WASHINGTON, Sept. 30, 2015 — Donald Trump doesn’t seem to understand the benefits of free trade.
Presidential candidate Trump has been harshly critical of China on trade. He says we have to renegotiate bad deals that allow China to take advantage of American consumers. He has also denounced the North America Free Trade Agreement (NAFTA). He says he will somehow rewrite, renegotiate or reinterpret it if he is elected.
NAFTA and the agreements with China are designed to remove barriers to free trade that include import taxes, tariffs and quotas. Because of these agreements and others, products made in Mexico, Canada and some countries in Central America (because of CAFTA) and China can be imported into the U.S. at the lowest possible cost.
These markets are likewise opened to American firms that wish to sell goods and services in those countries.
The result, according to most studies, is that these agreements provide a net gain for the U.S. There are costs, but net gain is found by subtracting costs from benefits. If the costs are great, the benefits are greater.
Trump is focusing only on the costs.
The benefits are seen by U.S. consumers who purchase foreign-made products at a much lower price than if the products were made in the U.S. — that is, by almost everyone. The $600 smart phone in your pocket would cost about $1,800 if all components and final assembly of the phone were done in the U.S.
At the lower price, more Americans can afford to buy smart phones, and they’re left with more to spend on other goods and services. This promotes economic growth and improves our standard of living. The benefits also include greater employment in American companies that focus on American advantages. These positives are sometimes difficult to see and measure, but they add up to a better quality of life.
But it’s the negatives that Trump focuses on.
The biggest negative is that free trade creates a structural unemployment problem in the U.S. Workers who would be employed to make smart phones are out of a job, especially if the manufacturing skills they have are not easily transferred to other industries, particularly in the service sector.
Trump’s solution is to set policy that helps the unemployed manufacturing workers, who are about 5 percent of the workforce. Unfortunately, this will come at the expense of the majority of Americans. Trump wants to tax imports from China by as much as 35 percent. His logic is that the tax will raise the price of Chinese goods enough to make it cheaper for manufacturers to produce in the U.S.
That may help the 5 percent who are structurally unemployed, but it means the other 95 percent of us will pay much higher prices for imported goods and also for the formerly imported goods that are now made in the U.S. This means a decline in purchasing power and a general reduction in the total amount of goods and services that consumers can buy.
His suggestion will help a few at the expense of the many.
China just devalued its currency, making the yuan relatively cheaper compared to the U.S. dollar. That means Chinese goods will be less expensive for Americans, while American-made goods will be more expensive in China.
That $600 smart phone may now cost Americans only $550.
That doesn’t seem to be a bad thing for the American consumer. In fact, many economists argue that if China wants to sell us products at lower prices, we should welcome all they will send to us. We end up receiving valuable goods in exchange for paper.
American companies make relatively few goods in the U.S. to export to China. The companies that sell products in China usually produce them in China, so the devaluation has no direct impact on them.
As economies mature, the focus of activity shifts from the agriculture sector to the manufacturing sector and then to the service sector. Today about 70 percent of U.S. GDP is generated in the service sector.
While Donald Trump enjoys wide support from the Republican Party for most of his views and his willingness to “tell it like it is,” his views on foreign trade are counter-productive and just plain wrong for the U.S. economy and American consumers.
Trump simply does not understand the vast benefits of free trade.