nutritious wheat in the same time period. This applies to all products, whether goods or services. This point is rather obvious, and axiomatic.

Now the question becomes: how do we make more stuff? There are two options. First, we could work harder: want more wheat? Plant more fields. More legal research? Work overtime. More bobbleheads? Build another factory. This is the archaic growth paradigm, and it boils down to the maxim: more input, more output.

Historically, growth this way was fueled by conquest, slavery, or immigration. Why? Because economic and population growth were synonymous. The problem with archaic growth is for you to get rich, someone else must become poor. Profit is zero sum.

The second way to make more stuff is to increase productivity; that is, make more stuff in the same amount of time. This is the industrial growth paradigm. This is how countries get rich. Why? Because it snaps the link between population and production. Take Britain at the dawn of the Industrial Revolution. In centuries prior, if Britain needed more cloth, it needed more weavers. It was that simple. But then something changed: in 1785 a man named Edmund Cartwright invented something called the power loom, which made British weavers 40-times more efficient. Within a few years, textile mills across Britain employed power looms, and churned out more cloth than the rest of Europe combined. This generated exponential economic growth and unprecedented material wealth.

The significance of the power loom cannot be overstated: not only did it usher in the industrial age, it also changed how people thought about economic growth. It switched the paradigm from one that was population-driven to one that was productivity-driven. This continues to be true today.

The question shifts for a final time: how do we improve productivity? In the short run there are many options. We could drink more coffee, organize our labor more efficiently (think Henry Ford), or we could trade with more efficient producers. These work, but only to a point: we can only do things so efficiently with our current technology before we hit a ceiling. For example: no matter how freely the Dutch traded, their textile mills could not compete with Britain’s until they also used power looms. At this point it should be obvious: technology drives long-run productivity, and therefore economic growth.

Better technology is also how we make better stuff. Televisions are a good example. The first TVs were chunky boxes that emitted grainy, monochromatic pictures. Today, TVs are thin, elegant, and can produce more colors than we can imagine. Even if we were no faster at manufacturing TVs than we were in the 1930s, the improvement in quality would still have expanded our economy. Both quantity and quality are elements of economic growth.

The key takeaway here is that long-run economic growth is a predicate of technological growth. This is the signal. Everything else—be it free trade or immigration—is noise.

Why Tariffs Work
Given that long-term economic growth depends upon technological growth, it goes without saying that more inventive countries have distinct advantages—advantages that translate into wealth. History proves this: creativity is why the West dominated the global economy for centuries. It is why Britain ushered in the modern era. And it is why America became an economic powerhouse.

The data also confirm this: over the last few decades, almost all of America’s economic growth was generated by our advanced industries—technologically advanced manufacturing, information technologies, pharmaceuticals etc. Collectively, these industries employ just 9 percent of America’s workforce, but file 85 percent of all patents, provide 90 percent of private sector research dollars, and employ 80 percent of all engineers. This is where economic growth happens. It is easy to see why: the invention of the personal computer improved America’s economic efficiency across all industries.

My point: not all industries are of equal value. This is why free trade fails, and tariffs win.

Free trade theory lacks a time-horizon: it stipulates that if America can make more money today by exporting beef in exchange for cheap IT services from the Philippines, that’s a good deal. But it neglects a key fact: ranching is not a growth industry; IT services are. By offshoring our advanced industries, we forgo future growth.

A good example is trade with Mexico. After the North American Free Trade Agreement took effect in 1994, U.S. corn exports surged, as did our imports of automobiles. Trouble is, automobile manufacturing is much more likely to benefit from disruptive technology than is growing corn—under NAFTA, the preponderance of long-run benefits went to Mexico, not the United States.

Again, the hard data reflect this: in 2016 America ran an $83 billion trade deficit in advanced technology products. We offshored their production—along with the opportunity to generate new discoveries. As a result, we’ve increased the likelihood that the “next big thing” will be invented in Japan, China, or India, as opposed to the United States. Proof of this can be found in patent filings: America is filing fewer patents per capita, and fewer as a percentage of the world total, because we are now importing research from abroad.

A competent trade policy would prevent America’s cutting-edge industries from relocating to different countries, and concentrate advanced industries domestically. We must preserve, and sharpen, our cutting edge. Tariffs are the least-intrusive way to do this: they are a completely avoidable tax that create a strong incentive for businesses to build their new laboratory, factory, or industrial park in America. Not China. Not India. Not Mexico. America. This benefits everyone in the long run.

And beyond the dry economic reasons justifying tariffs, they are also critical to our national security. No matter how you cut it, President Trump is right on tariffs.


Support Free & Independent Journalism Your support helps protect our independence so that American Greatness can keep delivering top-quality, independent journalism that's free to everyone. Every contribution, however big or small, helps secure our future. If you can, please consider a recurring monthly donation.

Want news updates?

Sign up for our newsletter to stay up to date.

