With the U.S.-China trade war and the sanctions on Iran and Russia dominating much of the news these days, U.S. trade policy has become the spark of much controversial debate. To me, this didn’t make much sense. Any Economics 101 professor would have told you in the first week of class that trade benefits all. But when I looked into it, it seemed that there was a consensus among some of the world’s highest-ranked officials that free trade was not equal to fair trade. And so, in order to figure out the truth behind all of this, I decided to interview one of our own experts in international trade: Alan Deardorff, University of Michigan’s John W. Sweetland Professor of International Economics and Public Policy.
When it came to the definition of free trade, the answer was pretty obvious: in Deardorff’s words, “eliminating barriers such that trade could flow freely.” But fair trade was much more ambiguous. The term had begun to be used freely “to mean any trade (an individual) didn’t like.” For example, when a country subsidizes one industry over another, the industry’s competitors would view the trade as largely unfair. But if, say, China, decided to subsidize their exports, the U.S. consumer population would benefit, as “we’d get cheap stuff.” Similarly, if a company were to outsource manufacturing to a country where labor and input costs were cheaper, it could also be viewed as unfair by domestic suppliers. But, the real question is, if these allegations of unfairness were addressed to, would trade become more efficient and less “unfair?” According to Deardorff, “that kind of unfair trade benefits us. Our country overall (would) be better off if we freely import from countries that want to sell to us, regardless of what determined the prices that they’re offering.”
That said, there is, in fact, a legal definition of unfair trade. Economic dumping occurs when a country exports for a price that is lower than the selling price locally. Now, this is controlled by laws that allow a country to put tariffs that would offset the price gap that dumping creates. But, that said, these anti-dumping duties are not often used by the U.S. except for specific cases in industries such as steel. Evidently, this “type” of unfair trade is obviously not what President Trump is talking about.
Rather, the current administration has been fixated on the tariffs that China has imposed on us, calling their acts of protectionism completely unfair and harmful to the U.S. Tariffs traditionally have two effects. One, they “raise the price to the (country’s) buyers,” and two, they “lower the price to the (country’s) sellers.” As long as the country is small, the effect of a tariff is localized and there is no change in the world price. However, “when a country becomes very large, there is the possibility of pushing down the exporter’s price.” According to studies done by Deardorff, though, “there is no country (not even the United States) that has enough share of the world economy (to significantly affect the world price).”
That said, tariffs instituted by countries like China do have the potential to affect U.S. producers. But, the extent to which our producers versus China’s consumers are getting hurt by a tariff is mixed. Obviously, U.S. producers will lobby for subsidies regardless, as it is in their political interest to do so. One popular case of this recently is the soybean industry.
With that in mind, our administration’s reaction in putting our own tariffs in place to combat the “inequity” created by the Chinese tariffs have doubly hurt our consumers. In fact, when I asked Deardorff about this, he said that there actually is a proper response to countries that have overstepped their boundaries by implementing high tariffs in filing a complaint with the World Trade Organization. The WTO would investigate the measure and determine whether the tariff is justified or not. In a perfect world, the United States should have paused, evaluated the conflict with China and filed an appropriate complaint. Rather, we hastily implemented tariffs which resulted in an escalation of the conflict, throwing us into a trade war. Neither country is really justified in their actions, and now the international trade scene has been turned upside down.
Trump seems to think that our trade deficit with China is the main cause of our conflict. However, trade deficits by nature are just a means of a company dealing with specialization. When a country buys more than it sells, it’s simply a matter of specialization and relative comparative advantage. Though trade deficits are not ideal in that we really should be producing for ourselves, there is no wrongdoing of China’s that is causing the imbalance and, according to economist Joseph Gagnon, “there is no evidence that high tariffs reduce (trade deficits).”
The U.S. has unequivocally got it wrong on trade. We are sacrificing free trade in the name of protectionist policies that are isolating our country from the rest of the world and creating major political and economic harm. It doesn’t align with Democratic or Republican policy. It’s just plain wrong.
Adithya Sanjay can be reached at email@example.com.