Walter Williams on Trade Protectionism

The great Walter Williams published an article on trade deficits, offering a sober and rational analysis of a non-existent problem, and some thoughts about whether or not President Trump’s protectionist policies will make things better or worse. Williams begins by using China as an example:

In 2016, the American people imported $479 billion worth of goods and services from Chinese producers, and we sold $170 billion worth of goods and services to Chinese customers. That made for a $309 billion current account deficit. In other words, we purchase more goods and services from Chinese producers than Chinese consumers purchase from American producers.

For many, this information on its own is adequate. It’s immediately presumed that this imbalance must be a bad thing. Williams, of course, asks the most important question of all:

How much of a problem is it when there is a deficit, or a negative imbalance…?

Again, most, a priori, assume that negative trade deficits are necessarily bad, but how do those “in-the-know” economists feel about this?

The late, great, Nobel Prize winning economist Milton Friedman didn’t think so, and said so, which you can hear for yourself here, or here though I’ll go ahead and include some highlights below:

…when people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of view of our well-being that’s an unfavorable balance. That means we are sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance when you have to send out more goods to get less coming in. It’s favorable when you can get more by sending out less.

…for the productive side of our lives the visible effects of tariffs are good, the invisible effects of tariffs are bad, even on the productive side. I have already referred to the steel case. It’s perfectly clear that if you restrict the imports of steel, there are some workers in the steel industry who will have jobs they otherwise would not have. The beneficial effects for them of a tariff are perfectly clear. But if we import less steel, foreigners earn fewer dollars. They have fewer dollars to spend in this country. There are people around the country who will not have jobs, not have productive jobs because exports do not develop.

…Let’s suppose that at the existing exchange rate, whatever it is, Japan, to take the example which is a favorite “whipping boy,” could undersell us in everything, that the Japanese can produce whatever you name across the board from wheat and soybeans to television sets and automobiles more cheaply than we can. And let’s see what would happen. We’d rush to buy them. The Japanese sellers would be paid for them in dollars. What would they do with the dollars? Nothing for them to buy in the United States, because by assumption everything is cheaper in Japan. What then would they do with the dollars?

The main point Friedman makes, and it’s not just a problem in economics, but in pretty much every sphere, is that people only see the benefits, but not the hidden costs associated with any given policy.

Taking it a step further, this is a great example of what the great Thomas Sowell describes as “stage one thinking.” Not the surface exporting a lot of goods to other countries sounds like a great idea, but when considered in the larger context as Friedman and William’s do, this isn’t necessarily the case.

The final two examples concerning the steel industry and the purchase of Japanese good by American consumers help to thoroughly drive the point home. Yes, we might save jobs in the steel industry, but what is the cost to other workers and the American economy in general. Given the state of fiat money in the world, Friedman is correct; ultimately, there’s nothing that can be done with dollars, except to spend them in the U.S.

For those of you who think Friedman is too conservative, or too right wing, consider the opinion of Paul Krugman, an economist that Chavez wouldn’t call right-wing:

…there’s no reason to believe that trade deficits reduce employment on net, even if they do redistribute it.

Back to Williams and the trade deficit with China:

money is flowing into our country from China. In other words, Chinese people are investing more money into the U.S. — in the forms of home and factory purchases, stocks, and bonds — than Americans are investing in China. Of necessity, the deficit that we have with China on our current account, ignoring timing issues, must equal the surplus we have with China on our capital account.

Williams then summarizes the overall effect that any protectionist trade policies–implemented by President Trump, or any other president–will have:

Tariffs on tires, clothing and electronics will mean more profits and jobs and more votes for politicians. The victims of trade restrictions, such as people in the real estate market and other areas where foreigners are investing, are less visible. Last year, Chinese citizens alone purchased record amounts of residential and commercial real estate, bringing their five-year real estate investment total to more than $110 billion (http://tinyurl.com/z3nd4fn).

And as the final nail in the coffin, Williams includes some information concerning the time periods during we which the U.S. has had a trade surplus:

I should say every president except Herbert Hoover and Franklin D. Roosevelt, whose administrations ushered in the Great Depression. Nine out of the 10 years of the economic downturn of the 1930s, our nation had a current account trade surplus. Should we reproduce the economic policies of that era and re-create the “wonderful” trade surplus?

Thus, economically, protectionist policies are destructive, but I’ll close by again quoting Friedman, who takes this point a step further, ultimately relating not only economic prosperity, but indeed, peace, that is the lack of war, appears to flourish in times of free trade:

Because once again, go back to the British experience, the century of free trade was also the century of the greatest international peace. Why? Because if you eliminate government from these matters you enable individuals to deal with one another. If you introduce protection, tariffs, restrictions on trade, they become matters for government-to-government wrangling and they are an enormous source of division. So in the name of both prosperity and world peace there are few steps that we could take which would contribute more than a complete move toward free trade.