By Bill Watson
Thursday, January 21, 2016
Thanks to Donald Trump’s recent proposal to impose a 45
percent tariff on all goods from China, last Thursday’s Republican debate
featured an unusually long back-and-forth on the topic of international trade.
Moderator Neil Cavuto asked Trump to defend his proposal, thereby giving all
the other candidates an opportunity to chime in with their own condemnations and
counterproposals. If you thought the candidates would all advocate for free and
open markets, you were sorely disappointed.
Trade remains one area where many GOP candidates don’t
even pretend to support free market policies. They may pay lip service to “free
trade,” but there’s almost always a “but.” Rather than unite around the value
of genuine free trade, candidates espoused a wide range of views. Not all of
them were bad, but some of them were horrible.
Donald Trump,
Belligerent Mercantilist
Among the candidates, Trump was certainly the most
economically wrongheaded. After falsely claiming that he had never proposed a
45 percent tariff, he then explained why he supports a 45 percent tariff.
According to Trump, China “is ripping us on trade.” He complained about the
U.S. trade deficit with China, which he overstated by about $150 billion. After
claiming to be “a free trader,” Trump then explained that we need to impose
tariffs on Chinese goods because the Chinese do the same to our goods, and
that’s not fair.
Trump’s rhetoric is completely incompatible with a policy
of free trade and open markets. If Trump truly were a free trader, he would
understand that trade is simply a word to describe the way people living in
different countries interact for mutual benefit. Trade is not a competition
between countries in which exports and imports are points on a scoreboard. Free
traders understand that artificial trade barriers protect incumbent industries
from competition at the expense of economic growth, productivity, and consumer
welfare.
Trump’s proposal for a tariff would make us all poorer.
Taxing American businesses and consumers does not make us richer simply because
it also harms foreigners.
Ted Cruz,
Respectable Mercantilist
Sen. Ted Cruz criticized Trump’s tariff proposal on the
ground that it would spark a reciprocal move from China. He then used the
opportunity to highlight his broad tax proposal. Although he calls it a “flat
tax,” what Cruz proposes is in fact a value-added tax (VAT), that is, a
national sales tax. In fairness to Cruz, he is proposing his VAT as an
alternative to the income tax, but it is still a proposal for a new tax.
After talking about his visit to John Deere and the
pitfalls of Chinese protectionism, Cruz noted how his tax plan would treat
imports and exports differently. Importers would have to pay the tax, while
exporters would not. “It’s like a tariff . . . [but] there’s no reciprocal
tariffs that come against us. It puts us on a level, even playing field, which
brings jobs here at home.”
Cruz’s proposal is more sophisticated than Trump’s 45
percent tariff, but it relies on the same mercantilist economic fallacies.
Cruz’s VAT would work as a subsidy for exporters, but exports are not a magical
category of goods that are better to make than other things. Like all
subsidies, Cruz’s VAT would cause resources to shift toward producing things
that Americans have to work harder to make but don’t use.
At the same time, the VAT would penalize imports, “like a
tariff,” and so make American consumers less wealthy and American businesses
less efficient. Creating “jobs here are home” through taxes and subsidies is
not a recipe for economic growth.
There’s no way to characterize Cruz’s proposal as
anything other than a call for protectionism. What makes Cruz different from
Trump is the senator’s decision to sound respectable and deliberate while
peddling bad economic policies.
John Kasich, Fair
Trader
Just like Trump, Gov. John Kasich said he’s “a free
trader” and then proposed government intervention to ensure that we have “fair
trade.” He described trade as contest in which China is “cheating us.” Kasich
then promoted a particular trade policy known as antidumping—imposing tariffs
on products found to be sold at “unfairly” low prices.
The U.S. antidumping law is not only economically
unsound, the lawless and abusive way it is administered means that it mostly
exists to protect a handful of politically powerful U.S. industries from
legitimate competition. It’s worth pointing out that most antidumping duties
are imposed on basic materials used by American manufacturers. The Ohio
governor’s story about his family’s work in steel mills says a lot about what
industry he thinks U.S. trade policy should serve—regardless of how many jobs
it destroys in downstream industries.
Jeb Bush, Trade
Establishment
Former Gov. Jeb Bush thankfully noted that Trump’s 45
percent tariff would raise prices for American consumers, especially people
“living paycheck to paycheck.” He then quickly shifted his focus to the costs
of foreign protectionism for American exporters. He brought up Iowa soybean
farmers and Boeing’s South Carolina plant as people who would be harmed by
Chinese retaliation to Trump’s tariff.
This sort of rhetoric drives America’s current trade
policy of opening trade through reciprocal trade agreements. He doesn’t reject
the value of imports or fret over “fairness” or the trade deficit. Where Kasich
supports protectionism because it furthers the interests of import-competing
businesses, Bush supports freer trade because it helps exporting businesses.
On the plus side, this business-friendly approach to
trade policy has contributed to decades of reciprocal trade liberalization that
has opened up U.S. and foreign markets for the benefit of billions of people.
However, this export-driven model of trade liberalization
is no longer working as well as it used to. Our trade agreements include
various policies (like rigid intellectual property protection or investment
arbitration) that help some American businesses but don’t actually liberalize
trade. These controversial policies have become a political liability to
achieving genuine trade liberalizing.
As interminably stalled World Trade Organization
negotiations demonstrate, the political will to further liberalize trade is
dwindling. Further progress may require more political daring and creativity
than Bush is portraying.
Marco Rubio, Free
Trader
Sen. Marco Rubio was the only candidate who responded to
Trump’s tariff proposal with a genuine defense of free trade. He started with
an unambiguous condemnation of tariffs as taxes on American consumers.
China doesn’t pay the tariff, the buyer pays the tariff. If you send a
tie or a shirt made in China into the United States and an American goes to buy
it at the store and there’s a tariff on it, it gets passed on in the price to
price to the consumer. So I think the better approach, the best thing we can do
to protect ourselves against China economically is to make our economy
stronger.
He then talked about reducing taxes and eliminating
harmful regulations. Rather than blaming China for any economic woes, Rubio
proposed to fix them by removing domestic impediments to growth and prosperity.
What makes Rubio’s response so different from the others
is that he refused to resort to trade policy as an economic policy tool. Unlike
the mercantilists, he didn’t say we needed protectionism to save us from
protectionism. He didn’t use “fairness” as an excuse to manage the economy in
favor of political cronies. Unlike Bush, he didn’t single out specific
industries or companies that need our help. He simply proposed good domestic
policies as a way to promote economic growth in an open globalized economy.
That’s not to say Rubio has always been a consummate
advocate for free trade during his career in the Senate. Local politics have
driven him to be a staunch supporter of both the failed Cuba embargo and
subsidies for sugar growers. Nevertheless, the approach he took to trade in Thursday’s
debate is something we should expect to hear from anyone claiming to be a free
trader.
Free traders know that trade is not a problem that needs
to be solved. It doesn’t become a problem simply because other countries are
“winning” at it by some economically unimportant metric. At no point is
restricting trade through taxes or promoting it through subsidies a good
economic policy. We would all be better off if more Republican candidates were
willing to promote in practice the economic ideas they claim to uphold.
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