11 responses to “Bourbon Doesn’t Matter (and Other Hard Truths About Trade)”

  1. It’s rather simplistic to say that automotive technology is open-ended and that agricultural technology is a closed book. Groundbreaking work is being done in horticultural genetics and farming technologies like GPS.

    • Shame on you! Putting words into the authors mouth is more than simplistic, it’s wrong!

      What he actually wrote was:
      “… automobile manufacturing is much more likely to benefit from disruptive technology than is growing corn …”[emphasis mine]
      Which is likely true and provable.

  2. Classical economics have not been discredited. Rather, when one has governments around the world that do not honor the rules that define a market, the effect can be the same as criminal activity, but backed by the resources of a state. Put simpler, there is no reason at all for letting foreign governments do to us what we won’t let our own government do – a point the libertarians unfortunately miss. Furthermore, the moral justification of capitalism is that it is the only economic system that recognizes man’s right to own himself, his labor, and the fruits of his labor, but one that also recognizes that production must precede consumption. It’s moral basis is not “cheaper stuff for consumers” whatever they are. That is a consequence of a proper market economy, but it is not its justification. This is also something many libertarians miss.

    To consider tariffs, note that we had a small tariff in the 19th century and indeed throughout much of our history. According to current pundits, our economy should have been a stagnant mass of unproductive, coddled and complacent industries. In fact, it was the most dynamic in history to that point – and largely since. That’s because apart from the tariff, there was damn little government involvement in the economy, gold was behind the currency, property and contracts were respected, and laws were few but clear. As a result, capital – which is required for production – poured in from abroad. Meanwhile, the total absence of a government social safety net meant that Americans saved (also essential capital) and lived within their means. To argue that this was somehow “unfree” trade whereas today’s highly politicized and regulated trade is somehow “free” simply because it lacks tariffs is absurd.

  3. “No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws.”

    “No Tax or Duty shall be laid on Articles exported from any State.”

    That is free trade. Three hundred pages of fine print with annexes is not.

  4. States should do the same thing, right? Obviously Iowa should impose tariffs against Nebraska to make Iowa more productive. Hell, counties within Iowa should impose tariffs too. Clearly Linn County needs to protect itself from the producers in Johnson County. What about towns within Linn County?

    This is idiocy as is the article above. They idea that self-imposing trade sanctions on the United States is good for the aggregate US economy is beyond idiocy. You may want to rethink that “independent intellectual” label you seem to have self-applied.

    • The nation is the transformation point wherein the economy takes on a different set of emergent properties. This is because international markets are governed by a different set of actors than are domestic markets—they’re called nation states. They obey a different set of rules, and therefore interact differently.

      You’re incorrectly assuming that economics work the same whether you’re in a family group, a small town, a big city, a country, or globally. This is self-evidently not the case. Economics, like groups of people, manifests different rules and principles depending upon the level of magnification.

      • That’s nonsense. You simply used a lot words to say “it’s different” without giving a scintilla of evidence as to why that should be the case.

      • New York and Wisconsin, to make a small example here, both have the same currency and both states fall under the authority of the Federal Government. As such Albany cannot manipulate the value of the US Dollar in order to protect dairy production from out of state competition. (Philadelphia Cream Cheese is made in Philadelphia, NY.) Nor can Madison just ignore all the environmental and workplace safety regulations set forth by Uncle Sam.

  5. Nicely argued, but wrong. Real growth comes ultimately from creating and freeing “human capital” -i.e. smart, educated, people working in low tax, low regulatory environments invent things. We outsource to 3rd world countries when, and if, the off shore service provides access to better people, freer environments (with respect to whatever we want done), or lower costs. Want to stop this? improve American education, reduce American regulation – that’s all it would take.

    • I think we agree, actually.

      Economic growth occurs when we make either (i) more stuff or (ii) better stuff in the same amount of time—more arrows or sharper arrows, more cloth or stronger cloth, more cars or faster cars. This is axiomatic, no?

      Now how do we get more & better stuff in the long run? The only option—and I do mean only—is to improve our technology.

      The things you mentioned are ways of improving our technology by proxy, but they’re not the end-goal (as you seem to tacitly admit by saying that such people “invent things”). The end goal is, and always is, to improve our technology.

      Therefore, the best economic policy is one which best unleashes mankind’s capacity for creativity: freer is generally better, but not always. Just like an organism, creativity requires some stress (domestic competition), but not ruinous stress (the offshoring of whole industries). It is akin to societal hormesis. A little poison is good, too much causes death.

      • Wouldn’t the reliance on cheap manufacturing labor retard technological growth? I mean, why go through the problems of adapting newer machine tools and improved manufacturing process and all the investment costs when you can just go overseas and shop around for cheaper labor?

        Let say you’re making widgets. Now to improve production you can do one of either two things (a) tie up a massive amount of capital into better manufacturing technology, or (b) contract out to a firm in China to make the widgets at a far lower labor cost then what you could find domestically. Your subcontractor can do this because his factory is staffed with political dissidents working off their term for anti-regime wrong-think.