Why is the US putting tariffs on everyone? Why are we picking a fight with Canada? Trump trade policy interpreted by a “free market” Trump supporter
By Allen Nitschelm
Interpreting President Trump’s economic policy is virtually impossible. He is quite mercurial and unpredictable. Probably the people in his inner-circle know the overall game plan, but us mere mortals looking on from the outside have to guess.
That being said, I don’t think his tariff and trade policies are all that hard to understand. So for those who are perplexed, upset, confused, or angry, perhaps this explanation will shed some light on the rationale and reasoning used by the President.
Let’s start with some important facts.
First, it is without question that the US has been taken advantage of by almost all other countries on earth when it comes to free trade. Most capitalists were taught to believe in “free trade,” but the definition of that in the US (prior to the Trump administration) was that other countries could sell whatever they wanted to in the US with very low tariffs, but our goods and services were often highly tariffed or outright blocked by our trading partners.
Why would the US allow this to happen for so long? I think the reason is that we were the world’s economic superpower, we wanted to have goods come in as cheaply as possible (that saves US consumers money), and perhaps our domestic markets were typically large enough not to need to rely on exporting.
When you have the largest market, producers in other countries have to conform to our rules and regulations in order to sell here. The corollary is often true as well. American producers have to comply with a recipient country’s laws regarding the products we export. When a US manufacturer can easily sell its products in the US since that is where they are based, how much effort is it worth to reconfigure products, packages, and distribution to target a smaller foreign market, in order for a potentially small increase in overall market share? These “barriers to entry” can often raise the cost of a product such that it simply isn’t competitive with a foreign producer in their home market.
So the first point is that the trading field is not level. Whether another country prohibits a class of products or services, places a high tariff, or puts up unreasonable barriers to entry, they all amount to the same result: US produces are at a big disadvantage when trying to ship to foreign countries.
You might think this is just the way it is and that’s how free markets work. But with the largest market that everyone wants to enter, we have the leverage to require fair trade. If other countries are not going to allow it, we can tariff or restrict their goods and services to require it.
President Trump clearly ran on an “American First” agenda. His trade policies are a natural extension of that. He is doing what is best in the long run for US manufacturing, US jobs, and US national security.
So Trump is requiring that “free trade” also be “fair trade,” which means that over say several years, the overall trade in goods and services should be roughly equal, not a perpetual deficit for the US in the hundreds of billions of dollars.
Second, the long-term strategy of letting other countries be manufacturers while we are only consumers is unsustainable. That is because once we can no longer manufacture something, especially something critical to our economy or national security, we are vulnerable to non-competitive price increases or worse (strategic withholding of things to pressure us in other areas.)
In addition, we suffer a long-term consequence of losing the ability to re-manufacture those items. Workers drift off, factories close, knowledge and improvements disappear, and suddenly we can’t just flip the switch and start up again. It then requires large investments of capital and talent to regain what we once had.
I am not sure these long-term consequences were foreseeable by the leaders of our country fifty years ago. Much like when Nixon opened China, who knew that we would be planting the seeds for a major-power conflict between our two countries in 50 years. At the time, it seemed like a good idea.
So now understanding the current situation is simple. We need to regain our manufacturing expertise and infrastructure, we need to produce critical products that relate to our national security in the US, and we cannot allow foreign geopolitical rivals to have leverage over us.
Third, the US’ overall annual trade deficit is in the hundreds of billions of dollars per year. President Trump was the person who recognized this, called it out as unsustainable, and took action to correct it.
When I took Economics 101, one of the lessons was that a trade deficit was a positive, not a negative. We were taught that it meant other countries were happy to provide goods and services for (essentially) pieces of paper (called dollars). This guaranteed that these dollars would one day be used to purchase US goods and services, thus completing the cycle and evening things out in the long run.
This hypothesis appears to be false. I’m not faulting my Eco101 professor, but back then, everyone believed in free trade and nobody seemed to predict the terrible downsides.
It turns out that having dollars does not require foreigners to purchase goods and services. They can buy other things, like real estate, investments, or even US companies. Some foes take it a step further and invest in developing industries to dominate world markets and using hi-tech against us. Think about the Chinese spyware on their cheap electronic products, or their “kill switch” on our giant port cranes which could cripple our shipping industry during a geopolitical or military conflict.
There was a second negative consequence to free trade, most notably with China. China has become an economic superpower because of free trade with the US. Essentially, we have traded 50 years of cheap goods for prosperity for the Chinese people. At the time, we thought this would lead to an open China which would eventually grow wealthy and embrace capitalism, free markets, and free elections. Little did we know that the Chinese Communist Party (CCP) would be able to maintain its stranglehold over its people, denying them those freedoms which we take for granted.
So that’s the big picture. What is happening with Canada is the little picture.
We have an annual trade imbalance with Canada, every year since around 2010. Crazy, but true. It looks like around $30-40 Billion per year. Why would this be happening?
- Does Canada allow low-tariff access across all goods and services to US businesses? (The answer is no.)
- Does Canada produce goods and services that are scarce and particularly desirable for America, stuff that we can’t produce ourselves? (The answer is no.)
- In the long run, is the US better off having Canada employ (say) 100,000 auto workers versus the US employing those 100,000 auto workers? (The answer again is no.)
These are unfortunate truths. We don’t dislike Canada or Canadians, but they effectively have been taking advantage of their larger “cousin” by siphoning off our manufacturing jobs, preventing American businesses from competing on a level playing field, and protecting their key industries by creating or maintaining high barriers to entry.
From Canada’s perspective, protecting their workers and their markets makes sense, if the US will allow it. But having America act the same way is outrageous, unfair, a “war” on Canada (as PM Carney called it) and I guess it requires them to now try to establish a closer economic relationship with Europe.
How about instead, Canada agrees to a fair trade policy where the annual trade deficit between the two countries is roughly even? What is wrong with that?
Allen Nitschelm lived in Acton for 30 years and has retired to tax-free New Hampshire.
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