What's the difference between 'good' and 'bad' trade?

Thanks to Donald Wilkie for continuing the trade discussion.  A few points are needed in response to Mr. Wilkie's concerns.

Regarding "good" and "bad" trade, there are indeed both categories when you look at trade from a national perspective – rather than just that of the individual.  Individuals engage in trade because it is mutually beneficial, but what is good for the individual trader may not be good for the nation.  This statement will set off the libertarians, but conservatism is not about unbounded liberty in commerce or any other facet of life.

Mr. Wilkie asks the following profound question:

Who is to determine what trade is "good" and what trade is "bad"?  Would you rather trust some faceless bureaucrat in Washington with a bunch of letters after his name or Joe Doaks, who is operating a business on Main Street? I believe that the answer is self-evident.

I, too, believe that the answer is self-evident, and it is neither of the options.  It is the collective American public that should determine what trade is "good" or "bad."  And the public is speaking very clearly this election cycle.

Donald Trump's positions on trade are quite clear, and refreshingly so after decades of babbling hand-waving incoherence and obfuscation by the corporatist think-tanks and their puppet politicians.  The GOP base has clearly chosen Trump over any and all comers in a very convincing manner.  Trump got the GOP nomination before Hillary Clinton will formally get the Democratic side locked up.  Trump won in a landslide, and his stance on trade was a key plank for victory.

The polling data on this issue strongly favors Trump's positions.  Take the Bloomberg general election poll from late March that I discussed a couple of days ago.  This poll is clearly biased toward liberals, and since polling data shows that liberals view trade more positively than conservatives in recent years, the bias probably underestimates the concern over trade among the American public.

When respondents were asked, "[D]o you think U.S. trade policy should have more restrictions on imported foreign goods to protect American jobs, or have fewer restrictions to enable American consumers to have the most choices and the lowest prices," two thirds (65%) of those surveyed said "more restrictions," while just 22% wanted "fewer restrictions."

When asked, "[D]o you think NAFTA, the North American Free Trade Agreement, has been good or bad for the U.S. economy," 44% said "bad," and only 29% indicated "good."  The rest were unsure.

When asked, "[W]hich do you think would be better for your community ... [a] factory owned by an American company that employed 1,000 workers [or a] factory owned by a Chinese company that employed 2,000 workers," 68% said they want the American company with fewer workers, while just 23% desire the Chinese company with twice as many workers.

When asked, "Are you willing to pay a little more for merchandise that is made in the U.S., or do you prefer the lowest possible price," 82% said they want "made in the USA" versus only 13% preferring the lowest price.

The public overwhelmingly wants economic nationalism, so that is who determines what trade is "good" or "bad."  Politicians who oppose this are going to get decimated at the polls come November.

It is also worth referring readers to a useful article Julia Hahn published Friday at Breitbart listing the protectionist measures employed by former president Ronald Reagan.  As Hahn notes, "Reagan's record on trade far more closely resembles Trump's position than it resembles the view of those in the #NeverTrump movement. In fact, by their own definition, Reagan would have been a radical 'protectionist'."  I've made similar points before that while Reagan often espoused and promoted free trade, he never had to govern under it, and his economic success is in large part due to fairly protectionist policy preferences on many trade issues.

As for Douglas Irwin's article on U.S. trade history from the National Bureau of Economic Research that I referenced, Irwin does indeed claim that the "nearly complete embargo on international commerce from December 1807 to March 1809 ... provides a rare opportunity (or natural experiment) to observe the effects of a nearly complete (albeit short-lived) elimination of international trade [and that] the static welfare cost of the embargo was about 5 percent of GDP."

Irwin's article contains some useful facts on the protectionist nature of U.S. trade history – which is why I cited it – but he is wrong on any serious insights from this extremely rapid trade embargo.  From 1807 to 1808, trade dropped from 56% of GDP down to 19% of GDP, and real per capita GDP declined nearly 6% over these two years.

So what?  It is self-evident that such a dramatic change in trade over such a short period of time would cause massively disruptive impacts to the American economy.  There is always going to be some economic pain with sharp movements as the economy has to readjust to a new equilibrium.  But what Irwin fails to discuss is how by 1810, that loss in real per capita GDP had already been recovered, and the American economy was back on track – meanwhile, trade remained at its new low level.  So there was some short-term pain for long-term gain, a fact that Irwin conveniently fails to discuss.

A plot of trade as a percentage of GDP over U.S. history makes the point nicely:

From the founding up to 1807, trade increased from 32% of GDP up to 56% of GDP, and the actions of Thomas Jefferson and Congress between December 1807 to March 1809 reversed that trend, sending trade in a progressively downward contribution toward American GDP that continued until the early 1960s.

