Extras: Christine McDaniel on Trade: A Tale of Two Presidents

…the net benefits of the government trying to protect domestic workers and producers from import competition are much smaller than the net costs of doing that. While it might sound great to anybody on the street to say, “you know the government's going to  help protect you from import competition,” the net effects are negative. It might help a small group of people but the cost on everybody else is so much greater.

One way to think about U.S. tariffs is death by a thousand cuts right because every time there's a new tariff on U.S imports it either hits you at the checkout aisle or it hurts the U.S. economy in terms of U.S companies now having to pay higher prices to purchase inputs. So those import taxes make U.S manufacturers less competitive both here and abroad and they either will lose sales, or they'll take the hits and the markup. We do see this in the sectors that have been hit more by tariffs…we also see the effects in terms of U.S jobs because as firms take the hit-end markup they will pull back in other areas like employment. The U.S companies that got hit by retaliatory tariffs shrank their employment base.

The devil’s in the details and what really that meant was just a whole bunch of tariffs that placed more taxes on U.S. imports. Then other countries retaliated and of course that meant that U.S. exporters were faced with those tariffs on their goods when they were trying to sell abroad, so the tariffs just boomeranged right back into the U.S. economy.

So, if you look at the price index for U.S goods and you break it down by tradable goods and non-tradable goods you see this huge difference. In terms of U.S tradable goods, they have experienced stark deflation over the years while the non-tradable goods in the U.S have experienced a steady march of upward price movement. So, what the tariffs do is you know they reverse a little bit of that and now they're putting a little bit more upward pressure on those prices of tradable goods. Reducing these tariffs will not solve the inflation issue at all but it certainly wouldn't hurt. I've seen some studies that show it might shave between a half and one and a half percentage points. But just because it wouldn't solve it doesn’t mean we shouldn't do it, there's usually never just one solution to any problem.

The alternative to free trade is protectionism and favoritism. You just end up with this activist trade policy where companies and trade associations are encouraged to try and seek special treatment. It's called rent seeking when interest groups try to create favor. Even if we can't do the redistribution ideally because there are going to be some winners and losers from trade and technology, you still need to look at the counterfactual. We ultimately cannot protect every single American worker from global competition, all we can do though is help write the rules that we believe in and then let people run the race.

I don't really see a U.S China trade deal in our future anytime soon because the American public just does not have the stomach to freely open up their market to a huge economy that is state run and will subsidize companies for their own reasons that do not comport with the principles of reciprocity.

Over time each generation gets a chance to mold its skills to the dynamism of an economy that has trade that's open to the world. If you don't do that you get people stuck into these stagnant situations but when you're open to goods and services and ideas and people from around the world it encourages innovation and human flourishing. It's true that at any point in time there will be people that struggle, whether that be from free trade or technology, it’s inevitable. But their children in the next generation are going to be better off.