Trump focuses on US economy, not theory of free trade

President Trump should impose tariffs on imported goods to level the playing field between domestic companies and foreign-based companies.  It will make domestic companies more competitive with foreign-based companies.  This is part of his program to stimulate the economy by reducing government regulations and the corporate income tax, which add to the costs of doing business – or, simply, to put America first.

Aside from the politics of attacking Trump's proposals, the premise of those who oppose tariffs and favor "free trade" is the principle of "comparative advantage."  This means that the economy benefits if goods and services are made and provided by the most efficient and lowest-cost provider.

Comparative advantage is a term associated with 19th Century English economist David Ricardo.

Ricardo considered what goods and services countries should produce, and suggested that they should specialise by allocating their scarce resources to produce goods and services for which they have a comparative cost advantage. There are two types of cost advantage – absolute, and comparative.

Absolute advantage means being more productive or cost-efficient than another country whereas comparative advantage relates to how much productive or cost efficient one country is than another.

Free trade may help the economies of poor countries that have low labor rates and production costs to attract companies to establish factories in poor countries.  But it does not help the U.S. economy, with its high labor and production costs, which will lose jobs to the poor countries.  The American president should focus on what is best for the U.S. economy, not the economies of other nations.

Free trade is touted as a benefit to consumers because consumers can purchase goods at the lowest price because goods are produced at the lowest cost, as evidenced by the cost of clothing, shoes, and consumer goods made overseas.

The principle of comparative and absolute advantage that supports free trade ignores the reality of how a country achieves the comparative and absolute advantage.  Businesses in the USA are regulated by numerous laws dealing with safety, environment, labor relations, zoning, taxes, etc.  For example, a business must deal with Obamacare, OSHA, the EPA, the EEOC, Wage and Hour dealing with minimum wage and overtime, the IRS, and various local and state laws and regulations.  These laws and regulations add to the cost of labor and of producing goods and services in the USA.

Countries such as Mexico, China, Vietnam, and others do not have the same laws and regulations we have.  They can produce goods cheaper, especially in the industries that require human labor.  The cost of labor is much higher in the USA than in the countries such as China and Mexico.  It is impossible for a USA-based business to be competitive with foreign-based companies, which have much lower labor costs.

This puts domestic companies at a comparative disadvantage compared to foreign-based companies.

If we follow the logic of free trade to its conclusion, then labor-intensive companies will establish their factories in countries that have lower labor costs.  The result is that the only companies that will have factories in the USA are those that use technology, such as robotics, to replace people so they can compete on costs of production.  Our economy will then be based on health, legal, and accounting services that cannot be imported; the education industry; industries such as technology that require skills and education not present in overseas countries; entertainment; and skilled trades such as plumbers and electricians that require the skilled person to reside in the USA to provide the service.

This results in an economy where the highly skilled, highly educated will make money while others lacking in skills and education will be working in service industries such as restaurants, retail stores, nursing homes, and other similar low-paying jobs. The gulf between high-income and low-income workers will widen.  Democrats complain about income inequality, yet they supported NAFTA and TPP, which contribute to income inequality.

An economic policy dealing with tariffs must consider the effects of  free trade on the loss of jobs with the resulting social costs of unemployment, and not merely the low cost of clothing, shoes, TVs, and electronics at Walmart.  If people do not have jobs that provide a suitable income, they cannot purchase even the cheap goods made overseas.

The policy of "free trade" espoused by both parties with NAFTA and the now discarded TPP agreement favors the elites whose jobs are not affected, but who can purchase lots of consumer products at cheap prices.

Every economic policy has social implications.  Free trade hurts our workers, who lose jobs because their employers move their factories overseas or close.

Trump's suggestion of tariffs is sound economic and social policy to benefit our country, but it must be done with policies to reduce the cost of production in our country.  For example, Trump wants to reduce regulations, reduce the corporate income tax, and repeal Obamacare.  These measures will reduce the costs of doing business.  American companies will be more competitive if we reduce the costs imposed by government. 

We cannot rely solely on tariffs.  But a combination of tariffs and reduction of government-imposed costs will work.

Unlike Obama, President Trump focuses on what is best for the U.S. economy, not the economies of other nations.