Another point Irwin doesn't make in his article is that from 1790 to 1806 – the year before the embargo started – there is a substantial negative correlation between real per capita GDP growth and trade.  In fact, over the two decades between 1796 and 1806 under the high-trade regime, the average annual real per capita GDP growth rate was just 1.0%, which is hardly something to use as a basis for claiming that trade made the U.S. rich.  By comparison, average annual real GDP growth for the remainder of the 19th century under the low-trade regime from 1809 through 1899 was 1.6%.

In short, the 16-month embargo hurt the economy in the very short term but appears to have helped it over the long term.  That is solid policymaking in the national interest.

As for Mr. Wilkie's point that both China and India have high trade percentages and strong economic growth, the reply is, indeed, they do.  In general, poor countries win when trading with rich countries, so the ability of China and India to prosper in recent decades as trade became ever more important to their respective economies isn't an argument for increasing U.S. trade; it is an argument against it.  We are making these developing nations richer at our own expense.  Furthermore, the communist state of China is hardly a free market, making it a poor comparison for the U.S. when it comes to trade impacts on economic growth.  The same applies to India, which is a quasi-democracy but littered with massive regulatory corruption.

Regardless, here are the relations between trade and real per capita GDP growth for rich countries like the U.S. since 1960 compared to lower-middle-income economies such as India and upper-middle-income economies such as China over the past three decades:

The more we trade, the lower our economic growth rate.  The more they trade, the richer they get – wealth transfer 101, from the rich to the poor.  I guess the trade advocates support wealth redistribution, as long as it is not their specific wealth being redistributed.

In the increasingly polarized societies of the West, another divide has formed: those who favor high trade rates and those who do not.

The minority who benefit from ever increasing trade, regardless of net negative macroeconomic impacts, want more trade.  The majority who are suffering under the high-trade regime clearly have a different view.  Since quotes are in vogue, Upton Sinclair once observed that "[i]t is difficult to get a man to understand something, when his salary depends on his not understanding it."

There will not be a meeting of minds between the minority in the West who reap the rewards of globalization and the majority who do not.  Onward the policy battles go within the conservative movement, as many on the right side of the spectrum increasingly find they have more in common economically with those in the center and center-left portions.  Ergo the meteoric rise of Donald J. Trump and the re-awakening of the silent majority.

Thanks to Donald Wilkie for continuing the trade discussion.  A few points are needed in response to Mr. Wilkie's concerns.

Regarding "good" and "bad" trade, there are indeed both categories when you look at trade from a national perspective – rather than just that of the individual.  Individuals engage in trade because it is mutually beneficial, but what is good for the individual trader may not be good for the nation.  This statement will set off the libertarians, but conservatism is not about unbounded liberty in commerce or any other facet of life.

Mr. Wilkie asks the following profound question:

Who is to determine what trade is "good" and what trade is "bad"?  Would you rather trust some faceless bureaucrat in Washington with a bunch of letters after his name or Joe Doaks, who is operating a business on Main Street? I believe that the answer is self-evident.

I, too, believe that the answer is self-evident, and it is neither of the options.  It is the collective American public that should determine what trade is "good" or "bad."  And the public is speaking very clearly this election cycle.

Donald Trump's positions on trade are quite clear, and refreshingly so after decades of babbling hand-waving incoherence and obfuscation by the corporatist think-tanks and their puppet politicians.  The GOP base has clearly chosen Trump over any and all comers in a very convincing manner.  Trump got the GOP nomination before Hillary Clinton will formally get the Democratic side locked up.  Trump won in a landslide, and his stance on trade was a key plank for victory.

The polling data on this issue strongly favors Trump's positions.  Take the Bloomberg general election poll from late March that I discussed a couple of days ago.  This poll is clearly biased toward liberals, and since polling data shows that liberals view trade more positively than conservatives in recent years, the bias probably underestimates the concern over trade among the American public.

When respondents were asked, "[D]o you think U.S. trade policy should have more restrictions on imported foreign goods to protect American jobs, or have fewer restrictions to enable American consumers to have the most choices and the lowest prices," two thirds (65%) of those surveyed said "more restrictions," while just 22% wanted "fewer restrictions."

When asked, "[D]o you think NAFTA, the North American Free Trade Agreement, has been good or bad for the U.S. economy," 44% said "bad," and only 29% indicated "good."  The rest were unsure.

When asked, "[W]hich do you think would be better for your community ... [a] factory owned by an American company that employed 1,000 workers [or a] factory owned by a Chinese company that employed 2,000 workers," 68% said they want the American company with fewer workers, while just 23% desire the Chinese company with twice as many workers.

