Free trade enhances American prosperity

In economics, there is the Law of Comparative Advantage which holds that a country should produce goods and services for which it has an economic advantage. Those for which it has a disadvantage are relegated to other countries.

For example, the United States has an economic advantage over other countries in the production of soybeans because of its climate and soil. China can make t-shirts much cheaper because of its low cost of labor.

So it makes sense for the United States to buy t-shirts from China and for them to buy soybeans from us. By doing this, consumers in each country benefit from the advantages of the other and jobs in those industries are good for their people. This is called free trade.

But confusion creeps in about trade deficits — when we buy more from China than China buys from us. Suppose that China buys U.S. soybeans worth $15 billion and the U.S. buys T-shirts worth $30 billion resulting in a trade deficit for the U.S.

Some people might look at this and conclude that the U.S. is being ripped off — cheated — by China because we are buying much more from China than they are buying from us. They might assume that it is bad because it isn’t fair trade. But that would be a mistake because both consumers and workers in each country benefit from free trade.

Worse, some might erroneously conclude that U.S. shirts are being discriminated against, so the U.S. should levy tariffs against China and make Chinese shirts as expensive as U.S.-made shirts.

Suppose then that the U.S. invokes tariffs against Chinese shirts, making them now uneconomical. U.S. manufacturers begin making t-shirts but at a cost of $30 billion.

While tariffs might create jobs for thousands of people, Walmart cannot now sell $3 t-shirts, but now must charge, say, $6. This means that millions of consumers would need to pay a much higher price.

But wait, there’s more: China would retaliate with tariffs of its own against our soybeans so soybeans would cost more in China and our farmers would become less competitive or even non-competitive and lose sales to other countries. In other words, it would be a losing situation for both countries.

It is important to disabuse President Donald Trump of his naïve notion that trade deficits are unfair ripoffs. They are not. If it were not for a trade deficit, there would be no Walmart that provides 1.5 million American jobs and low-priced merchandise to tens of millions of American consumers. If it were not for a trade deficit, Apple would not be one of the most successful companies in the world.

While the tariff on metals might provide new jobs for the workers in that industry, it puts in jeopardy many of the 7 million jobs in the U.S. auto industry, due to the increased cost of auto parts, making American-made cars less competitive.

In 1930, Congress passed the infamous Smoot-Hawley Act that placed tariffs on foreign goods in an attempt to prop up American companies. It did just the opposite, exacerbating the deep depression and making matters much worse. Economists learned that lesson long ago and consequently, 1,100 of them signed a letter to Trump decrying tariffs.

Even the most conservative of economists, Arthur Laffer, warns against these tariffs and staunch conservative Sen. Orrin Hatch pleaded with Trump to reconsider.

The bottom line is that free trade increases prosperity for Americans — and the citizens of all participating nations — by allowing consumers to buy products at lower costs and by allowing American jobs to remain more stable. Tariffs are bad for all parties involved.