Coyote Blog

A few days back, we had a debate in the comments about whether Trump really wants free trade.   In my view, Trump looks at tariff rates and trade deficits like a simple scorecard of winning or losing without really understanding trade and its benefits.  Sure, Trump proposed a zero tariff rate agreement in passing with our European trading partners.  I think he did this because it made him look good and he knew they would never go for it.

But no matter the case, even if he is sincere, he still is judging this proposal by a very different standard than economists would.  Take European tariffs on passenger cars.  My understanding is that they are about 10% on US cars vs. our 2.5% on theirs  (this ignores the absolute hypocrisy in this whole thing that our light truck tariff on imports is like 25%, but put that aside).  Trump sees taking these two passenger car tariff rates to zero as a win NOT because it would be a benefit to consumers but because in his thinking the US gets a 10% concession out of Europe and only gives up a 2.5% concession in exchange.  Winning!

I tried to think of the best way to highlight the difference between Trump's thinking and good economic thinking on trade, and I came up with this hypothetical:

Consider two trade regimes.  In Regime #1, the US charges 0% tariffs on German steel and Germany charges 0% tariffs on US steel.  In Regime #2, the US is able to charge 10% tariffs on German steel while Germany still charges 0% tariffs on US steel.   I would bet quite a bit of money that Trump would say that Regime #2 is a better deal for the US, while free traders like myself and most economists would say that Regime #1 is not only better for the world as a whole, it is better for the US.  Zero tariffs allows the division of labor and comparative advantage to all work their magic to make sure capital and productive effort in this country are employed for the highest return.  I believe from reading the comment section of this blog that there are many many people who call themselves a free trader but who would say that Regime #2 is a better deal for the US.  If you believe that, you better have done a lot of work educating yourself on the issue because the great mass of economic theory and practice is against you.

I am not an economist and I am too busy today to give the whole explanation today, but here is one hint at part of the answer:

As of mid-2017, there were 29,288 steel-consuming firms, employing more than 900,000 workers who face higher prices versus just 916 steel-producing firms with 80,000 employees who benefit from those higher prices and reduced competition.