When asked, "Are you willing to pay a little more for merchandise that is made in the U.S., or do you prefer the lowest possible price," 82% said they want "made in the USA" versus only 13% preferring the lowest price.

The public overwhelmingly wants economic nationalism, so that is who determines what trade is "good" or "bad."  Politicians who oppose this are going to get decimated at the polls come November.

It is also worth referring readers to a useful article Julia Hahn published Friday at Breitbart listing the protectionist measures employed by former president Ronald Reagan.  As Hahn notes, "Reagan's record on trade far more closely resembles Trump's position than it resembles the view of those in the #NeverTrump movement. In fact, by their own definition, Reagan would have been a radical 'protectionist'."  I've made similar points before that while Reagan often espoused and promoted free trade, he never had to govern under it, and his economic success is in large part due to fairly protectionist policy preferences on many trade issues.

As for Douglas Irwin's article on U.S. trade history from the National Bureau of Economic Research that I referenced, Irwin does indeed claim that the "nearly complete embargo on international commerce from December 1807 to March 1809 ... provides a rare opportunity (or natural experiment) to observe the effects of a nearly complete (albeit short-lived) elimination of international trade [and that] the static welfare cost of the embargo was about 5 percent of GDP."

Irwin's article contains some useful facts on the protectionist nature of U.S. trade history – which is why I cited it – but he is wrong on any serious insights from this extremely rapid trade embargo.  From 1807 to 1808, trade dropped from 56% of GDP down to 19% of GDP, and real per capita GDP declined nearly 6% over these two years.

So what?  It is self-evident that such a dramatic change in trade over such a short period of time would cause massively disruptive impacts to the American economy.  There is always going to be some economic pain with sharp movements as the economy has to readjust to a new equilibrium.  But what Irwin fails to discuss is how by 1810, that loss in real per capita GDP had already been recovered, and the American economy was back on track – meanwhile, trade remained at its new low level.  So there was some short-term pain for long-term gain, a fact that Irwin conveniently fails to discuss.

A plot of trade as a percentage of GDP over U.S. history makes the point nicely:

From the founding up to 1807, trade increased from 32% of GDP up to 56% of GDP, and the actions of Thomas Jefferson and Congress between December 1807 to March 1809 reversed that trend, sending trade in a progressively downward contribution toward American GDP that continued until the early 1960s.

Another point Irwin doesn't make in his article is that from 1790 to 1806 – the year before the embargo started – there is a substantial negative correlation between real per capita GDP growth and trade.  In fact, over the two decades between 1796 and 1806 under the high-trade regime, the average annual real per capita GDP growth rate was just 1.0%, which is hardly something to use as a basis for claiming that trade made the U.S. rich.  By comparison, average annual real GDP growth for the remainder of the 19th century under the low-trade regime from 1809 through 1899 was 1.6%.

In short, the 16-month embargo hurt the economy in the very short term but appears to have helped it over the long term.  That is solid policymaking in the national interest.

As for Mr. Wilkie's point that both China and India have high trade percentages and strong economic growth, the reply is, indeed, they do.  In general, poor countries win when trading with rich countries, so the ability of China and India to prosper in recent decades as trade became ever more important to their respective economies isn't an argument for increasing U.S. trade; it is an argument against it.  We are making these developing nations richer at our own expense.  Furthermore, the communist state of China is hardly a free market, making it a poor comparison for the U.S. when it comes to trade impacts on economic growth.  The same applies to India, which is a quasi-democracy but littered with massive regulatory corruption.

Regardless, here are the relations between trade and real per capita GDP growth for rich countries like the U.S. since 1960 compared to lower-middle-income economies such as India and upper-middle-income economies such as China over the past three decades:

The more we trade, the lower our economic growth rate.  The more they trade, the richer they get – wealth transfer 101, from the rich to the poor.  I guess the trade advocates support wealth redistribution, as long as it is not their specific wealth being redistributed.

In the increasingly polarized societies of the West, another divide has formed: those who favor high trade rates and those who do not.

The minority who benefit from ever increasing trade, regardless of net negative macroeconomic impacts, want more trade.  The majority who are suffering under the high-trade regime clearly have a different view.  Since quotes are in vogue, Upton Sinclair once observed that "[i]t is difficult to get a man to understand something, when his salary depends on his not understanding it."

There will not be a meeting of minds between the minority in the West who reap the rewards of globalization and the majority who do not.  Onward the policy battles go within the conservative movement, as many on the right side of the spectrum increasingly find they have more in common economically with those in the center and center-left portions.  Ergo the meteoric rise of Donald J. Trump and the re-awakening of the silent majority.