President Trump should impose tariffs on imported goods to level the playing field between domestic companies and foreign-based companies.  It will make domestic companies more competitive with foreign-based companies.  This is part of his program to stimulate the economy by reducing government regulations and the corporate income tax, which add to the costs of doing business – or, simply, to put America first.

Aside from the politics of attacking Trump's proposals, the premise of those who oppose tariffs and favor "free trade" is the principle of "comparative advantage."  This means that the economy benefits if goods and services are made and provided by the most efficient and lowest-cost provider.

Comparative advantage is a term associated with 19th Century English economist David Ricardo.

Ricardo considered what goods and services countries should produce, and suggested that they should specialise by allocating their scarce resources to produce goods and services for which they have a comparative cost advantage. There are two types of cost advantage – absolute, and comparative.

Absolute advantage means being more productive or cost-efficient than another country whereas comparative advantage relates to how much productive or cost efficient one country is than another.

Free trade may help the economies of poor countries that have low labor rates and production costs to attract companies to establish factories in poor countries.  But it does not help the U.S. economy, with its high labor and production costs, which will lose jobs to the poor countries.  The American president should focus on what is best for the U.S. economy, not the economies of other nations.

Free trade is touted as a benefit to consumers because consumers can purchase goods at the lowest price because goods are produced at the lowest cost, as evidenced by the cost of clothing, shoes, and consumer goods made overseas.

The principle of comparative and absolute advantage that supports free trade ignores the reality of how a country achieves the comparative and absolute advantage.  Businesses in the USA are regulated by numerous laws dealing with safety, environment, labor relations, zoning, taxes, etc.  For example, a business must deal with Obamacare, OSHA, the EPA, the EEOC, Wage and Hour dealing with minimum wage and overtime, the IRS, and various local and state laws and regulations.  These laws and regulations add to the cost of labor and of producing goods and services in the USA.

Countries such as Mexico, China, Vietnam, and others do not have the same laws and regulations we have.  They can produce goods cheaper, especially in the industries that require human labor.  The cost of labor is much higher in the USA than in the countries such as China and Mexico.  It is impossible for a USA-based business to be competitive with foreign-based companies, which have much lower labor costs.

This puts domestic companies at a comparative disadvantage compared to foreign-based companies.

If we follow the logic of free trade to its conclusion, then labor-intensive companies will establish their factories in countries that have lower labor costs.  The result is that the only companies that will have factories in the USA are those that use technology, such as robotics, to replace people so they can compete on costs of production.  Our economy will then be based on health, legal, and accounting services that cannot be imported; the education industry; industries such as technology that require skills and education not present in overseas countries; entertainment; and skilled trades such as plumbers and electricians that require the skilled person to reside in the USA to provide the service.

This results in an economy where the highly skilled, highly educated will make money while others lacking in skills and education will be working in service industries such as restaurants, retail stores, nursing homes, and other similar low-paying jobs. The gulf between high-income and low-income workers will widen.  Democrats complain about income inequality, yet they supported NAFTA and TPP, which contribute to income inequality.

An economic policy dealing with tariffs must consider the effects of  free trade on the loss of jobs with the resulting social costs of unemployment, and not merely the low cost of clothing, shoes, TVs, and electronics at Walmart.  If people do not have jobs that provide a suitable income, they cannot purchase even the cheap goods made overseas.

The policy of "free trade" espoused by both parties with NAFTA and the now discarded TPP agreement favors the elites whose jobs are not affected, but who can purchase lots of consumer products at cheap prices.

Every economic policy has social implications.  Free trade hurts our workers, who lose jobs because their employers move their factories overseas or close.

Trump's suggestion of tariffs is sound economic and social policy to benefit our country, but it must be done with policies to reduce the cost of production in our country.  For example, Trump wants to reduce regulations, reduce the corporate income tax, and repeal Obamacare.  These measures will reduce the costs of doing business.  American companies will be more competitive if we reduce the costs imposed by government. 

We cannot rely solely on tariffs.  But a combination of tariffs and reduction of government-imposed costs will work.

Unlike Obama, President Trump focuses on what is best for the U.S. economy, not the economies of other nations.