Why Trump is Right About Tariffs

In 1988, Donald Trump told Oprah Winfrey that America was being “ripped off” by its trading partners. Nearly 2 million Americans lost their manufacturing jobs between 1979 and 1988 to cheap, government-backed Japanese competitors. Oprah’s audience applauded.

Three decades later nothing has changed: America lost 5 million more manufacturing jobs, and Trump is still lambasting our trade partners for ripping us off:

President Trump is right. Our trading partners—particularly China, Japan, and Mexico—are taking America to the woodshed.

Consider that China steals more than half a trillion dollars in American intellectual property every single year. This is one of the reasons America’s trade deficit with China is so massive. For example, in 2010 Chinese companies stole high-speed rail designs from American firms, thereby depriving them of hundreds of billions in potential revenues. Such theft occurs in nearly every industry, whether it’s software programs or branded consumer goods. And the worst part? We let it happen.

The globalist GOP refuses to punish China for its predatory trade policies. Why? Some congressmen are Chinese pawns, no doubt, but many erroneously believe that asymmetrical free trade works. Some even think large, chronic trade deficits are good. This is wrong—seriously wrong. Economic growth has nothing to do with international free trade. Rather, growth depends upon human creativity, made manifest in better technology. Until our politicians and our people understand this axiomatic fact, America will continue getting ripped off by anyone and everyone.

Rumpelstiltskin’s Spindle: Understanding 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 trucks or better (more fuel-efficient or luxurious) trucks with the same labor. In either case, the value of America’s production increases. The same logic applies to all products, whether goods or services.

There are two ways to make more stuff. First, we could work harder. For example, we could cultivate more land to grow more wheat, build a new factory to produce more globes, or work longer hours to draft more architectural blueprints. The common denominator, in this case, is to add labor. This understanding of economic growth is called the archaic growth paradigm, and it can be summed up with the maxim: more input equals more output. The problem with this model is that it links population with production in a linear way, which means wealth is zero-sum—one can only get richer by making someone correspondingly poorer.

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, and it’s how countries get rich. Why? Because it snaps the link between population and production. Consider Britain at the dawn of the Industrial Revolution. In centuries prior, if Britain needed more cloth, it needed more weavers. Everything changed when Edmund Cartwright invented the power loom in 1785. The power loom made British weavers 40-times more efficient, generating massive surpluses of cloth—and therefore 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—one in which growth is linear to one in which growth is exponential. That’s still true today.

How then 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. 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 clunky boxes with gritty images. 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 still would have expanded our economy by increasing the value of our production. Both quantity and quality are elements of economic growth.

The key takeaway here is that long-run economic growth depends upon technological growth. This is the signal. Everything else—including free trade—is noise.

Killing the Golden Goose
The data confirm my point. In his book Antifragile, Nassim Taleb notes that economic growth depends upon “black swan” events: highly improbable, yet highly consequential inventions that shift the economic paradigm. Good examples of these are the railroad, the lightbulb, or the microchip—economies without access to these technologies could never be as wealthy as those using them, no matter how freely they traded.

Likewise, research from the Brookings Institute finds that nearly all of America’s economic growth in recent decades was generated by our advanced industries—those that focus on inventing new technologies. Examples of these include America’s advanced manufacturers like Boeing and information technology (IT) companies like Google. Although these advanced industries employ just 9 percent of America’s workforce, they file 85 percent of all patents, provide 90 percent of private sector research dollars, and employ 80 percent of all engineers. This is where the economic growth happens, since advanced industries are the most likely to generate new paradigm-shifting technology. Therefore, if America wants to increase its odds at exponential growth, it needs to concentrate more advanced industries within its borders.

Yet our trade policy does exactly the opposite. After the North American Free Trade Agreement took effect in 1994, U.S. corn exports surged, as did our imports of automobiles. The problem is that 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. The same is true with America’s trade relationship with China: America’s advanced goods trade deficit with China now tops $120 billion. Meanwhile, our biggest export is soybeans.

Free trade is, quite literally, turning America into China’s mercantile resource colony: we buy their value-added, manufactured products, and we sell them raw materials.

The picture is slightly more rosy globally: in 2016 America ran an $83 billion trade deficit in advanced technology products according to the U.S. Census Bureau, which slightly mitigated our losses to China. The core issue remains: we continue to  offshore our advanced industries at an alarming pace, which will only increase the likelihood that the “next big thing” will be invented abroad. If we do not reverse this trend, we will soon be on the outside looking in.

America needs to impose large tariffs to discourage its advanced industries from moving abroad. This will not only help us retain our technological edge, but it will also create an incentive for foreign technology firms to invest in America, further concentrating advanced industry in our nation. Although we cannot guarantee that America will invent the “next big thing,” we can maximize our odds. To do this, we need tariffs.

Photo credit: Stephen Jaffe/AFP/Getty Images

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