Why Trade Should Be Free
Because I expect Donald Trump to win the presidency, it's important to understand the case for free trade. Even if Kamala Harris wins, she is no free trader either.
One of the gloomier items in the current presidential election is the extent to which both major candidates, Donald Trump and Kamala Harris, oppose free trade and favor tariffs. Trump is much more extreme. He advocates a 60 percent tariff rate on goods from China and a 10 to 20 percent rate on goods from other countries. Harris wants selective tariffs to steer the US economy in directions that she and her advisers think are good.
Unfortunately, neither candidate seems to understand the case for free trade and the case against protectionism. They are not alone. Many of the candidates’ supporters don’t understand either. So, it’s a good time to lay out the case for free trade.
I’ll state it briefly here. Free trade causes us to produce the goods and services in which our producers have a comparative advantage, which is really nothing more than a cost advantage, and to buy the goods and services for which producers in other countries have a comparative (or cost) advantage. Moreover, those who worry about a trade deficit need to realize that the counterpart is a capital surplus. The larger our trade deficit, the greater is the net amount of foreign capital coming into our country.
These are the opening 3 paragraphs of my latest article for the Hoover Institution. It’s David R. Henderson, “Why Trade Should be Free,” Defining Ideas, October 30, 2024.
Another excerpt, on the balance of payments:
Notice that US imports exceed exports by 3 percent of GDP. This trade deficit upsets a lot of people. But there is nothing worrying per se about a trade deficit. In a broader sense, there can’t be an overall deficit. When we spend more on imports than foreigners spend on our exports, foreigners end up with dollars that they use to buy US government bonds, other US bonds, or US plant and equipment, or they directly invest in the United States or hold some of these dollars. The last is particularly sweet for us. To the extent those dollars stay out of the country, our inflation rate is that much lower. If the Federal Reserve wants more inflation, it can print more dollars. The cost of printing each $100 bill is less than 10 cents, meaning that for each $100 bill foreigners accept as payment and then hold, we get $100 worth of imports in return for less than 10 cents. What a deal! It reminds me of the 1989 Jay Leno ad for Doritos: “Crunch all you want; we’ll make more.”
One person who wants more foreign investment is Donald Trump. In his recent appearance before the Economic Club of Chicago, Trump said he wants to impose high tariffs so that foreign firms will move their production to the United States. In other works, he wants more foreign direct investment.
Note the irony. Donald Trump doesn’t like large trade deficits. But he does like lots of foreign direct investment. He can’t have both.
Read the whole thing. It’s long and, surprisingly to me, I didn’t get to cover all the issues.
Great essay; thank you.
“Donald Trump doesn’t like large trade deficits. But he does like lots of foreign direct investment. He can’t have both.“
Without *actually* defending Trump’s espoused trade policy, he actually could have reduced goods/service deficits - even trade surpluses - while having lots of foreign direct investment.
There are, or at least surely have been, many countries over the years that had lots of direct foreign investment while running trade surpluses. The East Asian countries ex-Japan come to mind. China itself at one point comes to mind (it might still be true, idk).
Further, even if we can’t be ”East Asian Miracles”, if trade were managed in an (idiotic, to be sure) mercantilist fashion to be balanced in terms of goods and services, it would be possible that there was lots of cross border direct investment by the U.S. overseas, and by overseas investors here.
And you clearly do understand that when Trump talks of foreign investment he doesn’t mean investment in our bonds or in actual dollars, but rather “US plant and equipment, or they directly invest in the United States” exactly as you noted as distinct from investments in bonds. The Chinese and other countries’ nationals investing only in those, even if it meant selling their U.S. bonds, would easily allow Trump’s “both” to occur.
In fact trivially, if the rich Chinese and Europeans just used the U.S. as their (expensive, in many but not all cases) outsourcing country, with Chinese/European capital and management together with U.S. labor and raw materials in order to build stuff for not just the U.S. market but the rest of the world, surely we could have perennial large trade surpluses and large amounts of foreign direct investment. True, those Chinese and Europeans would get most of the profits, but hey they’d have to pay taxes here, and would be employing millions of Americans.
Methinks thou foundeth a great sounding line, but had a temporary brain spasm on the accuracy of it.
While it would imo surely be *bad* policy, an approach that would make us poorer, not richer - for all the reasons you’ve espoused forever, and in most of your piece - AND while I agree 100% with your piece’s well-written short conclusion, it’s simply false to claim that Trump couldn’t have both.
We don’t *want* him to have both, but that’s a completely different story.